##### Table of Contents

---



SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



---



FORM 10-KSB



---



Mark One



|x | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------



| | for the fiscal year ended December 31, 2004
| | -------------------------------------------



or



| ̈ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



| | for the transition period from  to
.
| | ------------------------------------



Commission File Number: 000-33201



---



REPUBLIC BANCSHARES OF TEXAS, INC.

(Exact name of small business issuer as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 76-0691991                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4200 Westheimer, Houston, Texas                                |  | 77027                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



281-315-1100

(Issuers telephone number)



---



Securities registered
pursuant to Section 12(b) of the Act:



|                     |  |                                           
|-------------------- |  | ------------------------------------------
|Title of each class: |  | Name of each exchange on which registered:
|NONE                 |  | NONE                                      



Securities
registered pursuant to Section 12(g) of the Act:



Title
of class:

Common Stock, $1.00 par value



---



Check whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 (Act) 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 ̈



Check if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to Form 10-KSB.  x



Issuers revenues for the fiscal year ended December 31, 2004 were $28,361,000.



As of February 28, 2005, the aggregate market value of the common stock held by non-affiliates of the issuer was approximately $40,737,000.



The number of shares of common stock of the issuer outstanding as of February 28, 2005 was
3,947,289.



Documents incorporated by reference.Portions of the
Companys Proxy Statement for the 2005 Annual Meeting of Shareholders, which will be filed within 120 days after December 31, 2004, are incorporated by reference into Part III, Items 9-12 and 14 of this Form 10-KSB.



Transitional Small Business Disclosure
Format:    Yes ̈No  x



---





---

##### Table of Contents



REPUBLIC BANCSHARES OF
TEXAS, INC.



ANNUAL REPORT ON FORM 10-KSB



For the year ended December 31, 2004



Table of Contents



|          |  |                                                                                                                 |  |   
|--------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|PART I.  
|          |  |                                                                                                                
|ITEM 1.   |  | DESCRIPTION OF BUSINESS                                                                                         |  | 3 
|ITEM 2.   |  | DESCRIPTION OF PROPERTY                                                                                         |  | 9 
|ITEM 3.   |  | LEGAL PROCEEDINGS                                                                                               |  | 9 
|ITEM 4.   |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                             |  | 9 
|         
|PART II. 
|          |  |                                                                                                                
|ITEM 5.   |  | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES  |  | 10
|ITEM 6.   |  | SELECTED CONSOLIDATED FINANCIAL DATA                                                                            |  | 11
|ITEM 7.   |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                           |  | 12
|ITEM 8.   |  | FINANCIAL STATEMENTS                                                                                            |  | 30
|ITEM 9.   |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                            |  | 30
|ITEM 9A.  |  | CONTROLS AND PROCEDURES                                                                                         |  | 30
|         
|PART III.
|          |  |                                                                                                                
|ITEM 10.  |  | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT |  | 31
|ITEM 11.  |  | EXECUTIVE COMPENSATION                                                                                          |  | 31
|ITEM 12.  |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS                     |  | 31
|ITEM 13.  |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                  |  | 31
|ITEM 14.  |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                |  | 31
|ITEM 15.  |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                          |  | 32



2



---

##### Table of Contents



PART I.



ITEM 1. DESCRIPTION OF BUSINESS



GENERAL



Republic Bancshares of Texas, Inc.
(the Company) was incorporated as a business corporation under the laws of the State of Texas on May 17, 2001 for the purpose of serving as a bank holding company for Republic National Bank (the Bank). On June 20, 2001, RBT
Holdings, Inc. (RBT) was incorporated under the laws of Delaware. Pursuant to the terms of an agreement and plan of reorganization dated May 30, 2001, the Bank became a wholly-owned subsidiary of RBT and RBT became a wholly-owned
subsidiary of the Company. The reorganization was consummated on September 7, 2001. The reorganization was accounted for in a manner similar to that in pooling-of-interests accounting and all financial statements reflect the consolidated operations
as if the reorganization had taken place prior to the periods covered by such consolidated financial statements. The Bank was chartered as a national banking association which began operations on November 13, 1998. At December 31, 2004, the Company
had total assets of $573.7 million, total loans of $402.5 million, total deposits of $497.8 million and shareholders equity of $35.2 million.



The Company offers a diversified range of commercial and personal banking products and services to small- and medium-sized businesses and consumers located primarily in
the greater Houston metropolitan area. The Bank presently has six (6) full-service banking offices located in Houston. The Bank offers checking accounts, savings accounts, certificates of deposit, bank-by-mail and 24-hour depository facilities,
drive-up banking, cashiers checks, travelers checks, savings bonds, consumer loans, commercial loans, commercial payroll accounts, merchant bank card services, lock-box and other cash management services, safe deposit boxes and online banking
services. The Banks business emphasis is to provide personal, responsive and dependable banking services to individuals, professionals and owner-operated businesses. The Bank does not presently offer trust services. Through Star-NET, the
Banks online banking product, customers can view their account information, transfer funds and download information to a personal finance software program. Online bill payment services are also available for an additional fee.



EMPLOYEES AND EMPLOYMENT RELATIONS



As of December 31, 2004, the Bank and Company had 133 full-time equivalent employees, 57 of
whom were officers. The Bank provides medical insurance and other benefits to full-time employees and considers relations with employees to be excellent. The Banks employees are not represented by any collective bargaining group.



COMPETITION



The Company has substantial competition in lending funds and attracting and retaining
deposits. The primary factors in competing for loans are the range and quality of lending services offered, interest rates and loan origination fees. In competing for commercial loans (a targeted growth segment), management believes that the
personal relationships between lending officers and commercial borrowers is a primary factor. Competition for the origination of real estate loans normally comes from other commercial banks, thrift institutions, mortgage bankers, finance and
insurance companies. The primary factors in competing for deposits are the range and quality of financial services offered, the ability to offer attractive rates and the availability of convenient locations. There is direct competition for deposits
from commercial banks, credit unions and thrift institutions. Additional significant competition for savings deposits comes from other investment alternatives, such as money market funds, credit unions, and corporate and government securities.



The Company expects increased competition. Management believes that, the
consolidation within the financial services industry will likely continue which means that the number of locally-owned financial institutions will decrease and that the Bank will increasingly compete against larger regional and out-of-state banks.
While these larger regional and out-of-state banks will likely attract the largest Texas businesses (sales over $100 million), the Company believes that these large banks are unable to provide the relationship-oriented, customer service that the
Company provides its target customer base of small and medium-sized businesses, professionals and other individuals. Although the Bank has been able to compete effectively in its market areas to date, there is no assurance that the Bank will
continue to do so in the future.



3



---

##### Table of Contents

The companys success is dependent to a significant degree on economic conditions in the greater Houston area. An
economic recession or a delayed recovery over a prolonged period of time in the Houston area could cause an increase in the level of the Companys non-performing assets and loan losses, thereby causing operating losses, impairing liquidity and
eroding capital. There can be no assurance that future adverse changes in the local economy would not have a material adverse effect on the Companys consolidated financial condition, results of operations, and cash flows.



REGULATION AND SUPERVISION



The following discussion sets forth the material elements of the regulatory framework
applicable to bank holding companies and their subsidiaries, and provides certain specific information relevant to the Company and the Bank. This regulatory framework primarily is intended for the protection of depositors and the deposit insurance
funds that insure deposits of banks, and the banking system as a whole, and not for the protection of the Companys shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its
entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to the Company or its subsidiaries may have a material effect on its business.



General. As a bank holding company, the Company is subject to regulation under the
Bank Holding Company Act of 1956, as amended, and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (FRB). Under the Bank Holding Company Act, bank holding companies generally may not
acquire ownership or control of any company, including a bank, without the prior approval of the FRB. In addition, bank holding companies generally may engage, directly or indirectly, only in banking and those other activities as are determined by
the FRB to be closely related to banking. Under legislation effective in 2000, certain bank holding companies can elect to become financial holding companies and engage in broader financial activities. See The Gramm-Leach-Bliley Act
below.



Various governmental requirements, including Sections 23A and 23B of
the Federal Reserve Act, as amended, limit borrowings by the Company and its non-bank subsidiaries and also limit various other transactions between the Company and its non-bank subsidiaries, on the one hand, and the Company, on the other. Section
23A of the Federal Reserve Act also generally requires that an insured depository institutions loans to its non-bank affiliates be secured, and Section 23B of the Federal Reserve Act generally requires that an insured depository
institutions transactions with its non-bank affiliates be on arms-length terms.



The Bank is subject to extensive supervision, examination and regulation by the Office of the Comptroller of the Currency (the OCC). The Company and its subsidiaries are also affected by the fiscal and
monetary policies of the Federal government and the FRB, and by various other governmental requirements and regulations.



Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of governmental policy on financial institutions in recent years has been aimed at
combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the USA Patriot Act) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance
and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued a number of implementing regulations which apply to various
requirements of the USA Patriot Act to financial institutions such as Republic National Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report
money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the
relevant laws or regulations, could have serious legal and reputational consequences for the company.



4



---

##### Table of Contents

Source of Strength. Under current FRB policy, a bank holding company is expected to act as a source of financial
and managerial strength to a subsidiary bank and to maintain resources adequate to support the subsidiary bank. This support may be required at times when the bank holding company may not have the resources to provide it. In addition, Section 55 of
the National Bank Act permits the OCC to order the pro rata assessment of stockholders of a national bank whose capital has become impaired. If a stockholder fails, within three months, to pay that assessment, the board of directors has a duty to
sell the stockholders stock to cover the deficiency. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a Federal bank regulatory agency to maintain the capital of a subsidiary bank would be
assumed by the bankruptcy trustee and entitled to priority of payment.



Any
depository institution insured by the Federal Deposit Insurance Corporation (the FDIC) can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with:



| |  |  | the default of a commonly controlled FDIC-insured depository institution; or
| | - |  | ----------------------------------------------------------------------------



| |  |  | any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



Default generally is defined as the appointment of a conservator or receiver and
in danger of default generally is defined as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Also, if a default occurred with respect to a bank, any capital loans
to the bank from its parent holding company would be subordinate in right of payment to payment of the banks depositors and certain of its other obligations.



Capital Requirements. The Company is subject to risk-based capital requirements and guidelines imposed by the FRB, which are
substantially similar to the capital requirements and guidelines imposed by the OCC on the Bank. For this purpose, a depository institutions or holding companys assets and certain specified off-balance sheet commitments are assigned to
four risk categories, each weighted differently based on the level of credit risk that is ascribed to those assets or commitments. In addition, risk-weighted assets are adjusted for low-level recourse and market-risk equivalent assets. A depository
institutions or holding companys capital, in turn, is divided into three tiers:



| |  |  | core, or Tier 1, capital, which consists primarily of stockholders equity less certain identifiable intangible assets and certain other assets;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | supplementary, or Tier 2, capital, which includes, among other items, certain other debt and equity investments that do not qualify as Tier 1 capital; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | market risk, or Tier 3, capital, which includes qualifying unsecured subordinated debt.
| | - |  | -----------------------------------------------------------------------------------------



Like other bank holding companies, the Company currently is required to maintain Tier 1 and Total Capital (the sum of Tier 1,
Tier 2 and Tier 3 capital) equal to at least 4% and 8% of its total risk-weighted assets (including certain off-balance-sheet items, such as unused lending commitments and standby letter of credit), respectively. At December 31, 2004, the Company
met both requirements, with Tier 1 and Total Capital equal to 9.7% and 10.8%, respectively, of its total risk-weighted assets.



The FRB also requires bank holding companies to maintain a minimum Leverage Ratio, defined as Tier 1 capital to average adjusted total assets, of 3%, if the
bank holding company has the highest regulatory rating and meets certain other requirements, or of at least 4% if the bank holding company does not meet these requirements. At December 31, 2004, the Companys leverage ratio was 9.0%, which
exceeded the minimum leverage ratio to which it was subject.



The FRB may set
capital requirements higher than the minimums noted above for holding companies whose circumstances warrant it. For example, bank holding companies experiencing or anticipating significant growth may be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the FRB has indicated that it will consider a Tangible Tier 1



5



---

##### Table of Contents

Capital Leverage Ratio, which would deduct all intangibles and other indicia of capital strength in evaluating proposals for expansion or new
activities.



The Bank is subject to similar risk-based and leverage capital
requirements adopted by the OCC. Like the Company, the Bank was in compliance with the minimum capital requirements applicable to it as of December 31, 2004.



Failure to meet capital requirements could subject the Company to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to
certain restrictions on its business, which are described immediately below.



Corrective Measures for Capital Deficiencies. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, identifies five capital categories for insured depository institutions 
well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized  and requires Federal bank regulatory agencies to implement systems for prompt corrective action for insured
depository institutions that do not meet minimum capital requirements based on these categories. FDICIA imposes progressively more restrictive constraints on operation, management and capital distributions, depending on the category in which an
institution is classified. Unless a bank is well-capitalized, it is subject to restrictions on its ability to offer brokered deposits and on certain other aspects of its operations. An undercapitalized bank must develop a capital restoration plan
and its parent bank holding company must guarantee the banks compliance with the plan up to the lesser of 5% of a banks assets at the time it became undercapitalized or the amount needed to comply with the plan.



As of December 31, 2004, the Bank was well capitalized, based on the prompt corrective action
ratios and guidelines described above. It should be noted, however, that a banks capital category is determined solely for the purpose of applying the OCCs, or the FDICs, prompt corrective action regulations and that the capital
category may not constitute an accurate representation of the banks overall financial condition or prospects.



Dividend Restrictions. For the foreseeable future, the principal source of revenues to the Company is through the sale of common stock and the payment of dividends
by the Bank. Federal and state statutory provisions limit the amount of dividends that the Bank can pay to the Company without regulatory approval. Dividend payments by national banks are limited to the lesser of:



| |  |  | the level of undivided profits; and
| | - |  | -----------------------------------



| |  |  | absent regulatory approval, an amount not in excess of net income for the current year combined with retained net income for the preceding two years.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



In addition, Federal bank regulatory authorities have authority to prohibit the Bank from
engaging in an unsafe or unsound practice in conducting business. The payment of dividends, depending upon the Banks financial condition at the time of the proposed dividend payment, could be deemed to constitute an unsafe or unsound practice.
The Banks ability to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines.



Deposit Insurance Assessments. The deposits of the Company are insured up to regulatory limits by the FDIC, and, accordingly, are subject to deposit insurance
assessments to maintain the Bank Insurance Fund (the BIF), which is administered by the FDIC. The FDIC has adopted regulations establishing a permanent risk-related deposit insurance assessment system. Under this system, the FDIC places
each insured bank in one of nine risk categories based on (1) the banks capitalization and (2) supervisory evaluations provided to the FDIC by the institutions primary Federal regulator. Each insured banks insurance assessment rate
is then determined by the risk category in which it is classified by the FDIC. The annual insurance premiums on bank deposits insured by the BIF currently vary between $0.00 per $100 of deposits for banks classified in the highest capital and
supervisory evaluation categories to $0.27 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories.



In addition to BIF assessments, banks insured under BIF are required to pay a portion of the interest due on bonds that were issued by the Financing Corporation
(FICO) to help shore up the ailing Federal Savings and Loan Insurance Corporation in 1987. With regard to the assessment for the FICO obligation, for the fourth quarter of 2004, the BIF rate was .00152% of deposits.



6



---

##### Table of Contents

Interstate Banking and Branching. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
(Interstate Act), subject to certain concentration limits and other requirements:



| |  |  | bank holding companies, such as the Company, are permitted to acquire banks and bank holding companies located in any state;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | any bank that is a subsidiary of a bank holding company is permitted to receive deposits, renew time deposits, close loans, service loans and receive loan payments as an agent for
any other bank subsidiary of that bank holding company; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | banks are permitted to acquire branch offices outside their home states by merging with out-of-state banks, purchasing branches in other states and establishing de novo branch
offices in other states. The ability of banks to acquire branch offices through purchase or opening of other branches is contingent, however, on the host state having adopted legislation opting in to those provisions of the Interstate
Act. In addition, the ability of a bank to merge with a bank located in another state is contingent on the host state not having adopted legislation opting out of that provision of the Interstate Act.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Control Acquisitions. The Change in Bank Control Act prohibits a person or group of
persons from acquiring control of a bank holding company, unless the FRB has been notified and has not objected to the transaction. Under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of
voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank
holding company.



In addition, a company is required to obtain the approval of
the FRB under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding common stock of a bank holding company, or otherwise obtaining control or a
controlling influence over that bank holding company.



The
Gramm-Leach-Bliley Act. In November 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the GLBA) was signed into law, which allows bank holding companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. Under the GLBA, a bank holding company that elects to become a financial holding company may engage in any activity that the FRB, in consultation with the Secretary of the Treasury,
determines by regulation or order is (1) financial in nature, (2) incidental to any such financial activity, or (3) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. The GLBA makes significant changes in U.S. banking law, principally by repealing the restrictive provisions of the 1933 Glass-Steagall Act. The GLBA specifies certain activities that are deemed to be
financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment, or economic advisory services; underwriting, dealing in
or making a market in, securities; and any activity currently permitted for bank holding companies by the FRB under section 4(c)(8) of the Bank Holding Company Act. The GLBA does not authorize banks or their affiliates to engage in commercial
activities that are not financial in nature. A bank holding company may elect to be treated as a financial holding company only if all depository institution subsidiaries of the holding company are well-capitalized, well-managed and have at least a
satisfactory rating under the Community Reinvestment Act.



7



---

##### Table of Contents

National banks are also authorized by the GLBA to engage, through financial subsidiaries, in any activity
that is permissible for a financial holding company (as described above) and any activity that the Secretary of the Treasury, in consultation with the FRB, determines is financial in nature or incidental to any such financial activity, except (1)
insurance underwriting, (2) real estate development or real estate investment activities (unless otherwise permitted by law), (3) insurance company portfolio investments and (4) merchant banking. The authority of a national bank to invest in a
financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from the banks capital outstanding investments in financial
subsidiaries). The GLBA provides that state banks may invest in financial subsidiaries (assuming they have the requisite investment authority under applicable state law) subject to the same conditions that apply to national bank investments in
financial subsidiaries.



Instability of Regulatory Structure



Various legislation, such as the Gramm-Leach-Bliley Act which expanded the powers of
banking institutions and their holding companies, and proposals to overhaul the bank regulatory system and limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. Such legislation
may change banking statutes and the environment in which the Company and its banking subsidiaries operate in substantial and unpredictable ways. Neither the Company nor the Bank can determine the ultimate effect that the Gramm-Leach-Bliley Act will
have, or the effect that any other potential legislation, if enacted, or implementing regulations with respect thereto, would have, upon the financial condition or results of operations of the Company or the Bank.



Expanding Enforcement Authority



One of the major additional burdens imposed on the banking industry by FDICIA is the
increased ability of banking regulators to monitor the activities of banks and their holding companies. In addition, the Federal Reserve and FDIC are possessed of extensive authority to police unsafe or unsound practices and violations of applicable
laws and regulations by depository institutions and their holding companies. For example, the FDIC may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess
civil money penalties, issue cease and desist or removal orders, seek injunctions, appoint conservators and receivers and publicly disclose such actions. FDICIA and other laws have expanded the agencies authority in recent years, and the
agencies have not yet fully tested the limits of their powers.



Monetary
Policy



The monetary policies of regulatory authorities, including the
Federal Reserve, have a significant effect on the operating results of banks and bank holding companies. The Federal Reserve supervises and regulates the national supply of bank credit. Among the means available to the Federal Reserve to regulate
the supply of bank credit are open market purchases and sales of U.S. government securities, changes in the discount rate on borrowings from the Federal Reserve System and changes in reserve requirements with respect to deposits. These activities
are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits on a national basis, and their use may affect interest rates charged on loans or paid for deposits.



Federal Reserve monetary policies and the fiscal policies of the federal government have
materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. We cannot predict the nature of future monetary and fiscal policies and the effect of such policies on the future business
and earnings of the Bank or the Company.



8



---

##### Table of Contents

ITEM 2. DESCRIPTION OF PROPERTY



The Bank
currently operates six banking office locations in Houston, Texas, and other than the Northwest Freeway office, all of the locations are leased.



The following table sets forth specific information on the Banks offices, each of which offers full banking operations provided by a full complement of lobby staff
(including tellers, new account representatives, and lending professionals on site), safe-deposit boxes, an automated teller machine, and drive-through banking services:



|                  |  |                                 |  |                         |  |                              |        
|----------------- |  | ------------------------------- |  | ----------------------- |  | ---------------------------- | -------
|Banking Office    |  | Size in SquareFeet(Approximate) |  | Location                |  | Deposits atDecember 31, 2004
|                  |  |                                 |  |                         |  | (In thousands)              
|Champions         |  | 8,200                           |  | 6809 FM 1960 West       |  | $                            | 151,554
|Cypress Station   |  | 5,000                           |  | 1055 FM 1960 West       |  |                              | 71,477 
|River Oaks        |  | 11,775                          |  | 4200 Westheimer Road    |  |                              | 158,218
|Memorial          |  | 8,800                           |  | 10301-A Katy Freeway    |  |                              | 64,005 
|Northwest Freeway |  | 11,400                          |  | 14604 Northwest Freeway |  |                              | 42,070 
|Southeast         |  | 2,100                           |  | 4130 Fairmont Parkway   |  |                              | 10,436 
|                  |  |                                 |  |                         |  |                              |        
|                  |  |                                 |  |                         |  | $                            | 497,760
|                  |  |                                 |  |                         |  |                              |        



ITEM 3. LEGAL PROCEEDINGS



The Company and the
Bank are involved in routine legal proceedings from time to time in the normal course of business. Management does not believe that there is any pending or threatened proceeding against the Company or the Bank which, if determined adversely, would
have a material effect on the business, financial position or results of operations of the Company or the Bank.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted to a vote of the Companys security holders during the fourth quarter of 2004.



9



---

##### Table of Contents



PART II.



ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES



There is no public trading market for the shares of common stock of the Company and it is unlikely that an active market will develop for the common stock in the
foreseeable future. The Company has no present plans for listing its common stock on a national or regional securities exchange or with the National Association of Securities Dealers Automated Quotations System. Trades in shares of the
Companys stock are often privately negotiated between a buyer and a seller, and management of the Company does not know the prices at which some or all of such transactions took place. In March 2000, the Bank sold 1,440,000 shares of common
stock at $6.25 per share. The only other sales by the Company have been to employees in connection with the exercise of stock options or purchases through the Companys Employee Stock Purchase Plan. As of February 28, 2005, there were 3,947,289
shares outstanding and 700 shareholders of record.



Dividends



The Company has not declared or paid any cash dividends since inception
and has no plans to pay dividends in the foreseeable future. One of the principal sources of cash revenue to the Company is dividends paid by the Bank with respect to the Banks capital stock. See Description of Business-Regulation and
Supervision-Dividend Restrictions for a description of regulatory restrictions that limit the Banks ability to pay dividends on its common equity.



Securities authorized for issuance under equity compensation plans



The Company currently has options outstanding. The options were granted under the Companys 1998 Stock Option Plan, which was approved by the Banks
shareholders and assumed by the Company in connection with its formation. The Plan was amended in 2004 to increase the number of shares issuable under the plan. The following table provides information as of December 31, 2004 regarding the
Companys equity compensation plans under which the Companys equity securities are authorized for issuance (adjusted to reflect the two-for-one stock split effective May 24, 2004):



EQUITY COMPENSATION PLAN INFORMATION



|                                                           |  |                                                                                         |  |                                                      |      |                                                                                                                                        |        
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ---------------------------------------------------- | ---- | -------------------------------------------------------------------------------------------------------------------------------------- | -------
|                                                           |  | (a)                                                                                     |  | (b)                                                  |      | (c)                                                                                                                                   
|Plan category                                              |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstanding options |      | Number of securitiesremaining available forfuture issuance
underequity compensationplans (excludingsecurities reflected in column (a))
|Equity compensation plans approved by security holders     |  | 539,800                                                                                 |  | $                                                    | 6.43 |                                                                                                                                        | 320,200
|Equity compensation plans not approved by security holders |  |                                                                                        |  |                                                      |     |                                                                                                                                        |       
|                                                           |  |                                                                                         |  |                                                      |      |                                                                                                                                        |        
|Total                                                      |  | 539,800                                                                                 |  | $                                                    | 6.43 |                                                                                                                                        | 320,200
|                                                           |  |                                                                                         |  |                                                      |      |                                                                                                                                        |        



10



---

##### Table of Contents

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA



The
following selected consolidated financial data should be read in conjunction with the consolidated financial statements of the Company and the notes thereto, appearing elsewhere in this Annual Report, and the information contained in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations. The selected historical consolidated financial data as of the end of and for each of the five years in the period ended December 31, 2004 are derived
from the Companys Consolidated Financial Statements which have been audited by independent accountants.



|                                                        |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------- |  | ------------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                        |  | Year Ended December 31,                                 |          
|                                                        |  | 2004                                                    |           |   | 2003 |   |           | 2002 |  |   | 2001      |   |  | 2000 |          
|                                                        |  | (Dollars in thousands, except share and per share data) |          
|Income Statement Data:                                  |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income                                         |  | $                                                       | 25,355    |   |      | $ | 22,800    |      |  | $ | 21,258    |   |  | $    | 19,832    |   |  | $ | 13,886    |  
|Interest expense                                        |  |                                                         | 5,454     |   |      |   | 4,944     |      |  |   | 5,272     |   |  |      | 7,589     |   |  |   | 5,610     |  
|                                                        |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                     |  |                                                         | 19,901    |   |      |   | 17,856    |      |  |   | 15,986    |   |  |      | 12,243    |   |  |   | 8,276     |  
|Provision for loan losses                               |  |                                                         | 1,450     |   |      |   | 1,730     |      |  |   | 2,095     |   |  |      | 1,076     |   |  |   | 1,204     |  
|                                                        |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income after provision for loan losses     |  |                                                         | 18,451    |   |      |   | 16,126    |      |  |   | 13,891    |   |  |      | 11,167    |   |  |   | 7,072     |  
|Noninterest income                                      |  |                                                         | 3,006     |   |      |   | 2,644     |      |  |   | 1,705     |   |  |      | 1,239     |   |  |   | 755       |  
|Noninterest expenses                                    |  |                                                         | 14,312    |   |      |   | 12,666    |      |  |   | 11,014    |   |  |      | 8,986     |   |  |   | 6,757     |  
|                                                        |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Income before income taxes                              |  |                                                         | 7,145     |   |      |   | 6,104     |      |  |   | 4,582     |   |  |      | 3,420     |   |  |   | 1,070     |  
|Provision for income taxes                              |  |                                                         | 2,332     |   |      |   | 2,057     |      |  |   | 1,581     |   |  |      | 1,175     |   |  |   | 364       |  
|                                                        |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income                                              |  | $                                                       | 4,813     |   |      | $ | 4,047     |      |  | $ | 3,001     |   |  | $    | 2,245     |   |  | $ | 706       |  
|                                                        |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Per Share Data (1):                                     |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic earning per common share (2)                      |  | $                                                       | 1.23      |   |      | $ | 1.04      |      |  | $ | 0.78      |   |  | $    | 0.59      |   |  | $ | 0.21      |  
|Diluted earnings per common share (2)                   |  | $                                                       | 1.18      |   |      | $ | 1.00      |      |  | $ | 0.75      |   |  | $    | 0.58      |   |  | $ | 0.20      |  
|Book value per share                                    |  | $                                                       | 8.93      |   |      | $ | 7.71      |      |  | $ | 6.72      |   |  | $    | 5.94      |   |  | $ | 5.36      |  
|Weighted average shares outstanding (basic)             |  |                                                         | 3,911,802 |   |      |   | 3,876,796 |      |  |   | 3,855,238 |   |  |      | 3,844,516 |   |  |   | 3,484,000 |  
|Weighted average shares outstanding (diluted)           |  |                                                         | 4,085,977 |   |      |   | 4,046,018 |      |  |   | 4,015,170 |   |  |      | 3,911,672 |   |  |   | 3,510,000 |  
|Performance Ratios:                                     |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average assets                                |  |                                                         | 0.99      | % |      |   | 0.94      | %    |  |   | 0.86      | % |  |      | 0.86      | % |  |   | 0.44      | %
|Return on average common equity                         |  |                                                         | 14.92     | % |      |   | 14.21     | %    |  |   | 12.18     | % |  |      | 10.27     | % |  |   | 3.97      | %
|Net interest margin                                     |  |                                                         | 4.44      | % |      |   | 4.46      | %    |  |   | 4.98      | % |  |      | 5.04      | % |  |   | 5.68      | %
|Efficiency ratio (4)                                    |  |                                                         | 62.48     | % |      |   | 63.38     | %    |  |   | 62.26     | % |  |      | 66.65     | % |  |   | 74.82     | %
|Balance Sheet Data (3):                                 |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total assets                                            |  | $                                                       | 573,662   |   |      | $ | 435,218   |      |  | $ | 384,419   |   |  | $    | 312,197   |   |  | $ | 211,326   |  
|Investment securities                                   |  |                                                         | 89,445    |   |      |   | 83,922    |      |  |   | 41,704    |   |  |      | 1,125     |   |  |   | 4,070     |  
|Loans                                                   |  |                                                         | 402,495   |   |      |   | 315,486   |      |  |   | 293,555   |   |  |      | 258,487   |   |  |   | 183,559   |  
|Allowance for loan losses                               |  |                                                         | 4,813     |   |      |   | 3,783     |      |  |   | 3,236     |   |  |      | 2,885     |   |  |   | 1,836     |  
|Total deposits                                          |  |                                                         | 497,760   |   |      |   | 355,181   |      |  |   | 349,083   |   |  |      | 288,141   |   |  |   | 190,097   |  
|Total shareholders equity                              |  |                                                         | 35,152    |   |      |   | 30,003    |      |  |   | 26,005    |   |  |      | 22,855    |   |  |   | 20,592    |  
|Capital Ratio:                                          |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Average equity to average assets                        |  |                                                         | 6.64      | % |      |   | 6.59      | %    |  |   | 7.07      | % |  |      | 8.27      | % |  |   | 10.97     | %
|Asset Quality Ratios (3):                               |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Nonperforming assets (5) to loans and other real estate |  |                                                         | 0.16      | % |      |   | 0.15      | %    |  |   | 0.26      | % |  |      | 0.07      | % |  |   | 0.00      | %
|Net charge-offs to average loans                        |  |                                                         | 0.12      | % |      |   | 0.40      | %    |  |   | 0.63      | % |  |      | 0.01      | % |  |   | 0.00      | %
|Allowance for loan losses to total loans                |  |                                                         | 1.20      | % |      |   | 1.20      | %    |  |   | 1.10      | % |  |      | 1.12      | % |  |   | 1.00      | %
|Allowance for loan losses to nonperforming assets (5)   |  |                                                         | 761.55    | % |      |   | 793.08    | %    |  |   | 419.17    | % |  |      | 1559.46   | % |  |   | N/A       |  

---

|(1) | Adjusted for the two-for-one stock split effective May 24, 2004.
|--- | ----------------------------------------------------------------

|(2) | Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.
Diluted earnings per common share is computed by dividing net income available to common shareholders, adjusted for any changes in income that would result from the assumed conversion of all potential dilutive common shares, by the sum of the
weighted average number of common shares outstanding and the effect of all dilutive potential common shares outstanding for the period.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | At period end, except net charge-offs to average loans.
|--- | -------------------------------------------------------

|(4) | Calculated by dividing total noninterest expenses by net interest income plus noninterest income, excluding net security gains (losses).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(5) | Nonperforming assets consist of nonaccrual loans, troubled debt restructurings and loans contractually past due 90 days or more, ORE and foreclosed property.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS



This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition,
results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive positions, growth opportunities, benefits from new technology, plans and
objectives of management, and other matters. Statements in this document that are not historical facts are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements include, without limitation, those relating to the future business prospects, revenues, working capital, liquidity, capital
needs, interest costs and income, wherever they occur in this document, are necessarily estimates reflecting the best judgment of the senior management of Republic Bancshares of Texas, Inc. (the Company) and involve a number of risks and
uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various important factors, including those set
forth in this document. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation:



| |  |  | changes in interest rates and market prices, which could reduce the Companys net interest margins, asset valuations and expense expectations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing, impact and other uncertainties of the Companys ability to establish a significant presence in new geographic service areas and capitalize on growth opportunities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | changes in statutes and government regulations or their interpretations applicable to national banks;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the effects of vigorous competition in the markets in which the Company operates, including the impact on revenues and earnings of competitive changes to existing price structures
and underlying interest rates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requirements imposed (or latitude allowed to competitors) by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation (FDIC), or state regulatory bodies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic or business conditions that may be less favorable than expected, resulting in, among other things, lower than expected revenues or greater than expected credit
problems among the Companys customer and potential customer base;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of the Company to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological
changes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensations levels; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adverse changes in debt and capital markets.
| | - |  | --------------------------------------------



12



---

##### Table of Contents

The words estimate, project, intend, expect, believe and
similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this document and the other documents incorporated herein by reference. All written and oral
forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a
result of new information, future events or otherwise, unless the securities laws require it to do so.



Managements Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Companys consolidated balance sheets and consolidated statements of
income. This section should be read in conjunction with the Companys consolidated financial statements and accompanying notes and other financial information appearing elsewhere in this document.



On May 24, 2004, the Company completed a two-for-one stock split effected in the form of a
100% stock dividend payable to shareholders of record on May 10, 2004. The Companys Common Stock outstanding increased to approximately 3.9 million shares after the split. All prior period per share and share information has been restated to
reflect this split.



For The Years Ended December 31, 2004
and 2003



OVERVIEW



The primary source of the Companys revenue is interest income from loans, fee income
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 compensation and occupancy expenses.



For the year ended December 31, 2004, the Company produced net income of $4.8 million,
diluted earnings per share of $1.18 and a return on average equity of 14.92% compared with net income of $4.0 million, diluted earnings per share of $1.00 and a return on average equity of 14.21% for the year ended December 31, 2003. Return on
average assets for the years ended December 31, 2004 and 2003 was 0.99% and 0.94%, respectively.



For the year ended December 31, 2004, the net interest margin and the net interest rate spread were 4.44% and 3.96%, respectively, compared with 4.46% and 4.00%, respectively, for the year ended December 31, 2003.



At December 31, 2004, the Company had total assets of $573.7 million, total
loans of $402.5 million, total deposits of $497.8 million and shareholders equity of $35.2 million. At December 31, 2003, the Company had total assets of $435.2 million, total loans of $315.5 million, total deposits of $355.2 million and
shareholders equity of $30.0 million.



RESULTS OF OPERATIONS



Net interest income



Net interest income represents the amount by which interest income on interest-earning
assets, including investment securities and loans, exceeds interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is the principal source of the Companys income. Interest
rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income.



Net interest income was $19.9 million for the year ended December 31, 2004 compared with $17.9 million for the year ended December 31, 2003. This represents an increase
of $2.0 million or 11.2%. An increase in the average earning asset base of $47.5 million partially offset by a decrease in the net interest margin of 2 basis points primarily account for the difference.



13



---

##### Table of Contents

The Companys deposits grew from $355.2 million at December 31, 2003 to $497.8 million at December 31, 2004, an
increase of $142.6 million or 40.1%. Noninterest-bearing deposits increased $49.9 million or 42.3% while interest-bearing deposits increased $92.7 million or 39.1%. For the years ended December 31, 2004 and 2003, the Company posted a net interest
margin of 4.44% and 4.46%, respectively.



The following table presents, for the
periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax
equivalent adjustments were made and all average balances are daily average balances. Nonaccruing loans have been included in the table as loans carrying a zero yield. Interest on nonaccruing loans is included to the extent it is received. The yield
on the securities portfolio is based on average historical cost balances and does not give effect to changes in fair value that are reflected as a component of consolidated shareholders equity.



|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|------------------------------------------ |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------------------- |  | ---- | --------------------------- |  | - | --------------------- | - | ------------------- | - | ------ |  | ---- | -
|                                           |  | For the year ended December 31, 2004 |         |   | For the year ended December 31, 2003 |  
|                                           |  | Average Outstanding Balance          |         |   | Interest Earned/ Paid                |   | Average Yield/ Rate |  |      | Average Outstanding Balance |  |   | Interest Earned/ Paid |   | Average Yield/ Rate |  
|                                           |  | (Dollars in thousands)               |        
|ASSETS                                     |  |                                      |         |  
|Interest-earning assets:                   |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Loans                                      |  | $                                    | 350,695 |   |                                      | $ | 22,560              |  | 6.43 | %                           |  | $ | 298,927               |   |                     | $ | 20,079 |  | 6.72 | %
|Securities                                 |  |                                      | 84,238  |   |                                      |   | 2,564               |  | 3.04 |                             |  |   | 87,906                |   |                     |   | 2,567  |  | 2.92 |  
|Federal funds sold & other                 |  |                                      | 13,399  |   |                                      |   | 231                 |  | 1.72 |                             |  |   | 13,958                |   |                     |   | 154    |  | 1.10 |  
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Total interest-earning assets              |  |                                      | 448,332 |   |                                      |   | 25,355              |  | 5.66 | %                           |  |   | 400,791               |   |                     |   | 22,800 |  | 5.69 | %
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Less allowance for loan losses             |  |                                      | (4,294  | ) |                                      |   |                     |  |      |                             |  |   | (3,597                | ) |                     |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Total earning assets, net of allowance     |  |                                      | 444,038 |   |                                      |   |                     |  |      |                             |  |   | 397,194               |   |                     |   |        |  |      |  
|Nonearning assets                          |  |                                      | 42,272  |   |                                      |   |                     |  |      |                             |  |   | 35,556                |   |                     |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Total assets                               |  | $                                    | 486,310 |   |                                      |   |                     |  |      |                             |  | $ | 432,750               |   |                     |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Interest-bearing liabilities:              |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Money market checking accounts             |  | $                                    | 25,401  |   |                                      | $ | 91                  |  | 0.36 | %                           |  | $ | 22,418                |   |                     | $ | 87     |  | 0.39 | %
|Money market and savings deposits          |  |                                      | 114,368 |   |                                      |   | 831                 |  | 0.73 |                             |  |   | 117,212               |   |                     |   | 794    |  | 0.68 |  
|Certificates of deposit                    |  |                                      | 134,678 |   |                                      |   | 3,399               |  | 2.52 |                             |  |   | 115,864               |   |                     |   | 3,147  |  | 2.72 |  
|Other borrowings                           |  |                                      | 37,495  |   |                                      |   | 715                 |  | 1.91 |                             |  |   | 28,734                |   |                     |   | 519    |  | 1.81 |  
|Junior subordinated debentures             |  |                                      | 8,248   |   |                                      |   | 418                 |  | 5.07 |                             |  |   | 8,248                 |   |                     |   | 397    |  | 4.81 |  
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Total interest-bearing liabilities         |  |                                      | 320,190 |   |                                      |   | 5,454               |  | 1.70 | %                           |  |   | 292,476               |   |                     |   | 4,944  |  | 1.69 | %
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Noninterest-bearing liabilities:           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Noninterest-bearing deposits               |  |                                      | 131,801 |   |                                      |   |                     |  |      |                             |  |   | 110,450               |   |                     |   |        |  |      |  
|Other liabilities                          |  |                                      | 2,052   |   |                                      |   |                     |  |      |                             |  |   | 1,343                 |   |                     |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Total liabilities                          |  |                                      | 454,043 |   |                                      |   |                     |  |      |                             |  |   | 404,269               |   |                     |   |        |  |      |  
|Shareholders equity                       |  |                                      | 32,267  |   |                                      |   |                     |  |      |                             |  |   | 28,481                |   |                     |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Total liabilities and shareholders equity |  | $                                    | 486,310 |   |                                      |   |                     |  |      |                             |  | $ | 432,750               |   |                     |   |        |  |      |  
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Net interest income                        |  |                                      |         |   |                                      | $ | 19,901              |  |      |                             |  |   |                       |   |                     | $ | 17,856 |  |      |  
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Net interest spread                        |  |                                      |         |   |                                      |   |                     |  | 3.96 | %                           |  |   |                       |   |                     |   |        |  | 4.00 | %
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  
|Net interest margin                        |  |                                      |         |   |                                      |   |                     |  | 4.44 | %                           |  |   |                       |   |                     |   |        |  | 4.46 | %
|                                           |  |                                      |         |   |                                      |   |                     |  |      |                             |  |   |                       |   |                     |   |        |  |      |  



14



---

##### Table of Contents

The following table presents the dollar amount of changes in interest income and interest expense for the major
components of interest-earning assets, and interest-bearing liabilities and distinguishes between the increase (decrease) related to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and
volume have been allocated proportionately to the change due to volume and the change due to rate.



|                                              |  |                                       |       |   |      |   |        |      |  |       |    |  |   |       |  
|--------------------------------------------- |  | ------------------------------------- | ----- | - | ---- | - | ------ | ---- |  | ----- | -- |  | - | ----- | -
|                                              |  | Years ended December 31,2004 vs. 2003 |      
|                                              |  | Increase (Decrease)due to             |       |   |     
|                                              |  | Volume                                |       |   | Rate |   |        | Days |  | Total |   
|                                              |  | (Dollars in thousands)                |      
|Interest-earning assets:                      |  |                                       |       |   |      |   |        |      |  |       |    |  |   |       |  
|Loans                                         |  | $                                     | 3,487 |   |      | $ | (1,061 | )    |  | $     | 55 |  | $ | 2,481 |  
|Securities                                    |  |                                       | (107  | ) |      |   | 97     |      |  |       | 7  |  |   | (3    | )
|Federal funds sold & other                    |  |                                       | (6    | ) |      |   | 83     |      |  |       |   |  |   | 77    |  
|                                              |  |                                       |       |   |      |   |        |      |  |       |    |  |   |       |  
|Total increase (decrease) in interest income  |  |                                       | 3,374 |   |      |   | (881   | )    |  |       | 62 |  |   | 2,555 |  
|                                              |  |                                       |       |   |      |   |        |      |  |       |    |  |   |       |  
|Interest-bearing liabilities:                 |  |                                       |       |   |      |   |        |      |  |       |    |  |   |       |  
|Money market checking accounts                |  |                                       | 12    |   |      |   | (8     | )    |  |       |   |  |   | 4     |  
|Money market and savings deposits             |  |                                       | (19   | ) |      |   | 54     |      |  |       | 2  |  |   | 37    |  
|Certificates of deposit                       |  |                                       | 511   |   |      |   | (268   | )    |  |       | 9  |  |   | 252   |  
|Other borrowings                              |  |                                       | 158   |   |      |   | 36     |      |  |       | 2  |  |   | 196   |  
|Junior subordinated debentures                |  |                                       |      |   |      |   | 20     |      |  |       | 1  |  |   | 21    |  
|                                              |  |                                       |       |   |      |   |        |      |  |       |    |  |   |       |  
|Total increase (decrease) in interest expense |  |                                       | 662   |   |      |   | (166   | )    |  |       | 14 |  |   | 510   |  
|                                              |  |                                       |       |   |      |   |        |      |  |       |    |  |   |       |  
|Increase (decrease) in net interest income    |  | $                                     | 2,712 |   |      | $ | (715   | )    |  | $     | 48 |  | $ | 2,045 |  
|                                              |  |                                       |       |   |      |   |        |      |  |       |    |  |   |       |  



Provision for loan losses



The 2004 provision for loan losses was $1.45 million, a decrease of
$280,000 from 2003. Changes in the provision for loan losses were attributable to the changes in net charge-offs and managements evaluation of changes in current risk factors. Although no assurance can be given, management believes that the
present allowance for loan losses is adequate to provide for probable losses inherent in the loan portfolio considering loss experience, delinquency trends and current economic conditions. Management regularly reviews the Companys loan loss
allowance in accordance with its standard procedures. (See Allowance for Loan Losses.)



Noninterest income



The Companys primary source of noninterest income is service charges on deposit accounts, gains on sale of securities and other banking service-related fees. Noninterest income for the years ended December 31,
2004 and 2003 was $3.0 million and $2.6 million, respectively, an increase of $400,000 or 15.4%. The increase is primarily due to fee income on Bank Owned Life Insurance, $284,000; commissions on the sale of insurance, $191,000; service charges up
$105,000, and NSF fees up $249,000. These increases were offset by a decline in gain on sale of securities of $516,000.



15



---

##### Table of Contents

Noninterest expense



Generally, noninterest expense is composed of all costs associated with operating the Companys business facilities, obtaining and retaining banking customer
relationships and providing banking services. Major components of noninterest expense typically include: (1) employee salaries and benefits, (2) occupancy-related charges (including depreciation of furniture, fixtures, and equipment), and (3) data
processing fees and technology-related costs. During 2004, the Company has added employees in the existing offices to meet additional customer needs due to growth.



The following table presents for the periods indicated the major categories of noninterest expense:



|                                     |  |                          |        |      |   |       
|------------------------------------ |  | ------------------------ | ------ | ---- | - | ------
|                                     |  | Years ended December 31,
|                                     |  | 2004                     |        | 2003
|                                     |  | (Dollars in thousands)  
|                                     |  |                         
|Salaries and benefits                |  | $                        | 9,096  |      | $ | 7,537 
|Premises and equipment expenses, net |  |                          | 2,020  |      |   | 1,731 
|Data processing fees                 |  |                          | 267    |      |   | 271   
|Data service bureau                  |  |                          | 603    |      |   | 589   
|Other expenses                       |  |                          | 2,326  |      |   | 2,538 
|                                     |  |                          |        |      |   |       
|Total noninterest expense            |  | $                        | 14,312 |      | $ | 12,666
|                                     |  |                          |        |      |   |       



Employee compensation and benefits
expenses increased $1.6 million or 20.7% during 2004 and reflects growth in the Companys management and staff to 133 full-time-equivalent employees as of December 31, 2004. This increase is partially attributable to officers and staff hired to
accommodate growth in all aspects of the Companys operations. Management expects to continue to add personnel during 2005 due to the increased needs at the offices as both lobby and support functions grow.



Non-staff expenses were $5.2 million for the year ended December 31, 2004 compared with $5.1
million for the year ended December 31, 2003, an increase of $100,000 or 2.0%. Decreases in franchise taxes, losses on accounts and legal fees on problem loans combined with strict expense control led to a modest increase in non-staff expenses. The
efficiency ratio is calculated by dividing total noninterest expenses by net interest income plus noninterest income, excluding net security gains (losses). An increase in the efficiency ratio indicates that more resources are being utilized to
generate the same volume of income while a decrease would indicate a more efficient allocation of resources. The Companys efficiency ratios were 62.5% and 63.4% for the years ended December 31, 2004 and 2003, respectively. The improved
efficiency ratio in 2004 is primarily a result of the increase in noninterest income.



FINANCIAL CONDITION



Total assets increased to $573.7 million at
December 31, 2004, up $138.5 million or 31.8% from $435.2 million at December 31, 2003. Loans increased to $402.5 million at December 31, 2003 representing a growth of 27.6% over the $315.5 million in loans at December 31, 2003. Investment
securities available for sale at December 31, 2004 were $72.6 million representing a growth of $11.1 million over December 31, 2003. Investment securities held to maturity were $16.9 million at December 31, 2004, a decline of $5.5 million over
December 31, 2003.



16



---

##### Table of Contents

Loan portfolio



The Banks primary lending focus is on middle-market commercial loans and owner-occupied real estate loans to local businesses. Typically, the Banks customers
have financing requirements between $100,000 and $5,000,000. The Bank makes commercial loans primarily to small and medium-sized businesses and to professionals. The Bank offers a variety of consumer loan and commercial loan products including
revolving lines of credit, letters of credit, working capital loans and loans to finance accounts receivable, inventory and equipment.



Commercial



The Banks commercial loans are primarily made within its market area and are underwritten on the basis of the borrowers ability to service such debt from income. As a general practice, many of the
Banks commercial loans have floating rates, are for varying terms, generally not exceeding three years, are personally guaranteed by the business owner and are secured by accounts receivable, inventory and/or other business assets. In general,
commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk for commercial loans is due to the type of collateral securing these loans. The
increased risk also derives from the expectation that commercial loans generally will be serviced principally from the business operations, and those operations may not be successful. As a result of these additional complexities, variables and
risks, commercial loans require more thorough underwriting and servicing than other types of loans.



In addition to commercial loans secured by non-real estate business assets, the Bank makes commercial mortgage loans to finance the purchase of real property, which generally consists of real estate with completed
structures. Commercial mortgage lending typically involves higher loan principal amounts and the repayment of loans is dependent on cash flow from business operations or income from the properties securing the loans to cover operating expenses and
debt service. As a general practice, the Bank requires its commercial mortgage loans to be well secured and guaranteed by responsible parties. The Banks commercial mortgage loans are generally secured by first liens on real estate and
typically amortize over a 10 to 15 year period with balloon payments due at the end of one to five years. In underwriting commercial mortgage loans, consideration is given to the borrowers financial condition and cash flow with additional
consideration given to the propertys operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit checks, appraisals and an evaluation of the
guarantors financial condition and cash flow.



Construction



The Bank makes loans to finance the construction of residential and,
commercial properties. Construction loans are secured by first liens on real estate and a minimum of 20% cash equity is typically required. The Bank conducts periodic inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Construction
lending often involves the disbursement of substantial funds with repayment dependent, in part, on the successful completion of the construction project rather than the ability of a borrower or guarantor to repay the loan. If the Bank is forced to
foreclose on a project prior to completion, the Bank may choose to complete the construction project. However, there is no assurance that it will be able to recover all of the unpaid portion of the loan. In addition, the Bank may be required to fund
additional amounts to complete a project and may have to hold the property for an indeterminate period of time. Underwriting guidelines similar to those described above with respect to commercial mortgage loans are also used in the Banks
construction lending activities.



17



---

##### Table of Contents

1-4 Family Residential



The Bank offers a variety of residential mortgage loan products. The Banks loans collateralized by 1-4 family residential real estate generally are originated in
amounts of no more than 90% of the lower of cost or appraised value. The Bank generally requires mortgage title insurance and hazard insurance in the amount of the loan.



Consumer



The Bank provides a wide variety of consumer loans including motor vehicle, watercraft, education loans, personal loans (collateralized and uncollateralized) and deposit
account collateralized loans. The terms of these loans typically range from 12 to 72 months and vary based upon the nature of collateral and size of loan. As of December 31, 2004, the Bank had no indirect consumer loans, indicating a preference to
maintain personal banking relationships and strict underwriting standards. Consumer loans entail greater risk than do 1-4 family residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrowers continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans.



The Bank rarely makes loans at its legal lending limit. Lending officers are assigned various levels of loan approval authority based upon
their respective levels of experience and expertise. All relationships above $1.0 million are evaluated and acted upon by the Loan Committee, while relationships in excess of $250,000 are subject to each banking offices chief executive
officers review and approval. All new and renewed loans greater than $100,000 are reported monthly to the Board of Directors. The Banks strategy for approving or disapproving loans is to follow conservative loan policies and underwriting
practices which include: (i) granting loans on a sound and collectible basis; (ii) investing funds properly for the benefit of shareholders and the protection of depositors; (iii) serving the legitimate needs of the community and the Banks
general market area while obtaining a balance between maximum yield and minimum risk; (iv) ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan; (v) developing and maintaining adequate
diversification of the loan portfolio as a whole and of the loans within each category; and (vi) ensuring that each loan is properly documented and, if appropriate, insurance coverage is adequate. The Banks loan review and compliance personnel
interact regularly with commercial and consumer lenders to identify potential underwriting or technical exception variances. In addition, the Bank has placed increased emphasis on the early identification of problem loans to aggressively seek
resolution of the situations and thereby keep loan losses at a minimum.



The
following table summarizes the Banks loan portfolio by type of loan as of December 31, 2004 and 2003:



|                                           |  |                        |         |         |       |   |        |   |         |  |       |  
|------------------------------------------ |  | ---------------------- | ------- | ------- | ----- | - | ------ | - | ------- |  | ----- | -
|                                           |  | 2004                   |         |         | 2003  |  
|                                           |  | Amount                 |         | Percent |       |   | Amount |   | Percent | 
|                                           |  | (Dollars in thousands) |        
|Commercial                                 |  | $                      | 130,896 |         | 32.5  | % |        | $ | 120,667 |  | 38.2  | %
|Real estate:                               |  |                        |         |         |       |   |        |   |         |  |       |  
|Commercial owner occupied and multi-family |  |                        | 143,415 |         | 35.6  |   |        |   | 103,312 |  | 32.7  |  
|Construction and land development          |  |                        | 68,028  |         | 16.9  |   |        |   | 39,467  |  | 12.5  |  
|Residential 1-4 family                     |  |                        | 26,901  |         | 6.7   |   |        |   | 22,782  |  | 7.2   |  
|Consumer and other                         |  |                        | 33,255  |         | 8.3   |   |        |   | 29,258  |  | 9.4   |  
|                                           |  |                        |         |         |       |   |        |   |         |  |       |  
|Total loans                                |  | $                      | 402,495 |         | 100.0 | % |        | $ | 315,486 |  | 100.0 | %
|                                           |  |                        |         |         |       |   |        |   |         |  |       |  



18



---

##### Table of Contents

The contractual maturity ranges of the commercial and industrial and real estate construction and land development loan
portfolios and the amount of such loans with predetermined interest rates and floating interest rates in each maturity range as of December 31, 2004 are summarized in the following table:



|                                                |  |                        |        |                              |   |                  |  |       |       |  |   |        
|----------------------------------------------- |  | ---------------------- | ------ | ---------------------------- | - | ---------------- |  | ----- | ----- |  | - | -------
|                                                |  | One Year or Less       |        | After One Through Five Years |   | After Five Years |  | Total
|                                                |  | (Dollars in thousands)
|Commercial and industrial                       |  | $                      | 66,960 |                              | $ | 59,867           |  | $     | 4,069 |  | $ | 130,896
|Real estate  construction and land development |  |                        | 24,584 |                              |   | 38,945           |  |       | 2,132 |  |   | 65,661 
|                                                |  |                        |        |                              |   |                  |  |       |       |  |   |        
|Total                                           |  | $                      | 91,544 |                              | $ | 98,812           |  | $     | 6,201 |  | $ | 196,557
|                                                |  |                        |        |                              |   |                  |  |       |       |  |   |        
|Loans with a predetermined interest rate        |  | $                      | 15,425 |                              | $ | 72,906           |  | $     | 4,190 |  | $ | 92,521 
|Loans with a floating interest rate             |  |                        | 76,119 |                              |   | 25,906           |  |       | 2,011 |  |   | 104,036
|                                                |  |                        |        |                              |   |                  |  |       |       |  |   |        
|Total                                           |  | $                      | 91,544 |                              | $ | 98,812           |  | $     | 6,201 |  | $ | 196,557
|                                                |  |                        |        |                              |   |                  |  |       |       |  |   |        



Nonperforming assets



Nonperforming assets, which include nonaccrual loans, accruing loans 90
or more days past due, restructured loans, and other real estate and foreclosed property, were $632,000 at December 31, 2004, compared with $477,000 at December 31, 2003. This resulted in a ratio of nonperforming assets to loans and other real
estate of 0.16% and 0.15% at December 31, 2004 and 2003, respectively. The increase in nonperforming assets was primarily due to an increase in nonaccrual loans, partially offset by a decrease in other real estate.



The following table presents information regarding nonperforming assets as of the dates
indicated:



|                                                          |  |                        |      |   |      |   |      |  
|--------------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | -
|                                                          |  | December 31,           |     
|                                                          |  | 2004                   |      |   | 2003 |  
|                                                          |  | (Dollars in thousands) |     
|Nonaccrual loans                                          |  | $                      | 289  |   |      | $ | 39   |  
|Accruing loans 90 or more days past due                   |  |                        | 329  |   |      |   | 318  |  
|Other real estate and foreclosed property                 |  |                        | 14   |   |      |   | 120  |  
|                                                          |  |                        |      |   |      |   |      |  
|Total nonperforming assets                                |  | $                      | 632  |   |      | $ | 477  |  
|                                                          |  |                        |      |   |      |   |      |  
|Nonperforming assets to total loans and other real estate |  |                        | 0.16 | % |      |   | 0.15 | %



Loans on which the accrual of interest
has been discontinued are designated as nonaccrual loans. Loans are designated as nonaccrual when reasonable doubt exists as to the full collection of interest and principal. When a loan is placed on nonaccrual status, all interest previously
accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of interest and principal is probable. Interest accruals
are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Gross interest
income on nonaccrual loans that would have been recorded had these loans been performing as agreed was approximately $6,804 and $23,000 for the years ended December 31, 2004 and 2003, respectively.



The Company regularly updates appraisals on loans collateralized by real estate, particularly
those categorized as nonperforming loans and potential problem loans. In instances where updated appraisals reflect reduced collateral values, an evaluation of the borrowers overall financial condition is made to determine the need, if any,
for possible writedowns or appropriate additions to the allowance for loan losses.



19



---

##### Table of Contents

Allowance for loan losses  Critical Accounting Policy



The Company considers its allowance for loan losses as a policy critical to its sound
operations. The company believes that of its significant accounting policies, the allowance for loan losses may involve a higher degree of judgment and complexity. The allowance for loan losses is a valuation allowance for probable losses inherent
in the Banks loan portfolio. The Company provides for loan losses each period by an amount resulting from both (a) an estimate by management of probable loan losses that occurred during the period and (b) the ongoing adjustment of prior
estimates of probable losses occurring in prior periods. The provision for loan losses increases the allowance for loan losses which is netted against loans on the consolidated balance sheets. As losses are confirmed, the loan is written down,
reducing the allowance for loan losses. See Note 3 to the consolidated financial statements for additional information on loans and the allowance for loan losses.



Management has established an allowance for loan losses which it believes is adequate for probable losses in the Banks loan portfolio.
The Bank follows a loan review program to evaluate the credit risk in the loan portfolio. Through the loan review process, the Bank maintains an internally classified loan watch list which, along with a delinquency list of loans, helps management
assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In making its evaluation, management considers factors such as growth in the loan portfolio, the diversification by industry of the Banks
commercial loan portfolio, the effect of changes in the local real estate market on collateral values, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge-offs for the period,
the amount of nonperforming loans and related collateral security and the evaluation of its loan portfolio by the loan review function. Charge-offs occur when a loan is deemed to be uncollectible. Loans classified as substandard are
those loans with clear and defined weaknesses such as a highly-leveraged position, unfavorable financial ratios, uncertain repayment sources, or poor financial condition, any or all of which may jeopardize recoverability of the debt.



The following table presents an analysis of the allowance for loan losses and other data for
the years ended December 31, 2004 and 2003:



|                                                               |  |                          |       |   |      |   |        |  
|-------------------------------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ------ | -
|                                                               |  | Years ended December 31, |      
|                                                               |  | 2004                     |       |   | 2003 |  
|                                                               |  | (Dollars in thousands)   |      
|Balance, beginning of year                                     |  | $                        | 3,783 |   |      | $ | 3,236  |  
|Provision for loan losses                                      |  |                          | 1,450 |   |      |   | 1,730  |  
|Loans charged off:                                             |  |                          |       |   |      |   |        |  
|Commercial loans                                               |  |                          | (519  | ) |      |   | (1,121 | )
|Consumer loans                                                 |  |                          | (85   | ) |      |   | (122   | )
|Recoveries:                                                    |  |                          |       |   |      |   |        |  
|Commercial loans                                               |  |                          | 171   |   |      |   | 54     |  
|Consumer loans                                                 |  |                          | 13    |   |      |   | 6      |  
|                                                               |  |                          |       |   |      |   |        |  
|Net charge offs                                                |  |                          | (420  | ) |      |   | (1,183 | )
|                                                               |  |                          |       |   |      |   |        |  
|Balance, end of year                                           |  | $                        | 4,813 |   |      | $ | 3,783  |  
|                                                               |  |                          |       |   |      |   |        |  
|Ratios:                                                        |  |                          |       |   |      |   |        |  
|Allowance to end of period loans                               |  |                          | 1.20  | % |      |   | 1.20   | %
|Net charge-offs to average loans outstanding during the period |  |                          | 0.12  | % |      |   | 0.40   | %



20



---

##### Table of Contents

The following table reflects the distribution of the allowance for loan losses among various categories of loans and
provides certain other information for the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from
any segment of the loan portfolio.



|                   |  |                        |       |                                |       |   |        |   |                                |  |       |  
|------------------ |  | ---------------------- | ----- | ------------------------------ | ----- | - | ------ | - | ------------------------------ |  | ----- | -
|                   |  | December 31,           |      
|                   |  | 2004                   |       |                                | 2003  |  
|                   |  | Amount                 |       | Percent of loansto total loans |       |   | Amount |   | Percent of loansto total loans | 
|                   |  | (Dollars in thousands) |      
|Commercial         |  | $                      | 1,564 |                                | 32.5  | % |        | $ | 1,445                          |  | 38.2  | %
|Real estate        |  |                        | 2,849 |                                | 59.2  |   |        |   | 1,982                          |  | 52.4  |  
|Consumer and other |  |                        | 400   |                                | 8.3   |   |        |   | 356                            |  | 9.4   |  
|                   |  |                        |       |                                |       |   |        |   |                                |  |       |  
|Total              |  | $                      | 4,813 |                                | 100.0 | % |        | $ | 3,783                          |  | 100.0 | %
|                   |  |                        |       |                                |       |   |        |   |                                |  |       |  



Where management is able to identify
specific loans or categories of loans where specific amounts of allowance are required, allocations are assigned to those loans. Federal regulators also require that a bank maintain an allowance that is sufficient to absorb an estimated amount of
unidentified potential losses based on managements perception of economic conditions, loan portfolio growth, historical charge-off experience and concentration exposure. Management of the Bank will monitor these conditions and is committed to
maintaining an adequate allowance.



Investment securities



At the date of purchase, the Company classifies debt and equity securities into one of three
categories: held to maturity, trading or available for sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities classified as held to maturity are stated at cost, increased by accretion of
discounts and reduced by amortization of premiums, both computed by the interest method, only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair value in the financial statements with unrealized gains and losses included in earnings. Securities not classified as either held to maturity or trading are classified as
available for sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as a component of accumulated other comprehensive income (loss) until realized. Gains and losses on sales of securities
are determined using the specific-identification method. Fair value of investment securities changes daily based primarily on market rates. Losses shown in the tables below are temporary and in all cases have occurred during the past twelve months.



The amortized cost and approximate fair value of investment securities
classified as available for sale held at December 31, 2004 and 2003 is as follows:



|                                      |  |                        |        |                  |   |      |  |            |     |  |   |       
|------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ---- |  | ---------- | --- |  | - | ------
|                                      |  | December 31, 2004     
|                                      |  |                        |        | Gross Unrealized |   |     
|                                      |  | Amortized Cost         |        | Gain             |   | Loss |  | Fair Value
|                                      |  | (Dollars in thousands)
|U.S. Government and agency securities |  | $                      | 5,000  |                  | $ |     |  | $          |    |  | $ | 5,000 
|Mortgage-backed securities            |  |                        | 63,547 |                  |   | 6    |  |            | 285 |  |   | 63,268
|Municipal securities                  |  |                        | 984    |                  |   |     |  |            | 16  |  |   | 968   
|Federal Reserve Bank stock            |  |                        | 841    |                  |   |     |  |            |    |  |   | 841   
|Federal Home Loan Bank stock          |  |                        | 2,515  |                  |   |     |  |            |    |  |   | 2,515 
|                                      |  |                        |        |                  |   |      |  |            |     |  |   |       
|Total securities available for sale   |  | $                      | 72,887 |                  | $ | 6    |  | $          | 301 |  | $ | 72,592
|                                      |  |                        |        |                  |   |      |  |            |     |  |   |       



21



---

##### Table of Contents

|                             |  |                        |        |                  |   |      |  |            |     |  |   |       
|---------------------------- |  | ---------------------- | ------ | ---------------- | - | ---- |  | ---------- | --- |  | - | ------
|                             |  | December 31, 2003     
|                             |  |                        |        | Gross Unrealized |   |     
|                             |  | Amortized Cost         |        | Gain             |   | Loss |  | Fair Value
|                             |  | (Dollars in thousands)
|Mortgage-backed securities   |  | $                      | 55,363 |                  | $ | 201  |  | $          | 479 |  | $ | 55,085
|Municipal securities         |  |                        | 990    |                  |   |     |  |            | 8   |  |   | 982   
|Federal Reserve Bank stock   |  |                        | 841    |                  |   |     |  |            |    |  |   | 841   
|Federal Home Loan Bank stock |  |                        | 4,616  |                  |   |     |  |            |    |  |   | 4,616 
|                             |  |                        |        |                  |   |      |  |            |     |  |   |       
|                             |  | $                      | 61,810 |                  | $ | 201  |  | $          | 487 |  | $ | 61,524
|                             |  |                        |        |                  |   |      |  |            |     |  |   |       



The amortized cost and gross market
value of investment securities classified as held to maturity at December 31, 2004 and 2003 is as follows:



|                                      |  |                        |        |                  |   |                    |  |   |    |  |   |       
|------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ------------------ |  | - | -- |  | - | ------
|                                      |  | December 31, 2004     
|                                      |  |                        |        | Gross Unrealized |   | Gross Market Value
|                                      |  | Amortized Cost         |        | Gain             |   | Loss               | 
|                                      |  | (Dollars in thousands)
|U.S. Government and agency securities |  | $                      | 9,201  |                  | $ |                   |  | $ | 43 |  | $ | 9,158 
|Mortgage-backed securities            |  |                        | 7,652  |                  |   | 51                 |  |   | 7  |  |   | 7,696 
|                                      |  |                        |        |                  |   |                    |  |   |    |  |   |       
|                                      |  | $                      | 16,853 |                  | $ | 51                 |  | $ | 50 |  | $ | 16,854
|                                      |  |                        |        |                  |   |                    |  |   |    |  |   |       



|                                      |  |                        |        |                  |   |                    |  |   |    |  |   |       
|------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ------------------ |  | - | -- |  | - | ------
|                                      |  | December 31, 2003     
|                                      |  |                        |        | Gross Unrealized |   | Gross Market Value
|                                      |  | Amortized Cost         |        | Gain             |   | Loss               | 
|                                      |  | (Dollars in thousands)
|U.S. Government and agency securities |  | $                      | 10,331 |                  | $ | 67                 |  | $ |   |  | $ | 10,398
|Mortgage-backed securities            |  |                        | 12,067 |                  |   | 96                 |  |   | 42 |  |   | 12,121
|                                      |  |                        |        |                  |   |                    |  |   |    |  |   |       
|                                      |  | $                      | 22,398 |                  | $ | 163                |  | $ | 42 |  | $ | 22,519
|                                      |  |                        |        |                  |   |                    |  |   |    |  |   |       



The following table summarizes the
contractual maturity of investment securities available for sale on a fair value basis and their weighted average yields as of December 31, 2004. Contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life
because borrowers have a right to prepay their obligations at any time.



|                                      |  |                        |   |       |                                     |   |        |                                       |       |  |                 |        |  |       |        |  |        |   |       |   |        |       |      |       |  |   |        |  |      |  
|------------------------------------- |  | ---------------------- | - | ----- | ----------------------------------- | - | ------ | ------------------------------------- | ----- |  | --------------- | ------ |  | ----- | ------ |  | ------ | - | ----- | - | ------ | ----- | ---- | ----- |  | - | ------ |  | ---- | -
|                                      |  | December 31, 2004      |  
|                                      |  | Due Within One Year    |   |       | After One Yearbut Within Five Years |   |        | After Five Years but Within Ten Years |       |  | After Ten Years |        |  |       |        |  |       
|                                      |  | Amount                 |   | Yield |                                     |   | Amount |                                       | Yield |  |                 | Amount |  | Yield |        |  | Amount |   | Yield |   |        | Total |      | Yield | 
|                                      |  | (Dollars in thousands) |  
|U.S. Government and agency securities |  | $                      |  |       |                                    | % |        | $                                     | 5,000 |  | 3.00            | %      |  | $     |       |  |       | % |       | $ |       |       |     | %     |  | $ | 5,000  |  | 3.00 | %
|Mortgage-backed securities            |  |                        |  |       |                                    |   |        |                                       |      |  |                |        |  |       | 17,209 |  | 4.04   |   |       |   | 46,059 |       | 3.89 |       |  |   | 63,268 |  | 3.93 |  
|Municipal securities                  |  |                        |  |       |                                    |   |        |                                       | 968   |  | 2.93            |        |  |       |       |  |       |   |       |   |       |       |     |       |  |   | 968    |  | 2.93 |  
|                                      |  |                        |   |       |                                     |   |        |                                       |       |  |                 |        |  |       |        |  |        |   |       |   |        |       |      |       |  |   |        |  |      |  
|                                      |  | $                      |  |       |                                    | % |        | $                                     | 5,968 |  | 2.99            | %      |  | $     | 17,209 |  | 4.04   | % |       | $ | 46,059 |       | 3.89 | %     |  | $ | 69,236 |  | 3.81 | %
|                                      |  |                        |   |       |                                     |   |        |                                       |       |  |                 |        |  |       |        |  |        |   |       |   |        |       |      |       |  |   |        |  |      |  



22



---

##### Table of Contents

The following table summarizes the contractual maturity of investment securities held to maturity on an amortized cost
basis and their weighted average yields as of December 31, 2004. Contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers have a right to prepay their obligations at any time.



|                                      |  |                        |       |       |                                     |   |        |                                      |       |  |                 |        |  |       |   |  |        |   |       |   |       |       |      |       |  |   |        |  |      |  
|------------------------------------- |  | ---------------------- | ----- | ----- | ----------------------------------- | - | ------ | ------------------------------------ | ----- |  | --------------- | ------ |  | ----- | - |  | ------ | - | ----- | - | ----- | ----- | ---- | ----- |  | - | ------ |  | ---- | -
|                                      |  | December 31, 2004      |      
|                                      |  | Due Within One Year    |       |       | After One Year butWithin Five Years |   |        | After Five Yearsbut Within Ten Years |       |  | After Ten Years |        |  |       |   |  |       
|                                      |  | Amount                 |       | Yield |                                     |   | Amount |                                      | Yield |  |                 | Amount |  | Yield |   |  | Amount |   | Yield |   |       | Total |      | Yield | 
|                                      |  | (Dollars in thousands) |      
|U.S. Government and agency securities |  | $                      | 3,012 |       | 2.39                                | % |        | $                                    | 6,189 |  | 2.99            | %      |  | $     |  |  |       | % |       | $ |      |       |     | %     |  | $ | 9,201  |  | 2.79 | %
|Mortgage-backed securities            |  |                        |      |       |                                    |   |        |                                      | 561   |  | 4.30            |        |  |       |  |  |       |   |       |   | 7,091 |       | 4.23 |       |  |   | 7,652  |  | 4.23 |  
|                                      |  |                        |       |       |                                     |   |        |                                      |       |  |                 |        |  |       |   |  |        |   |       |   |       |       |      |       |  |   |        |  |      |  
|                                      |  | $                      | 3,012 |       | 2.39                                | % |        | $                                    | 6,750 |  | 3.10            | %      |  | $     |  |  |       | % |       | $ | 7,091 |       | 4.23 | %     |  | $ | 16,853 |  | 3.45 | %
|                                      |  |                        |       |       |                                     |   |        |                                      |       |  |                 |        |  |       |   |  |        |   |       |   |       |       |      |       |  |   |        |  |      |  



Deposits



The Banks deposits increased to $497.8 million at December 31, 2004, up from $355.2
million at December 31, 2003, an increase of $142.6 million or 40.1%. Management believes that the increase in noninterest-bearing deposits is more significant, since noninterest-bearing demand deposits are typically an indicator of the sort of
business banking relationships that constitute the Banks target market. Noninterest-bearing deposits reached $167.8 million at December 31, 2004, up from $117.9 million at December 31, 2003. For the year ended December 31, 2004,
interest-bearing deposits increased 39.1% from $237.3 million at December 31, 2003 to $330.0 million at December 31, 2004.



The daily average balances and weighted average rates paid on deposits for the years ended December 31, 2004 and 2003 are presented below:



|                                |  |                          |         |      |      |   |        |   |         |  |      |  
|------------------------------- |  | ------------------------ | ------- | ---- | ---- | - | ------ | - | ------- |  | ---- | -
|                                |  | Years ended December 31, |        
|                                |  | 2004                     |         |      | 2003 |  
|                                |  | Amount                   |         | Rate |      |   | Amount |   | Rate    | 
|                                |  | (Dollars in thousands)   |        
|Money market checking accounts  |  | $                        | 25,401  |      | 0.36 | % |        | $ | 22,418  |  | 0.39 | %
|Money market and savings        |  |                          | 114,368 |      | 0.73 |   |        |   | 117,212 |  | 0.68 |  
|Certificates of deposit         |  |                          | 134,678 |      | 2.52 |   |        |   | 115,864 |  | 2.72 |  
|                                |  |                          |         |      |      |   |        |   |         |  |      |  
|Total interest-bearing deposits |  |                          | 274,447 |      | 1.57 |   |        |   | 255,494 |  | 1.59 |  
|Noninterest-bearing deposits    |  |                          | 131,801 |      |     |   |        |   | 110,450 |  |     |  
|                                |  |                          |         |      |      |   |        |   |         |  |      |  
|Total deposits                  |  | $                        | 406,248 |      | 1.06 | % |        | $ | 365,944 |  | 1.11 | %
|                                |  |                          |         |      |      |   |        |   |         |  |      |  



23



---

##### Table of Contents

Time deposits are solicited from markets served by the Bank and are not sought through brokered sources. Time deposits
are a significant source of the Banks funds. The following table presents the maturities of time deposits as of December 31, 2004 and 2003:



|                                       |  |                        |         |   |      |   |         |  
|-------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | -
|                                       |  | December 31,           |        
|                                       |  | 2004                   |         |   | 2003 |  
|                                       |  | (Dollars in thousands) |        
|Maturities of time deposits            |  |                        |         |   |      |   |         |  
|Three months or less                   |  | $                      | 63,806  |   |      | $ | 54,204  |  
|Over 3 through 6 months                |  |                        | 18,462  |   |      |   | 16,129  |  
|Over 6 through 12 months               |  |                        | 25,887  |   |      |   | 13,919  |  
|Over 12 months                         |  |                        | 49,199  |   |      |   | 35,226  |  
|                                       |  |                        |         |   |      |   |         |  
|Total                                  |  | $                      | 157,354 |   |      | $ | 119,478 |  
|                                       |  |                        |         |   |      |   |         |  
|Weighted average rate on time deposits |  |                        | 2.65    | % |      |   | 2.50    | %
|                                       |  |                        |         |   |      |   |         |  



Other Borrowings



Short-term borrowings ranging from one to thirty days consist of federal funds purchased and
other bank borrowings. The Companys long-term borrowings generally consist of borrowings with the Federal Home Loan Bank maturing within five years. The increase in long-term borrowings resulted from a leverage strategy whereby the Bank
borrowed funds from the Federal Home Loan Bank and used the proceeds to purchase investment securities. A positive spread was achieved from this transaction. Information relating to these borrowings for the years ended December 31, 2004 and 2003 is
summarized as follows:



|                                        |  |                          |        |   |      |   |        |  
|--------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                        |  | Years ended December 31, |       
|                                        |  | 2004                     |        |   | 2003 |  
|                                        |  | (Dollars in thousands)   |       
|Long-term borrowings:                   |  |                          |        |   |      |   |        |  
|Average                                 |  | $                        | 31,585 |   |      | $ | 23,753 |  
|Period-end                              |  | $                        | 30,000 |   |      | $ | 35,000 |  
|Maximum month-end balance during period |  | $                        | 35,000 |   |      | $ | 35,000 |  
|Interest rate:                          |  |                          |        |   |      |   |        |  
|Weighted average for the period         |  |                          | 1.98   | % |      |   | 1.95   | %
|Weighted average at period-end          |  |                          | 2.01   | % |      |   | 1.92   | %
|Short-term borrowings:                  |  |                          |        |   |      |   |        |  
|Average                                 |  | $                        | 5,910  |   |      | $ | 4,981  |  
|Period-end                              |  | $                        |       |   |      | $ | 5,000  |  
|Maximum month-end balance during period |  | $                        | 21,000 |   |      | $ | 20,000 |  
|Interest rate:                          |  |                          |        |   |      |   |        |  
|Weighted average for the period         |  |                          | 1.31   | % |      |   | 1.14   | %
|Weighted average at period-end          |  |                          |       | % |      |   | 1.21   | %



24



---

##### Table of Contents

Junior subordinated debentures



On December 19, 2002, the Companys wholly owned subsidiary trust, Republic Bancshares Capital Trust I (the Trust),
completed the private placement of 8,000 floating rate capital securities (the Capital Securities) with an aggregate liquidation value of $8,000,000. Concurrent with the issuance of the Capital Securities, the Trust issued trust common
securities to the Company in the aggregate liquidation value of $248,000. The proceeds of the issuance of the Capital Securities and trust common securities were invested in $8,248,000 of the Companys Floating Rate Junior Subordinated Debt
Securities due 2033 (the Debentures). The Debentures will mature on January 7, 2033, which date may be shortened to a date not earlier than January 7, 2008 if certain conditions are met, including the prior approval of the Federal
Reserve and any other required regulatory approvals. The Debentures, which are the only assets of the Trust, are subordinate and junior in right of payment to all present and future senior indebtedness (as defined in the Indenture dated December 19,
2002) of the Company. The Debentures accrue interest at a floating rate equal to the three-month LIBOR plus 3.35%, payable quarterly on January 7, April 7, July 7 and October 7 of each year; provided that the rate may not exceed 12.5% through
January 7, 2008. The quarterly distributions on the Capital Securities are paid at the same rate that interest is paid on the Debentures.



The Company has fully and unconditionally guaranteed the payment by the Trust of distributions and other amounts under the Capital Securities to the extent that the Trust
has funds available for such payments. The Trust must redeem the Capital Securities when the Debentures are paid at maturity or upon any earlier prepayment of the Debentures. The Debentures may be prepaid if certain events occur, including a change
in the tax status or regulatory capital treatment of the Capital Securities or a change in existing laws that requires the Trust to register as an investment company. Under the provisions of the Debentures, the Company has the right to defer payment
of interest on the Debentures at any time, or from time to time, for up to twenty consecutive quarterly periods. If interest payments on the Debentures are deferred, the distributions on the Capital Securities will also be deferred.



On December 31, 2003, the Company retroactively implemented FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,resulting in the deconsolidation of the Trust established in 2002, which was created for the sole purpose of issuing junior subordinated debentures. As a result of
the implementation of this Interpretation, the Company no longer reflects the trust preferred securities issued by the Trust in its consolidated balance sheets. Instead, the junior subordinated debentures are shown as liabilities in the consolidated
balance sheets, the $248,000 investment in the common equity of the trust is included in the consolidated balance sheets as other assets, and the interest income received from and interest expense paid to the Trust, respectively, being included in
the consolidated statements of income as interest income and interest expense. The increase to both other interest income and interest expense totaled $12,000 for the years ended December 31, 2004 and December 31, 2003.



Liquidity



Liquidity management involves maintaining sufficient cash levels to fund operations and to meet the requirements of borrowers, depositors,
and creditors. Higher levels of liquidity bear higher corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets, and higher interest expense involved in extending liability maturities. Liquid assets include
cash and cash equivalents, loans and securities maturing within one year, and money market instruments. In addition, the Bank holds securities maturing after one year, which can be sold to meet liquidity needs.



The Bank relies primarily on customer deposits and shareholders equity to fund
interest-earning assets. The Federal Home Loan Bank (FHLB) is also a source of liquidity. The FHLB allows member banks to borrow against their eligible collateral to satisfy liquidity requirements.



Maintaining a relatively stable funding base, which is achieved by diversifying funding
sources, competitively pricing deposit products, and extending the contractual maturity of liabilities, reduces the Banks exposure to roll over risk on deposits and limits reliance on volatile short-term purchased funds. Short-term funding
needs arise from declines in deposits or other funding sources, funding of loan commitments and requests for new loans.



25



---

##### Table of Contents

Management believes the Bank has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in
the present economic environment. In addition, the Bank has access to the FHLB for borrowing purposes. The Bank has not received any recommendations from regulatory authorities that would materially affect liquidity, capital resources or operations.



Subject to certain limitations, the Bank may borrow funds from the FHLB in the
form of advances. Credit availability from the FHLB to the Bank is based on the Banks financial and operating condition. Borrowings from the FHLB to the Bank were $30 million at December 31, 2004. These borrowings were collaterized by
investment securities held in safekeeping by the FHLB. In addition to creditworthiness, the Bank must own a minimum amount of FHLB capital stock. This minimum is 5.00% of outstanding FHLB advances, $1.5 million at December 31, 2004. Unused borrowing
capacity at December 31, 2004 was approximately $191.0 million. The Bank uses FHLB advances for both long-term and short-term liquidity needs. Other than normal banking operations, the Bank has no long-term liquidity needs. The Bank has never been
involved with highly leveraged transactions that may cause unusual potential long-term liquidity needs.



Republic Bancshares of Texas Inc. is a holding company and does not conduct operations; its primary sources of liquidity are dividends upstreamed from Republic National Bank. See Regulations and
Supervision-Dividend Restrictions regarding such dividends.



The
liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse
effect on the Companys liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented, would have a material adverse effect on the Company.



Payments due by period for the Companys contractual obligations (other
than deposit liabilities) at December 31, 2004 are presented below:



|                               |  |                        |        |                                  |   |                                   |  |                  |       |       |   |        |  |   |       
|------------------------------ |  | ---------------------- | ------ | -------------------------------- | - | --------------------------------- |  | ---------------- | ----- | ----- | - | ------ |  | - | ------
|                               |  | Within One Year        |        | After One but Within Three Years |   | After Three but Within Five Years |  | After Five Years |       | Total
|                               |  | (Dollars in thousands)
|Short-term borrowings          |  | $                      |       |                                  | $ |                                  |  | $                |      |       | $ |       |  | $ |      
|Long-term borrowings           |  |                        | 20,000 |                                  |   | 10,000                            |  |                  |      |       |   |       |  |   | 30,000
|Junior subordinated debentures |  |                        |       |                                  |   |                                  |  |                  |      |       |   | 8,248  |  |   | 8,248 
|Operating lease obligations    |  |                        | 910    |                                  |   | 1,800                             |  |                  | 1,841 |       |   | 2,551  |  |   | 7,102 
|                               |  |                        |        |                                  |   |                                   |  |                  |       |       |   |        |  |   |       
|Total contractual obligations  |  | $                      | 20,910 |                                  | $ | 11,800                            |  | $                | 1,841 |       | $ | 10,799 |  | $ | 45,350
|                               |  |                        |        |                                  |   |                                   |  |                  |       |       |   |        |  |   |       



Interest Rate Sensitivity



Asset and liability management is concerned with the timing and magnitude
of the repricing of assets as compared to liabilities. It is the objective of the Company to generate stable growth in net interest income and to attempt to control risks associated with interest rate movements. In general, managements
strategy is to reduce the impact of changes in interest rates on its net interest income by maintaining a favorable match between the maturities or repricing dates of its interest-earning assets and interest-bearing liabilities. The Company adjusts
its interest sensitivity during the year through changes in the mix of assets and liabilities. The Companys asset and liability management strategy is formulated and monitored by the Asset Liability Management Committee (the ALCO),
which is composed of senior officers of the Bank and two outside directors, in accordance with policies approved by the Banks Board of Directors. This Committee meets regularly to review, among other things, the sensitivity of the Banks
assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activity, and maturities of investments and borrowings. The Asset Liability Committee also approves
and establishes pricing and funding decisions with respect to the Banks overall asset and liability composition. The Committee reviews the Banks liquidity, cash flow flexibility, maturities of investments, deposits and borrowings, retail
and institutional deposit activity, current market conditions, and interest rates on both a local and national level.



26



---

##### Table of Contents

To effectively measure and manage interest rate risk, the Company uses simulation and analysis to determine the impact on
net interest income of changes in interest rates 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.



The following table presents an analysis of the sensitivity inherent in the
Companys net interest income. The data used to prepare the table is as of December 31, 2004, which may be not representative of average balances found at year end or any other time period. The analysis is a tool used by management that changes
every month based on changes in the composition of the balance sheet. Management believes that, based on available information, the Bank has been and will continue to be slightly asset sensitive. The interest rate scenarios presented in the table
include interest rates at December 31, 2004 and as adjusted by instantaneous rate changes upward and downward of up to 100 basis points. Each rate scenario reflects unique prepayment and repricing assumptions. Since there are limitations inherent in
any methodology used to estimate the exposure to changes in market interest rates, this analysis is not intended to be a forecast of the actual effect of a change in market interest rates on the Company. The market value sensitivity analysis
presented includes assumptions that (i) the composition of the Companys interest sensitive assets and liabilities existing at year end will remain constant over the twelve month measurement period; and (ii) that changes in market rates are
parallel and instantaneous across the yield curve regardless of duration or repricing characteristics of specific assets or liabilities. Further, the analysis does not contemplate any actions that the Company might undertake in response to changes
in market interest rates. Accordingly, this analysis is not intended and does not provide a precise forecast of the effect actual changes in market rates will have on the Company.



|                                         |  |                               |        |                                            |   |        |         |  |      |   
|---------------------------------------- |  | ----------------------------- | ------ | ------------------------------------------ | - | ------ | ------- |  | ---- | --
|                                         |  |                               |        | Increase (decrease) in net interest income |  
|Changes in interest rates (basis points) |  | Estimated net interest income |        | Amount                                     |   |        | Percent | 
|                                         |  | (Dollars in thousands)        |       
|+100                                     |  | $                             | 25,414 |                                            | $ | 806    |         |  | 3.3  | % 
|0                                        |  | $                             | 24,608 |                                            |   |       |         |  |     |   
|-100                                     |  | $                             | 23,505 |                                            | $ | (1,103 | )       |  | (4.5 | %)



The interest rate sensitivity
(GAP) is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A GAP is considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A GAP is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest rates, a negative GAP would tend to
adversely affect net interest income, 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. While the GAP is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that
measure. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively
even if an institution were perfectly matched in each maturity category.



The
Companys one-year cumulative GAP position at December 31, 2004 was a positive $17.5 million or 3.05% of assets compared to a negative $8.0 million at December 31, 2003. The change from the prior year is not considered significant. This is a
one-day position that is continually changing and is not indicative of the Companys position at any other time. While the GAP position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability
management, shortcomings are inherent in GAP analysis since certain assets and liabilities may not move proportionally as interest rates change.



27



---

##### Table of Contents

The following table summarizes interest rate sensitive assets and liabilities by their repricing dates at December 31,
2004:



|                                          |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|----------------------------------------- |  | ---------------------- | ------- | -- | ----------- | - | ------ | --------- |  | - | --------- | - |  | ------------ | ------- | - | ----- | - | ------- | - |  | - | -------
|                                          |  | 1-6 Months             |         |    | 6-12 Months |   |        | 1-3 Years |  |   | 3-5 Years |   |  | Over 5 Years |         |   | Total
|                                          |  | (Dollars in thousands)
|Interest-earning assets:                  |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|Federal funds sold and other              |  | $                      | 45,682  |    |             | $ |       |           |  | $ |          |   |  | $            |        |   |       | $ |        |   |  | $ | 45,682 
|Securities                                |  |                        | 15,734  |    |             |   | 23,397 |           |  |   | 29,932    |   |  |              | 18,807  |   |       |   | 1,575   |   |  |   | 89,445 
|Loans                                     |  |                        | 187,386 |    |             |   | 33,931 |           |  |   | 89,773    |   |  |              | 80,301  |   |       |   | 11,104  |   |  |   | 402,495
|                                          |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|Total interest-earning assets             |  |                        | 248,802 |    |             |   | 57,328 |           |  |   | 119,705   |   |  |              | 99,108  |   |       |   | 12,679  |   |  |   | 537,622
|                                          |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|Interest-bearing liabilities:             |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|Demand, money market and savings deposits |  |                        | 172,608 |    |             |   |       |           |  |   |          |   |  |              |        |   |       |   |        |   |  |   | 172,608
|Certificates of deposit and other time    |  |                        | 82,105  |    |             |   | 25,675 |           |  |   | 30,765    |   |  |              | 18,809  |   |       |   |        |   |  |   | 157,354
|Other borrowings                          |  |                        | 8,248   |    |             |   |       |           |  |   | 27,500    |   |  |              | 2,500   |   |       |   |        |   |  |   | 38,248 
|                                          |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|Total interest-bearing liabilities        |  |                        | 262,961 |    |             |   | 25,675 |           |  |   | 58,265    |   |  |              | 21,309  |   |       |   |        |   |  |   | 368,210
|                                          |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|Period GAP                                |  | $                      | (14,159 | )  |             | $ | 31,653 |           |  | $ | 61,440    |   |  | $            | 77,799  |   |       | $ | 12,679  |   |  | $ | 169,412
|                                          |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|Cumulative GAP at December 31, 2004       |  | $                      | (14,159 | )  |             | $ | 17,494 |           |  | $ | 78,934    |   |  | $            | 156,733 |   |       | $ | 167,488 |   |  |   |        
|                                          |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|Cumulative GAP at December 31, 2003       |  | $                      | (39,512 | )  |             | $ | (7,848 | )         |  | $ | 55,665    |   |  | $            | 110,028 |   |       | $ | 114,737 |   |  |   |        
|                                          |  |                        |         |    |             |   |        |           |  |   |           |   |  |              |         |   |       |   |         |   |  |   |        
|Period GAP to total assets                |  |                        | (2.47   | %) |             |   | 5.52   | %         |  |   | 10.71     | % |  |              | 13.56   | % |       |   | 2.21    | % |  |   |        
|Cumulative GAP to total assets            |  |                        | (2.47   | %) |             |   | 3.05   | %         |  |   | 13.76     | % |  |              | 27.32   | % |       |   | 29.53   | % |  |   |        



Off-Balance Sheet Arrangements



The contractual amount of the Companys financial instruments with
off-balance sheet risk expiring by period at December 31, 2004 is presented below:



|                                                             |  |                        |        |                                  |   |                                   |  |                  |       |       |   |       |  |   |       
|------------------------------------------------------------ |  | ---------------------- | ------ | -------------------------------- | - | --------------------------------- |  | ---------------- | ----- | ----- | - | ----- |  | - | ------
|                                                             |  | Within One Year        |        | After One but Within Three Years |   | After Three but Within Five Years |  | After Five Years |       | Total
|                                                             |  | (Dollars in thousands)
|Unfunded loan commitments including unfunded lines of credit |  | $                      | 49,551 |                                  | $ | 3,780                             |  | $                | 3,534 |       | $ | 5,058 |  | $ | 61,923
|Standby letters of credit                                    |  |                        | 3,786  |                                  |   | 27                                |  |                  |      |       |   |      |  |   | 3,813 
|                                                             |  |                        |        |                                  |   |                                   |  |                  |       |       |   |       |  |   |       
|Total financial instruments with off-balance sheet risk      |  | $                      | 53,337 |                                  | $ | 3,807                             |  | $                | 3,534 |       | $ | 5,058 |  | $ | 65,736
|                                                             |  |                        |        |                                  |   |                                   |  |                  |       |       |   |       |  |   |       



Due to the nature of the
Companys unfunded loan commitments, including unfunded lines of credit, the amounts presented above do not necessarily represent amounts the Company anticipates funding in the periods presented above.



28



---

##### Table of Contents

Capital resources



Shareholders equity increased to $35.2 million at December 31, 2004, up $5.2 million or 17.3% from $30.0 million at December 31, 2003 primarily from an increase in
comprehensive income. The leverage ratio was 9.0% at December 31, 2004, compared with 8.9% at December 31, 2003.



Capital management consists of providing equity to support both current and future operations. The Company and the Bank are subject to capital adequacy requirements
imposed by the Federal Reserve and the OCC. Both the Federal Reserve and the OCC have adopted risk-based capital requirements. The Companys and Banks regulatory capital amounts and ratios in relation to current regulatory capital
requirements for capital adequacy purposes are as follows:



|                                         |  |                         |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ----------------------- | ------ | ----- | ----------------------------- | - | ------ | ---------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | As of December 31, 2004 |       
|                                         |  | Actual                  |        |       | For capital adequacy purposes |   |        | To be well capitalized under prompt corrective action provisions |       
|                                         |  | Amount                  |        | Ratio |                               |   | Amount |                                                                  | Ratio  |  |      | Amount |  | Ratio |       
|                                         |  | (Dollars in thousands)  |       
|Company                                  |  |                         |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk-weighted assets)  |  | $                       | 48,353 |       | 10.80                         | % |        | $                                                                | 35,802 |  | 8.00 | %      |  | $     | 44,753 |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |                         | 43,540 |       | 9.73                          | % |        |                                                                  | 17,901 |  | 4.00 | %      |  |       | 26,852 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  |                         | 43,540 |       | 8.95                          | % |        |                                                                  | 19,452 |  | 4.00 | %      |  |       | 24,316 |  | 5.00  | %
|                                         |  |                         |        |       |                               |  
|Bank                                     |  |                         |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk-weighted assets)  |  | $                       | 47,147 |       | 10.55                         | % |        | $                                                                | 35,761 |  | 8.00 | %      |  | $     | 44,701 |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |                         | 42,334 |       | 9.47                          | % |        |                                                                  | 17,881 |  | 4.00 | %      |  |       | 26,821 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  |                         | 42,334 |       | 7.90                          | % |        |                                                                  | 21,429 |  | 4.00 | %      |  |       | 26,787 |  | 5.00  | %
|                                         | 
|                                         |  | As of December 31, 2003 |       
|                                         |  | Actual                  |        |       | For capital adequacy purposes |   |        | To be well capitalized under prompt correctiveaction provisions  |       
|                                         |  | Amount                  |        | Ratio |                               |   | Amount |                                                                  | Ratio  |  |      | Amount |  | Ratio |       
|                                         |  | (Dollars in thousands)  |       
|Company                                  |  |                         |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk-weighted assets)  |  | $                       | 42,166 |       | 12.33                         | % |        | $                                                                | 27,351 |  | 8.00 | %      |  | $     | 34,189 |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |                         | 38,383 |       | 11.23                         | % |        |                                                                  | 13,675 |  | 4.00 | %      |  |       | 20,513 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  |                         | 38,383 |       | 8.87                          | % |        |                                                                  | 17,310 |  | 4.00 | %      |  |       | 21,638 |  | 5.00  | %
|                                         |  |                         |        |       |                               |  
|Bank                                     |  |                         |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk-weighted assets)  |  | $                       | 41,115 |       | 12.05                         | % |        | $                                                                | 27,300 |  | 8.00 | %      |  | $     | 34,125 |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |                         | 37,332 |       | 10.94                         | % |        |                                                                  | 13,650 |  | 4.00 | %      |  |       | 20,475 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  |                         | 37,332 |       | 8.24                          | % |        |                                                                  | 18,114 |  | 4.00 | %      |  |       | 22,642 |  | 5.00  | %



29



---

##### Table of Contents

The $8.0 million in trust preferred securities issued by Republic Bancshares Capital Trust I (the Trust) are
currently included in the Tier 1 capital of the Company for regulatory capital purposes. On March 1, 2005, the Federal Reserve adopted final rules that continue to allow trust preferred securities to be included in Tier 1 capital, subject to
stricter quantitative and qualitative limits. Currently, trust preferred securities and qualifying perpetual preferred stock are limited in the aggregate to no more than 25% of a bank holding companys core capital elements. The new rule amends
the existing limit by providing that restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) can be no more than 25% of core capital, net of goodwill and associated deferred tax liability. The
amount of such excess trust preferred securities are includable in Tier 2 capital. The new quantitative limits will be fully effective March 31, 2009. Assuming these final rules were effective at December 31, 2004, because the Company has no
goodwill, the entire $8.0 million of trust preferred securities would count as Tier 1 capital.



The Trust that issued the trust preferred securities holds junior subordinated debentures the Company issued with a 30-year maturity. The final rules provide that in the last five years before the junior subordinated
debentures mature, the associated trust preferred securities will be excluded from Tier 1 capital and included in Tier 2 capital. In addition, under the proposal, the trust preferred securities during this five-year period would be amortized out of
Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the debentures.



ITEM 8. FINANCIAL STATEMENTS



Reference is made to
the financial statements, the report thereon, the notes thereto commencing at page F-1 of this Form 10-KSB, which financial statements, report and notes are included herein.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



There have been no disagreements with accountants on any matter of accounting principles or practices or financial statement disclosures during the two-year period ended
December 31, 2004.



ITEM 9A. 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 our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act)) were effective to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported to the Companys management within the time periods specified in the Securities and Exchange Commissions rules and forms.



Changes in internal controls over financial reporting. There were no changes in the
Companys internal controls 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.



30



---

##### Table of Contents



PART III.



ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT



The information under the captions Election of Directors, Continuing Directors and Executive Officers, Section 16(a) Beneficial Ownership
Reporting Compliance and Code of Ethics in the Companys definitive Proxy Statement for its 2005 Annual Meeting of Shareholders (the 2005 Proxy Statement) to be filed with the Commission within 120 days after
December 31, 2004, is incorporated herein by reference in response to this item.



ITEM 11. EXECUTIVE COMPENSATION



The information
under the caption Executive Compensation and Other Matters in the 2005 Proxy Statement is incorporated herein by reference in response to this item.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The information under the caption Beneficial Ownership of Common Stock by Management of the Company and Principal Shareholders in the 2005 Proxy Statement is
incorporated herein by reference in response to this item.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information under the caption Interests of Management and Others in Certain Transactions in the 2005 Proxy Statement is incorporated herein by reference in response to this item.



ITEM 14. EXHIBITS



|            |  |                                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                              
|            | 
|2.1         |  | Agreement and Plan of Reorganization by and among Republic Bancshares of Texas, Inc., Republic National Bank and RBT Holdings, Inc. dated as of May 30, 2001 (incorporated herein by reference
to Exhibit 2.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on September 27, 2001 (the Form 8-K)).
|            | 
|3.1         |  | Articles of Incorporation of Republic Bancshares of Texas, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Form 8-K).                                                                                                                                                                                                        
|            | 
|3.2         |  | Bylaws of Republic Bancshares of Texas, Inc. (incorporated herein by reference to Exhibit 3.2 to the Companys Form 8-K).                                                                                                                                                                                                                           
|            | 
|4.1         |  | Specimen certificate for shares of Common Stock of Republic Bancshares of Texas, Inc. (incorporated herein by reference to Exhibit 4.1 to the Companys Form 8-K).                                                                                                                                                                                  
|            | 
|10.1+       |  | Republic Bancshares of Texas, Inc. 1998 Stock Option Plan (incorporated herein by reference to Exhibit 4.4 to the Companys Registration Statement on Form S-8, Registration No.
333-70458).                                                                                                                                                        



31



---

##### Table of Contents

|      |  |                                                                                                                                                                                                   
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.2  |  | Republic Bancshares of Texas, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.4 to the Companys Registration Statement on Form S-8, Registration No.
333-70456).
|      | 
|21.1  |  | Subsidiaries of Republic Bancshares of Texas, Inc. (incorporated herein by reference to Exhibit 21.1 to the Companys Form 8-K).                                                                  
|      | 
|23.1* |  | Consent of KPMG LLP.                                                                                                                                                                              
|      | 
|31.1* |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                       
|      | 
|31.2* |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                       
|      | 
|32.1* |  | Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                  
|      | 
|33.2* |  | 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.                                            

---

|* | Filed herewith.
|- | ---------------

|+ | Represents management contract or compensatory plan or arrangement.
|- | -------------------------------------------------------------------



ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information under the caption Principal Accountant Fees and Services in the 2005 Proxy Statement is incorporated herein by reference in response to this item.



32



---

##### Table of Contents

SIGNATURES



In accordance with the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.



Republic Bancshares of Texas, Inc. (Registrant)By:

/s/ R. John McWhorterR. John McWhorterSecretary, Treasurer and Chief Financial OfficerDated: March 15, 2005




In accordance with the
requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. This report to be signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.



|                                             |  |                                                                                            |  |               
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------
|Signature                                    |  | Title                                                                                      |  | Date          
|/s/ C. P. BryanC. P. Bryan                   |  | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) |  | March 15, 2005
|                                             |  |                                                                                           
|/s/ R. John McWhorterR. John McWhorter       |  | Secretary, Treasurer and Chief FinancialOfficer (Principal Financial Officer)              |  | March 15, 2005
|                                             |  |                                                                                           
|/s/ Gerald W. BodzyGerald W. Bodzy           |  | Director                                                                                   |  | March 15, 2005
|                                             |  |                                                                                           
|/s/ Donn C. FullenweiderDonn C. Fullenweider |  | Director                                                                                   |  | March 15, 2005
|                                             |  |                                                                                           
|/s/ James C. HassellJames C. Hassell         |  | Director                                                                                   |  | March 15, 2005
|                                             |  |                                                                                           
|/s/ Wayne C. OwenWayne C. Owen               |  | Director                                                                                   |  | March 15, 2005



33



---

##### Table of Contents

Republic Bancshares of Texas, Inc. and Subsidiaries



Index to Consolidated Financial Statements



|                                                                                                          |  |     
|--------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                          |  | Page
|Consolidated Financial Statements                                                                         |  |     
|Report of Independent Registered Public Accounting Firm                                                   |  | F-2 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                              |  | F-3 
|Consolidated Statements of Income for the Years Ended December 31, 2004 and 2003                          |  | F-4 
|Consolidated Statements of Changes in Shareholders Equity for the Years ended December 31, 2004 and 2003 |  | F-5 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003                      |  | F-6 
|Notes to Consolidated Financial Statements                                                                |  | F-7 



F-1



---

##### Table of Contents



Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

Republic Bancshares of Texas, Inc.:



We have audited the accompanying consolidated balance sheets of Republic Bancshares of Texas, Inc. and subsidiaries (the
Company) as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Republic Bancshares of Texas, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity
with U. S. generally accepted accounting principles.



/s/ KPMG LLP



Houston, Texas

February 25, 2005



F-2



---

##### Table of Contents



Republic Bancshares of Texas, Inc. and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                |  | December 31,                             |        
|                                                                                                                                                                                |  | 2004                                     |         |   | 2003 |  
|                                                                                                                                                                                |  | (Dollars in thousands,except share data) |        
|Assets                                                                                                                                                                          |  |                                          |         |   |      |   |         |  
|Cash and due from banks                                                                                                                                                         |  | $                                        | 17,564  |   |      | $ | 19,998  |  
|Federal funds sold and other                                                                                                                                                    |  |                                          | 45,682  |   |      |   | 833     |  
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|Total cash and cash equivalents                                                                                                                                                 |  |                                          | 63,246  |   |      |   | 20,831  |  
|                                                                                                                                                                                |  |                                         
|Investment securities available for sale (note 2)                                                                                                                               |  |                                          | 72,592  |   |      |   | 61,524  |  
|Investment securities held to maturity (note 2)                                                                                                                                 |  |                                          | 16,853  |   |      |   | 22,398  |  
|                                                                                                                                                                                |  |                                         
|Loans (note 3)                                                                                                                                                                  |  |                                          | 402,495 |   |      |   | 315,486 |  
|Less: Allowance for loan losses (note 3)                                                                                                                                        |  |                                          | (4,813  | ) |      |   | (3,783  | )
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|Loans, net                                                                                                                                                                      |  |                                          | 397,682 |   |      |   | 311,703 |  
|                                                                                                                                                                                |  |                                         
|Premises and equipment, net (note 4)                                                                                                                                            |  |                                          | 8,321   |   |      |   | 6,560   |  
|Accrued interest receivable                                                                                                                                                     |  |                                          | 2,092   |   |      |   | 1,516   |  
|Other assets (note 5)                                                                                                                                                           |  |                                          | 12,876  |   |      |   | 10,686  |  
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|Total assets                                                                                                                                                                    |  | $                                        | 573,662 |   |      | $ | 435,218 |  
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|Liabilities and shareholders equity                                                                                                                                            |  |                                          |         |   |      |   |         |  
|Liabilities:                                                                                                                                                                    |  |                                          |         |   |      |   |         |  
|Deposits: (note 6)                                                                                                                                                              |  |                                          |         |   |      |   |         |  
|Noninterest-bearing                                                                                                                                                             |  | $                                        | 167,798 |   |      | $ | 117,925 |  
|Interest-bearing                                                                                                                                                                |  |                                          | 329,962 |   |      |   | 237,256 |  
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|Total deposits                                                                                                                                                                  |  |                                          | 497,760 |   |      |   | 355,181 |  
|Junior subordinated debentures (note 8)                                                                                                                                         |  |                                          | 8,248   |   |      |   | 8,248   |  
|Accrued interest payable                                                                                                                                                        |  |                                          | 846     |   |      |   | 502     |  
|Other borrowings (note 7)                                                                                                                                                       |  |                                          | 30,000  |   |      |   | 40,000  |  
|Other liabilities                                                                                                                                                               |  |                                          | 1,656   |   |      |   | 1,284   |  
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|Total liabilities                                                                                                                                                               |  |                                          | 538,510 |   |      |   | 405,215 |  
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|Commitments and contingencies (note 13)                                                                                                                                         |  |                                          |         |   |      |   |         |  
|Shareholders equity (notes 11 and 14)                                                                                                                                          |  |                                          |         |   |      |   |         |  
|Common stock, $1 par value; 20,000,000 shares authorized, 3,934,881 issued and outstanding as of December 31, 2004 and 3,889,130 issued and
outstanding as of December 31, 2003 |  |                                          | 3,935   |   |      |   | 3,889   |  
|Additional paid-in capital                                                                                                                                                      |  |                                          | 17,732  |   |      |   | 17,438  |  
|Accumulated other comprehensive loss, net of tax                                                                                                                                |  |                                          | (194    | ) |      |   | (190    | )
|Retained earnings                                                                                                                                                               |  |                                          | 13,679  |   |      |   | 8,866   |  
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|Total shareholders equity                                                                                                                                                      |  |                                          | 35,152  |   |      |   | 30,003  |  
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  
|Total liabilities and shareholders equity                                                                                                                                      |  | $                                        | 573,662 |   |      | $ | 435,218 |  
|                                                                                                                                                                                |  |                                          |         |   |      |   |         |  



See accompanying notes
to consolidated financial statements.



F-3



---

##### Table of Contents



Republic Bancshares of Texas, Inc. and Subsidiaries

Consolidated Statements of Income



|                                                          |  |                                                         |           |      |   |           |  
|--------------------------------------------------------- |  | ------------------------------------------------------- | --------- | ---- | - | --------- | -
|                                                          |  | Years ended December 31,                                |          
|                                                          |  | 2004                                                    |           | 2003 |  
|                                                          |  | (Dollars in thousands, except share and per share data) |          
|Interest income:                                          |  |                                                         |           |      |   |           |  
|Loans, including fees                                     |  | $                                                       | 22,560    |      | $ | 20,079    |  
|Investment securities                                     |  |                                                         | 2,564     |      |   | 2,567     |  
|Federal funds sold and other                              |  |                                                         | 231       |      |   | 154       |  
|                                                          |  |                                                         |           |      |   |           |  
|Total interest income                                     |  |                                                         | 25,355    |      |   | 22,800    |  
|                                                          |  |                                                         |           |      |   |           |  
|Interest expense:                                         |  |                                                         |           |      |   |           |  
|Interest-bearing deposits                                 |  |                                                         | 4,321     |      |   | 4,028     |  
|Other borrowings                                          |  |                                                         | 715       |      |   | 519       |  
|Junior subordinated debentures                            |  |                                                         | 418       |      |   | 397       |  
|                                                          |  |                                                         |           |      |   |           |  
|Total interest expense                                    |  |                                                         | 5,454     |      |   | 4,944     |  
|                                                          |  |                                                         |           |      |   |           |  
|Net interest income                                       |  |                                                         | 19,901    |      |   | 17,856    |  
|Provision for loan losses (note 3)                        |  |                                                         | 1,450     |      |   | 1,730     |  
|                                                          |  |                                                         |           |      |   |           |  
|Net interest income after provision for loan losses       |  |                                                         | 18,451    |      |   | 16,126    |  
|                                                          |  |                                                         |           |      |   |           |  
|Noninterest income:                                       |  |                                                         |           |      |   |           |  
|Service charges on deposit accounts                       |  |                                                         | 1,900     |      |   | 1,547     |  
|Other noninterest income                                  |  |                                                         | 1,106     |      |   | 581       |  
|Gain on sale of securities, net                           |  |                                                         |          |      |   | 516       |  
|                                                          |  |                                                         |           |      |   |           |  
|Total noninterest income                                  |  |                                                         | 3,006     |      |   | 2,644     |  
|                                                          |  |                                                         |           |      |   |           |  
|Noninterest expense:                                      |  |                                                         |           |      |   |           |  
|Salaries and employee benefits                            |  |                                                         | 9,096     |      |   | 7,537     |  
|Occupancy expense                                         |  |                                                         | 1,518     |      |   | 1,284     |  
|Premises and equipment expense                            |  |                                                         | 502       |      |   | 447       |  
|Service bureau fees                                       |  |                                                         | 603       |      |   | 589       |  
|Data processing fees                                      |  |                                                         | 267       |      |   | 271       |  
|Other                                                     |  |                                                         | 2,326     |      |   | 2,538     |  
|                                                          |  |                                                         |           |      |   |           |  
|Total noninterest expense                                 |  |                                                         | 14,312    |      |   | 12,666    |  
|                                                          |  |                                                         |           |      |   |           |  
|Income before federal income tax provision (benefit)      |  |                                                         | 7,145     |      |   | 6,104     |  
|Federal income tax provision (benefit) (note 9)           |  |                                                         |           |      |   |           |  
|Current                                                   |  |                                                         | 2,176     |      |   | 2,224     |  
|Deferred                                                  |  |                                                         | 156       |      |   | (167      | )
|                                                          |  |                                                         |           |      |   |           |  
|Total federal income tax provision                        |  |                                                         | 2,332     |      |   | 2,057     |  
|                                                          |  |                                                        
|Net income                                                |  | $                                                       | 4,813     |      | $ | 4,047     |  
|                                                          |  |                                                         |           |      |   |           |  
|Earnings per common share:                                |  |                                                         |           |      |   |           |  
|Basic                                                     |  | $                                                       | 1.23      |      | $ | 1.04      |  
|Diluted                                                   |  | $                                                       | 1.18      |      | $ | 1.00      |  
|                                                          |  |                                                        
|Weighted average shares used in computing per share data: |  |                                                         |           |      |   |           |  
|Basic                                                     |  |                                                         | 3,911,802 |      |   | 3,876,796 |  
|Diluted                                                   |  |                                                         | 4,085,977 |      |   | 4,046,018 |  



See accompanying notes
to consolidated financial statements.



F-4



---

##### Table of Contents



Republic Bancshares of Texas, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders Equity



|                                                                                                                    |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | ------------------------ | ----- |  | --------------------------------------------- | ------ | - | ---------------- | - | ------------------------ | - |  | - | ------ |  | - | ------ | -
|                                                                                                                    |  | Common stock   |  | Additionalpaid-incapital |       |  | Accumulatedothercomprehensiveloss, net of tax |        |   | Retainedearnings |   | Totalshareholdersequity |  
|                                                                                                                    |  | Shares         |  | Dollars                  |       |  |                                               |       
|                                                                                                                    |  | (In thousands) | 
|Balance at December 31, 2002                                                                                        |  | 3,869          |  | $                        | 3,869 |  | $                                             | 17,318 |   |                  | $ |                         |   |  | $ | 4,819  |  | $ | 26,006 |  
|                                                                                                                    |  |                |  |                          |       | 
|Issuance of common stock                                                                                            |  | 15             |  |                          | 15    |  |                                               | 101    |   |                  |   |                         |   |  |   |       |  |   | 116    |  
|                                                                                                                    |  |                |  |                          |       | 
|Exercise of stock options                                                                                           |  | 5              |  |                          | 5     |  |                                               | 29     |   |                  |   |                         |   |  |   |       |  |   | 34     |  
|                                                                                                                    |  |                |  |                          |       | 
|Other                                                                                                               |  |               |  |                          |      |  |                                               | (10    | ) |                  |   |                         |   |  |   |       |  |   | (10    | )
|                                                                                                                    |  |                |  |                          |       | 
|Comprehensive income                                                                                                |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   |        |  
|Net Income                                                                                                          |  |               |  |                          |      |  |                                               |       |   |                  |   |                         |   |  |   | 4,047  |  |   | 4,047  |  
|Net change in unrealized appreciation/(depreciation) on securities available for sale, net of deferred taxes of $97 |  |               |  |                          |      |  |                                               |       |   |                  |   | 151                      |   |  |   |       |  |   | 151    |  
|                                                                                                                    |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   |        |  
|Reclassification adjustment for gains included in net income, net of deferred taxes of $175                         |  |               |  |                          |      |  |                                               |       |   |                  |   | (341                     | ) |  |   |       |  |   | (341   | )
|                                                                                                                    |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   |        |  
|Total comprehensive income                                                                                          |  |               |  |                          |      |  |                                               |       |   |                  |   |                         |   |  |   |       |  |   | 3,857  |  
|                                                                                                                    |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   |        |  
|Balance at December 31, 2003                                                                                        |  | 3,889          |  | $                        | 3,889 |  | $                                             | 17,438 |   |                  | $ | (190                     | ) |  | $ | 8,866  |  | $ | 30,003 |  
|                                                                                                                    |  |                |  |                          |       | 
|Issuance of common stock                                                                                            |  | 29             |  |                          | 29    |  |                                               | 227    |   |                  |   |                         |   |  |   |       |  |   | 256    |  
|                                                                                                                    |  |                |  |                          |       | 
|Exercise of stock options                                                                                           |  | 17             |  |                          | 17    |  |                                               | 72     |   |                  |   |                         |   |  |   |       |  |   | 89     |  
|                                                                                                                    |  |                |  |                          |       | 
|Other                                                                                                               |  |               |  |                          |      |  |                                               | (5     | ) |                  |   |                         |   |  |   |       |  |   | (5     | )
|                                                                                                                    |  |                |  |                          |       | 
|Comprehensive income:                                                                                               |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   |        |  
|Net income                                                                                                          |  |               |  |                          |      |  |                                               |       |   |                  |   |                         |   |  |   | 4,813  |  |   | 4,813  |  
|Net change in unrealized appreciation/(depreciation) on securities available for sale, net of deferred taxes of $2  |  |               |  |                          |      |  |                                               |       |   |                  |   | (4                       | ) |  |   |       |  |   | (4     | )
|                                                                                                                    |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   |        |  
|Total comprehensive income                                                                                          |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   | 4,809  |  
|                                                                                                                    |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   |        |  
|Balance at December 31, 2004                                                                                        |  | 3,935          |  | $                        | 3,935 |  | $                                             | 17,732 |   |                  | $ | (194                     | ) |  | $ | 13,679 |  | $ | 35,152 |  
|                                                                                                                    |  |                |  |                          |       |  |                                               |        |   |                  |   |                          |   |  |   |        |  |   |        |  



See accompanying notes
to consolidated financial statements.



F-5



---

##### Table of Contents



Republic Bancshares of Texas, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                  |  |                          |         |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | -
|                                                                                  |  | Years ended December 31, |        
|                                                                                  |  | 2004                     |         |   | 2003 |  
|                                                                                  |  | (Dollars in thousands)   |        
|Cash flows from operating activities:                                             |  |                          |         |   |      |   |          |  
|Net income                                                                        |  | $                        | 4,813   |   |      | $ | 4,047    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |          |  
|Depreciation                                                                      |  |                          | 686     |   |      |   | 643      |  
|Net amortization of premium on investment securities                              |  |                          | 619     |   |      |   | 954      |  
|Amortization of issuance costs on junior subordinated debentures                  |  |                          | 25      |   |      |   | 25       |  
|Provision for loan losses                                                         |  |                          | 1,450   |   |      |   | 1,730    |  
|Deferred income tax expense (benefit)                                             |  |                          | 156     |   |      |   | (167     | )
|Gain on sales of securities                                                       |  |                          |        |   |      |   | (516     | )
|Increase in accrued interest receivable                                           |  |                          | (576    | ) |      |   | (82      | )
|Increase in other assets                                                          |  |                          | (369    | ) |      |   | (213     | )
|Decrease in accrued interest payable                                              |  |                          | 344     |   |      |   | 77       |  
|Increase in other liabilities                                                     |  |                          | 372     |   |      |   | 626      |  
|                                                                                  |  |                          |         |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                          | 7,520   |   |      |   | 7,124    |  
|                                                                                  |  |                          |         |   |      |   |          |  
|Cash flows from investing activities:                                             |  |                          |         |   |      |   |          |  
|Net increase in loans                                                             |  |                          | (87,429 | ) |      |   | (23,114  | )
|Principal paydowns and sales of investment securities available for sale          |  |                          | 40,676  |   |      |   | 68,081   |  
|Principal paydowns and calls of investment securities held to maturity            |  |                          | 5,345   |   |      |   | 12,846   |  
|Purchase of investment securities available for sale                              |  |                          | (52,169 | ) |      |   | (120,870 | )
|Purchase of investment securities held to maturity                                |  |                          |        |   |      |   | (3,000   | )
|Purchase of bank-owned life insurance policies                                    |  |                          | (2,000  | ) |      |   | (8,500   | )
|Purchase of bank premises and equipment                                           |  |                          | (2,447  | ) |      |   | (365     | )
|                                                                                  |  |                          |         |   |      |   |          |  
|Net cash used in investing activities                                             |  |                          | (98,024 | ) |      |   | (74,922  | )
|                                                                                  |  |                          |         |   |      |   |          |  
|Cash flows from financing activities:                                             |  |                          |         |   |      |   |          |  
|Net increase in deposits                                                          |  |                          | 142,579 |   |      |   | 6,098    |  
|Increase (decrease) from other borrowings                                         |  |                          | (10,000 | ) |      |   | 40,000   |  
|Proceeds from the sale of common stock                                            |  |                          | 256     |   |      |   | 116      |  
|Proceeds from exercise of stock options                                           |  |                          | 89      |   |      |   | 34       |  
|Other                                                                             |  |                          | (5      | ) |      |   | (10      | )
|                                                                                  |  |                          |         |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                          | 132,919 |   |      |   | 46,238   |  
|                                                                                  |  |                          |         |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                              |  |                          | 42,415  |   |      |   | (21,560  | )
|Cash and cash equivalents at beginning of year                                    |  |                          | 20,831  |   |      |   | 42,391   |  
|                                                                                  |  |                          |         |   |      |   |          |  
|Cash and cash equivalents at end of year                                          |  | $                        | 63,246  |   |      | $ | 20,831   |  
|                                                                                  |  |                          |         |   |      |   |          |  
|Supplemental disclosure of cash flow information:                                 |  |                          |         |   |      |   |          |  
|Interest paid                                                                     |  | $                        | 5,110   |   |      | $ | 4,867    |  
|Taxes paid                                                                        |  | $                        | 2,766   |   |      | $ | 2,360    |  



See accompanying notes
to consolidated financial statements.



F-6



---

##### Table of Contents



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(1) Organization
and summary of significant accounting policies



Republic
Bancshares of Texas, Inc. (the Company) was incorporated as a business corporation under the laws of the State of Texas on May 17, 2001 for the purpose of serving as a bank holding company for Republic National Bank (the
Bank). On June 20, 2001, RBT Holdings, Inc. (RBT) was incorporated under the laws of Delaware in accordance with the terms of an agreement and plan of reorganization dated May 30, 2001. Pursuant to the terms of the agreement,
the Bank became a wholly-owned subsidiary of RBT and RBT became a wholly-owned subsidiary of the Company. The reorganization was consummated on September 7, 2001. The reorganization was accounted for in a manner similar to that in
pooling-of-interests accounting and all financial statements reflect the consolidated operations as if the reorganization had taken place prior to the periods covered by such consolidated financial statements. The Bank was chartered as a national
banking association which began operations on November 13, 1998.



The Bank offers a full range of banking services through six banking offices located in the Houston metropolitan area. The accounting and reporting policies of the Company, RBT and the Bank conform to accounting principles generally
accepted in the United States of America and to general practices within the banking industry.



On May 24, 2004, the Company completed a two-for-one stock split effected in the form of a 100% stock dividend payable to shareholders of record on May
10, 2004. The Companys Common Stock outstanding increased to approximately 3.9 million shares after the split. All prior period per share and share information has been restated to reflect this split.



Use of estimates



The preparation of financial statements in conformity with U.S. generally
accepted accounting priniciples requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.



Principles of consolidation



The consolidated financial statements include the amounts of the Company, Bank and RBT. All significant intercompany amounts and transactions have been
eliminated in consolidation.



Cash and cash equivalents



Cash and cash equivalents include cash on hand, amounts
due from banks and federal funds sold.



Cash and
interest-bearing demand deposits of approximately $5.0 million at December 31, 2004 and 2003 are maintained to satisfy the Federal Reserve requirement.



F-7



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Investment securities



The Company uses the amortized cost method for investments in debt
securities when management has the positive intent and ability to hold such securities to maturity. Investments in debt securities that are not expected to be held to maturity and equity securities that have readily determinable fair values are to
be classified as trading or available for sale and measured at fair value in the consolidated balance sheets. Unrealized gains and losses on securities classified as trading securities are to be included in the consolidated statements of income.
Unrealized gains and losses on securities classified as available for sale are to be reported as a separate component of shareholders equity, net of the applicable tax effect. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity. For classification purposes, the Banks investment in the Federal Reserve Bank and the Federal Home Loan Bank are classified as available for sale. Gains and losses on the sale of securities are
calculated based on the specific identification method.



Loans



Interest on commercial and real estate
loans is calculated using the simple interest method based on daily average balances of the principal amount outstanding and is included in earnings. Interest on installment loans is included in earnings using a method that approximates the interest
method.



Management continually reviews the loan portfolio to
identify loans which, with respect to principal and/or interest, may become collection problems. When a loan, in managements judgement, becomes doubtful as to the collection of accrued interest income, it is placed on nonaccrual status and all
previously accrued interest is reversed through a charge to earnings. Interest payments received on nonaccrual loans are recognized as income on a cash basis.



Nonrefundable fees (including commitment fees and loan origination costs) are recognized into income as they occur. The difference in recognizing fees
and costs in this manner rather than in accordance with Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, which
generally requires the deferral of net direct origination fees and costs and subsequent amortization thereof by the interest method, is not material.



A loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impaired loans are valued using (i) the present value of expected future cash flows discounted at the effective interest rate of the loan, (ii) the fair value of the underlying collateral, or
(iii) the observable market price of the loan, whichever is more readily available.



Provision and allowance for loan losses



The allowance for loan losses is established through a provision for such losses charged against income. Loans are charged against the allowance for loan losses when management believes that the collection of the
principal is not probable. The allowance is an amount that management believes will be adequate to reflect the risks inherent in the existing loan portfolio and is based on evaluations of the collectibility and prior loss experience of loans. In
making its evaluation, management considers growth in the loan portfolio, the diversification by industry of the Companys commercial loan portfolio, the



F-8



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge-offs for the period, the amount of nonperforming loans and related collateral
and the evaluation of its loan portfolio by the loan review function.



The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change. Accordingly, the Company
may ultimately incur losses which vary from managements current estimates. Adjustments to the allowance for loan losses are reported in the period such adjustments become known or are reasonably estimable.



Premises and equipment



Premises and equipment are stated at cost, less accumulated depreciation and
amortization computed on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the useful life of the improvements or the remaining term of the lease. Maintenance,
repairs and minor improvements are charged to noninterest expense as incurred. Depreciation expense has been computed principally using estimated lives of thirty years for premises, three to five years for hardware and software, and five to ten
years for furniture and equipment.



Federal income taxes



Deferred income taxes are provided utilizing the asset
and liability method whereby deferred income tax assets or liabilities are recognized for the tax consequences in future years of differences in the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.



Deferred issuance costs



The Company capitalizes all costs related to the issuance of junior
subordinated debentures. The unamortized issuance costs at December 31, 2004 and 2003 of approximately $195,000 and $220,000, respectively, are included in other assets in the consolidated balance sheet. Deferred issuance costs are amortized over
ten years and included as interest expense on junior subordinated debentures in the consolidated statements of income.



Earnings per share



Basic earnings per common share is computed by dividing income available for common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per common share is computed by dividing income available for common shareholders by the sum of the weighted average number of common shares outstanding and the effect of all potential dilutive common
shares outstanding for the period.



F-9



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Stock-based compensation



Financial Accounting Standards Board (FASB) Statement No. 123
(Statement 123), Accounting for Stock-Based Compensation, requires companies to record compensation cost for stock-based employee compensation plans at fair value. Management has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Accordingly, compensation cost of stock options is measured as the excess, if any, of the fair value of the
Companys common stock at the date of the grant over the amount an employee must pay to acquire the common stock. No stock-based employee compensation cost is reflected in net income for the years ended December 31, 2004 and 2003.



In accordance with FASB Statement No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, the following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.



|                                                                                                                                             |  |                                          |       |   |      |   |       |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                                                                             |  | Years ended December 31,                 |      
|                                                                                                                                             |  | 2004                                     |       |   | 2003 |  
|                                                                                                                                             |  | (In thousands, except per share amounts) |      
|Net income as reported                                                                                                                       |  | $                                        | 4,813 |   |      | $ | 4,047 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards1, net of related tax effects |  |                                          | (53   | ) |      |   | (78   | )
|                                                                                                                                             |  |                                          |       |   |      |   |       |  
|Pro forma net income                                                                                                                         |  | $                                        | 4,760 |   |      | $ | 3,969 |  
|                                                                                                                                             |  |                                          |       |   |      |   |       |  
|Earnings per share:                                                                                                                          |  |                                          |       |   |      |   |       |  
|                                                                                                                                             |  |                                          |       |   |      |   |       |  
|Basic - as reported                                                                                                                          |  | $                                        | 1.23  |   |      | $ | 1.04  |  
|                                                                                                                                             |  |                                          |       |   |      |   |       |  
|Basic - pro forma                                                                                                                            |  | $                                        | 1.22  |   |      | $ | 1.02  |  
|                                                                                                                                             |  |                                          |       |   |      |   |       |  
|Diluted - as reported                                                                                                                        |  | $                                        | 1.18  |   |      | $ | 1.00  |  
|                                                                                                                                             |  |                                          |       |   |      |   |       |  
|Diluted - pro forma                                                                                                                          |  | $                                        | 1.17  |   |      | $ | 0.98  |  
|                                                                                                                                             |  |                                          |       |   |      |   |       |  

---

|1) | All awards consist of awards granted, modified, or settled in fiscal periods beginning after 1994that is, awards for which the fair value was required to be measured under
Statement 123.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-10



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Impaired loans



In accordance with FASB Statement No. 114, (Statement 114) Accounting by
Creditors for Impairment of a Loan, as amended by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan  Income Recognition and Disclosures, a loan is considered impaired when it is probable that the
creditor will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, including single family residential and consumer loans, are excluded from the
scope of Statement 114. These loans, however, are considered when determining the adequacy of the allowance for loan losses.



Impaired loans are identified and measured in conjunction with managements review of non-performing loans, classified assets, and the allowance for
loan losses. Impairment of large non-homogeneous loans is measured one of three ways: discounting estimated future cash flows, or the loans market price, or the fair value of the collateral, if the loan is collateral dependent. If the
measurement of the loan is less than the recorded amount of the loan, excluding any allowance for credit losses and including accrued interest, then the impairment is recognized by a charge to operations or an allocation of the allowance for loan
losses.



Recent accounting pronouncements



SFAS No.123, 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 is 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. The adoption of this standard is not expected to have a material impact on the
Companys financial statements.



F-11



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation is intended to achieve more consistent application of consolidation policies to variable interest entities and, thus, to improve comparability
between enterprises engaged in similar activities even if some of those activities are conducted through variable interest entities. Including the assets, liabilities, and results of activities of variable interest entities in the consolidated
financial statements of their primary beneficiaries will provide more complete information about the resources, obligations, risks and opportunities of the consolidated enterprise. This Interpretation applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities
in which an enterprise holds a variable interest that it acquired before February 1, 2003. This Interpretation applies to public enterprises as of the beginning of the applicable interim or annual period, and it applies to nonpublic enterprises as
of the end of the applicable annual period. This Interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years
with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 was revised and reissued in December 2003.



On December 31, 2003, the Company retroactively implemented FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an interpretation
of ARB No. 51,resulting in the deconsolidation of the Trust established in 2002, which was created for the sole purpose of issuing junior subordinated debentures. As a result of the implementation of this Interpretation, the Company no longer
reflects the trust preferred securities issued by the Trust in its consolidated balance sheets. Instead, the junior subordinated debentures are shown as liabilities in the consolidated balance sheets, the $248,000 investment in the common equity of
the trust is included in the consolidated balance sheets as other assets, and the interest income received from and interest expense paid to the Trust, respectively, being included in the consolidated statements of income as interest income and
interest expense. The increase to both other interest income and interest expense totaled $12,000 for the years ended December 31, 2004 and December 31, 2003.



In May 2003, the Financial Accounting Standards Board issued Statement No. 150 (Statement 150), Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. Statement 150 requires certain financial instruments that have characteristics of both liabilities and equity to be classified as a liability on the balance sheet. Prior to the issuance of
Statement 150, the Company classified junior subordinated debentures as a liability on the consolidated balance sheet and its related interest cost as interest expense on the consolidated statement of income, which is consistent with the
requirements of Statement 150. Statement 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Statement 150
will be effected by reporting the cumulative effect of a change in accounting principle for contracts created before the issuance date and still existing at the beginning of that interim period. The adoption of Statement 150 did not have impact on
the Companys consolidated financial statements.



F-12



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment
loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a
reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs
evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investments cost and its fair value. Certain disclosure requirements of EITF
03-1 were adopted in 2003 and the Company began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for
other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position to provide additional
implementation guidance.



Reclassifications



Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform to 2004 presentation with no effect on net income or shareholders equity as previously reported.



(2) Investment securities available for sale and held to maturity



Investment securities available for sale



The amortized cost and fair value of securities available for sale is as follows:



|                                      |  |                        |        |                  |   |      |  |            |     |  |   |       
|------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ---- |  | ---------- | --- |  | - | ------
|                                      |  | December 31, 2004     
|                                      |  |                        |        | Gross Unrealized |   |     
|                                      |  | Amortized Cost         |        | Gain             |   | Loss |  | Fair Value
|                                      |  | (Dollars in thousands)
|U.S. Government and agency securities |  | $                      | 5,000  |                  | $ |     |  | $          |    |  | $ | 5,000 
|Mortgage-backed securities            |  |                        | 63,547 |                  |   | 6    |  |            | 285 |  |   | 63,268
|Municipal securities                  |  |                        | 984    |                  |   |     |  |            | 16  |  |   | 968   
|Federal Reserve Bank stock            |  |                        | 841    |                  |   |     |  |            |    |  |   | 841   
|Federal Home Loan Bank stock          |  |                        | 2,515  |                  |   |     |  |            |    |  |   | 2,515 
|                                      |  |                        |        |                  |   |      |  |            |     |  |   |       
|                                      |  |                        |        |                 
|Total securities available for sale   |  | $                      | 72,887 |                  | $ | 6    |  | $          | 301 |  | $ | 72,592
|                                      |  |                        |        |                  |   |      |  |            |     |  |   |       



F-13



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



|                             |  |                        |        |                  |   |      |  |            |     |  |   |       
|---------------------------- |  | ---------------------- | ------ | ---------------- | - | ---- |  | ---------- | --- |  | - | ------
|                             |  | December 31, 2003     
|                             |  |                        |        | Gross Unrealized |   |     
|                             |  | Amortized Cost         |        | Gain             |   | Loss |  | Fair Value
|                             |  | (Dollars in thousands)
|Mortgage-backed securities   |  | $                      | 55,363 |                  | $ | 201  |  | $          | 479 |  | $ | 55,085
|Municipal securities         |  |                        | 990    |                  |   |     |  |            | 8   |  |   | 982   
|Federal Reserve Bank stock   |  |                        | 841    |                  |   |     |  |            |    |  |   | 841   
|Federal Home Loan Bank stock |  |                        | 4,616  |                  |   |     |  |            |    |  |   | 4,616 
|                             |  |                        |        |                  |   |      |  |            |     |  |   |       
|                             |  | $                      | 61,810 |                  | $ | 201  |  | $          | 487 |  | $ | 61,524
|                             |  |                        |        |                  |   |      |  |            |     |  |   |       



Sales of securities
available for sale were as follows:



|                      |  |                        |        |      |   |       
|--------------------- |  | ---------------------- | ------ | ---- | - | ------
|                      |  | December 31,          
|                      |  | 2004                   |        | 2003
|                      |  | (Dollars in thousands)
|Proceeds from sales   |  | $                      | 21,380 |      | $ | 57,080
|Gross realized gains  |  |                        | 9      |      |   | 523   
|Gross realized losses |  |                        | 9      |      |   | 7     



Investment
securities held to maturity



The amortized cost and gross
market value of investment securities classified as held to maturity is as follows:



|                                      |  |                        |        |                  |   |      |  |                   |    |  |   |       
|------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ---- |  | ----------------- | -- |  | - | ------
|                                      |  | December 31, 2004     
|                                      |  |                        |        | Gross Unrealized |   |     
|                                      |  | Amortized Cost         |        | Gain             |   | Loss |  | GrossMarket Value
|                                      |  | (Dollars in thousands)
|U.S. Government and agency securities |  | $                      | 9,201  |                  | $ |     |  | $                 | 43 |  | $ | 9,158 
|Mortgage-backed securities            |  |                        | 7,652  |                  |   | 51   |  |                   | 7  |  |   | 7,696 
|                                      |  |                        |        |                  |   |      |  |                   |    |  |   |       
|                                      |  | $                      | 16,853 |                  | $ | 51   |  | $                 | 50 |  | $ | 16,854
|                                      |  |                        |        |                  |   |      |  |                   |    |  |   |       



|                                      |  |                        |        |                  |   |      |  |                   |    |  |   |       
|------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ---- |  | ----------------- | -- |  | - | ------
|                                      |  | December 31, 2003     
|                                      |  |                        |        | Gross Unrealized |   |     
|                                      |  | Amortized Cost         |        | Gain             |   | Loss |  | GrossMarket Value
|                                      |  | (Dollars in thousands)
|U.S. Government and agency securities |  | $                      | 10,331 |                  | $ | 67   |  | $                 |   |  | $ | 10,398
|Mortgage-backed securities            |  |                        | 12,067 |                  |   | 96   |  |                   | 42 |  |   | 12,121
|                                      |  |                        |        |                  |   |      |  |                   |    |  |   |       
|                                      |  | $                      | 22,398 |                  | $ | 163  |  | $                 | 42 |  | $ | 22,519
|                                      |  |                        |        |                  |   |      |  |                   |    |  |   |       



F-14



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Other-than-temporary impairment



Declines in the fair value of held to maturity and available for sale
securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value.



Management
has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Furthermore, as of December 31, 2004, management also had the ability and
intent to hold the securities classified as available for sale for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying
securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to
reasons of credit quality. Accordingly, as of December 31, 2004, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Companys consolidated income statement.



Fair value of investment securities available for sale changes daily
based primarily on market rates. Losses shown in the tables below are considered temporary.



|                           |  |                        |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|-------------------------- |  | ---------------------- | ------ | ------------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                           |  | December 31, 2004     
|                           |  | Less than 12 months    |        | 12 months or longer |   | Total    
|                           |  | FairValue              |        | UnrealizedLosses    |   | FairValue |  | UnrealizedLosses |        | FairValue |   | UnrealizedLosses
|                           |  | (Dollars in thousands)
|Mortgage-backed securities |  | $                      | 22,237 |                     | $ | 52        |  | $                | 26,346 |           | $ | 233              |  | $ | 48,583 |  | $ | 285
|Municipal securities       |  |                        |       |                     |   |          |  |                  | 968    |           |   | 16               |  |   | 968    |  |   | 16 
|                           |  |                        |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|                           |  | $                      | 22,237 |                     | $ | 52        |  | $                | 27,314 |           | $ | 249              |  | $ | 49,551 |  | $ | 301
|                           |  |                        |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    



Fair value of
investment securities held to maturity changes daily based primarily on market rates. Losses shown in the tables below are considered temporary.



|                                      |  |                        |  |                     |  |             |        |                  |   |             |  |                  |        |  |   |   
|------------------------------------- |  | ---------------------- |  | ------------------- |  | ----------- | ------ | ---------------- | - | ----------- |  | ---------------- | ------ |  | - | --
|                                      |  | December 31, 2004     
|                                      |  | Less than 12 months    |  | 12 months or longer |  | Total      
|                                      |  | MarketValue            |  | UnrealizedLosses    |  | MarketValue |        | UnrealizedLosses |   | MarketValue |  | UnrealizedLosses
|                                      |  | (Dollars in thousands)
|U.S. Government and agency securities |  |                       |  |                    |  | $           | 9,158  |                  | $ | 43          |  | $                | 9,158  |  | $ | 43
|Mortgage-backed securities            |  |                       |  |                    |  |             | 2,396  |                  |   | 7           |  |                  | 2,396  |  |   | 7 
|                                      |  |                        |  |                     |  |             |        |                  |   |             |  |                  |        |  |   |   
|                                      |  |                       |  |                    |  | $           | 11,554 |                  | $ | 50          |  | $                | 11,554 |  | $ | 50
|                                      |  |                        |  |                     |  |             |        |                  |   |             |  |                  |        |  |   |   



F-15



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



There were $4.1 million and $3.1 million at December 31, 2004 and 2003,
respectively, of securities held to maturity pledged as collateral to public deposits and other purposes required or permitted by law.



Contractual maturities of investment securities



The following table summarizes the contractual maturity of investment securities available for sale on a fair value basis and their weighted average
yields as of December 31, 2004. Contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers have a right to prepay their obligations at any time.



|                                      |  |                        |   |       |                                     |   |        |                                     |       |  |                 |        |  |       |        |  |        |   |       |   |        |       |      |       |  |   |        |  |      |  
|------------------------------------- |  | ---------------------- | - | ----- | ----------------------------------- | - | ------ | ----------------------------------- | ----- |  | --------------- | ------ |  | ----- | ------ |  | ------ | - | ----- | - | ------ | ----- | ---- | ----- |  | - | ------ |  | ---- | -
|                                      |  | December 31, 2004      |  
|                                      |  | Due Within One Year    |   |       | After One Yearbut Within Five Years |   |        | After Five Yearsbut Within TenYears |       |  | After Ten Years |        |  |       |        |  |       
|                                      |  | Amount                 |   | Yield |                                     |   | Amount |                                     | Yield |  |                 | Amount |  | Yield |        |  | Amount |   | Yield |   |        | Total |      | Yield | 
|                                      |  | (Dollars in thousands) |  
|U.S. Government and agency securities |  | $                      |  |       |                                    | % |        | $                                   | 5,000 |  | 3.00            | %      |  | $     |       |  |       | % |       | $ |       |       |     | %     |  | $ | 5,000  |  | 3.00 | %
|Mortgage-backed securities            |  |                        |  |       |                                    |   |        |                                     |      |  |                |        |  |       | 17,209 |  | 4.04   |   |       |   | 46,059 |       | 3.89 |       |  |   | 63,268 |  | 3.93 |  
|Municipal securities                  |  |                        |  |       |                                    |   |        |                                     | 968   |  | 2.93            |        |  |       |       |  |       |   |       |   |       |       |     |       |  |   | 968    |  | 2.93 |  
|                                      |  |                        |   |       |                                     |   |        |                                     |       |  |                 |        |  |       |        |  |        |   |       |   |        |       |      |       |  |   |        |  |      |  
|                                      |  | $                      |  |       |                                    | % |        | $                                   | 5,968 |  | 2.99            | %      |  | $     | 17,209 |  | 4.04   | % |       | $ | 46,059 |       | 3.89 | %     |  | $ | 69,236 |  | 3.81 | %
|                                      |  |                        |   |       |                                     |   |        |                                     |       |  |                 |        |  |       |        |  |        |   |       |   |        |       |      |       |  |   |        |  |      |  



The following table
summarizes the contractual maturity of investment securities held to maturity on an amortized cost basis and their weighted average yields as of December 31, 2004. Contractual maturity of mortgage-backed securities is not a reliable indicator of
their expected life because borrowers have a right to prepay their obligations at any time.



|                                      |  |                        |       |       |                                     |   |        |                                    |       |  |                 |        |  |       |   |  |        |   |       |   |       |       |      |       |  |   |        |  |      |  
|------------------------------------- |  | ---------------------- | ----- | ----- | ----------------------------------- | - | ------ | ---------------------------------- | ----- |  | --------------- | ------ |  | ----- | - |  | ------ | - | ----- | - | ----- | ----- | ---- | ----- |  | - | ------ |  | ---- | -
|                                      |  | December 31, 2004      |      
|                                      |  | Due Within One Year    |       |       | After One Yearbut Within Five Years |   |        | After FiveYears butWithin TenYears |       |  | After Ten Years |        |  |       |   |  |       
|                                      |  | Amount                 |       | Yield |                                     |   | Amount |                                    | Yield |  |                 | Amount |  | Yield |   |  | Amount |   | Yield |   |       | Total |      | Yield | 
|                                      |  | (Dollars in thousands) |      
|U.S. Government and agency securities |  | $                      | 3,012 |       | 2.39                                | % |        | $                                  | 6,189 |  | 2.99            | %      |  | $     |  |  |       | % |       | $ |      |       |     | %     |  | $ | 9,201  |  | 2.79 | %
|Mortgage-backed securities            |  |                        |      |       |                                    |   |        |                                    | 561   |  | 4.30            |        |  |       |  |  |       |   |       |   | 7,091 |       | 4.23 |       |  |   | 7,652  |  | 4.23 |  
|                                      |  |                        |       |       |                                     |   |        |                                    |       |  |                 |        |  |       |   |  |        |   |       |   |       |       |      |       |  |   |        |  |      |  
|                                      |  | $                      | 3,012 |       | 2.39                                | % |        | $                                  | 6,750 |  | 3.10            | %      |  | $     |  |  |       | % |       | $ | 7,091 |       | 4.23 | %     |  | $ | 16,853 |  | 3.45 | %
|                                      |  |                        |       |       |                                     |   |        |                                    |       |  |                 |        |  |       |   |  |        |   |       |   |       |       |      |       |  |   |        |  |      |  



F-16



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(3) Loans



A summary of loans at December 31, 2004 and 2003 follows:



|                                           |  |                        |         |         |       |   |        |   |         |  |       |  
|------------------------------------------ |  | ---------------------- | ------- | ------- | ----- | - | ------ | - | ------- |  | ----- | -
|                                           |  | 2004                   |         |         | 2003  |  
|                                           |  | Amount                 |         | Percent |       |   | Amount |   | Percent | 
|                                           |  | (Dollars in thousands) |        
|Commercial                                 |  | $                      | 130,896 |         | 32.5  | % |        | $ | 120,667 |  | 38.2  | %
|Real estate:                               |  |                        |         |         |       |   |        |   |         |  |       |  
|Commercial owner occupied and multi-family |  |                        | 143,415 |         | 35.6  |   |        |   | 103,312 |  | 32.7  |  
|Construction and land development          |  |                        | 68,028  |         | 16.9  |   |        |   | 39,467  |  | 12.5  |  
|Residential 1-4 family                     |  |                        | 26,901  |         | 6.7   |   |        |   | 22,782  |  | 7.2   |  
|Consumer and other                         |  |                        | 33,255  |         | 8.3   |   |        |   | 29,258  |  | 9.4   |  
|                                           |  |                        |         |         |       |   |        |   |         |  |       |  
|Total loans                                |  | $                      | 402,495 |         | 100.0 | % |        | $ | 315,486 |  | 100.0 | %
|                                           |  |                        |         |         |       |   |        |   |         |  |       |  



All loans to
directors and officers of the Company and the Bank and principal shareholders of the Company and associates of such persons are, in the opinion of management, made in the ordinary course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable loans of like quality and risk of collectibility. The outstanding balance of such loans as of December 31, 2004 and 2003 was approximately $5.0 million and $4.1 million,
respectively.



At December 31, 2004 and 2003, the Company had
no recorded investment in impaired loans. At December 31, 2004 and 2003, the Company had an allowance for loan losses of $4.8 million and $3.8 million respectively. Management believes the allowance is adequate to cover probable losses inherent in
the loan portfolio. Four nonaccrual loans totaling $289,000 existed at December 31, 2004 and three nonaccrual loans with a balance of $39,000 existed at December 31, 2003.



The following is a summary of the activity in the allowance for loan losses for the years ended December 31, 2004 and 2003:



|                                     |  |                        |       |   |      |   |        |  
|------------------------------------ |  | ---------------------- | ----- | - | ---- | - | ------ | -
|                                     |  | 2004                   |       |   | 2003 |  
|                                     |  | (Dollars in thousands) |      
|Balance, beginning of year           |  | $                      | 3,783 |   |      | $ | 3,236  |  
|Provision for loan losses            |  |                        | 1,450 |   |      |   | 1,730  |  
|Loans charged off, net of recoveries |  |                        | (420  | ) |      |   | (1,183 | )
|                                     |  |                        |       |   |      |   |        |  
|Balance, end of year                 |  | $                      | 4,813 |   |      | $ | 3,783  |  
|                                     |  |                        |       |   |      |   |        |  



F-17



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(4) Premises and equipment



A summary of premises and equipment, at cost, and accumulated depreciation
follows:



|                                     |  |                        |        |   |      |   |        |  
|------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                     |  | December 31,           |       
|                                     |  | 2004                   |        |   | 2003 |  
|                                     |  | (Dollars in thousands) |       
|Land                                 |  | $                      | 1,815  |   |      | $ | 729    |  
|Buildings and leasehold improvements |  |                        | 5,054  |   |      |   | 4,505  |  
|Furniture and equipment              |  |                        | 4,195  |   |      |   | 3,461  |  
|                                     |  |                        |        |   |      |   |        |  
|Subtotal                             |  |                        | 11,064 |   |      |   | 8,695  |  
|Less: accumulated depreciation       |  |                        | (2,743 | ) |      |   | (2,135 | )
|                                     |  |                        |        |   |      |   |        |  
|Premises and equipment, net          |  | $                      | 8,321  |   |      | $ | 6,560  |  
|                                     |  |                        |        |   |      |   |        |  



Depreciation expense
for the years ended December 31, 2004 and 2003 was approximately $686,000 and $643,000, respectively.



(5) Other assets



Other
assets consist of the following:



|                                          |  |                        |        |      |   |       
|----------------------------------------- |  | ---------------------- | ------ | ---- | - | ------
|                                          |  | December 31,          
|                                          |  | 2004                   |        | 2003
|                                          |  | (Dollars in thousands)
|Other real estate and foreclosed property |  | $                      | 14     |      | $ | 120   
|Deferred income taxes                     |  |                        | 658    |      |   | 810   
|Cash value of Bank owned life insurance   |  |                        | 11,018 |      |   | 8,617 
|Other                                     |  |                        | 1,186  |      |   | 1,139 
|                                          |  |                        |        |      |   |       
|                                          |  | $                      | 12,876 |      | $ | 10,686
|                                          |  |                        |        |      |   |       



F-18



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(6) Deposits



The Company offers a variety of deposit products having a wide range of interest rates and terms. The Company relies on
competitive pricing policies and customer service to attract and retain these deposits. At both December 31, 2004 and 2003 the Company had no brokered deposits and does not anticipate having any in the foreseeable future. Deposits provide the
primary source of funding for the Companys lending and investing activities, and the interest paid for deposits must be managed carefully to help maintain the Companys net interest margin.



The Companys ratio of average noninterest-bearing demand deposits to
average total deposits for the years ended December 31, 2004 and 2003 was 32.4% and 33.2% respectively.



Deposits, their stated rates and the related weighted average interest rates at December 31, 2004 and 2003 are summarized below (dollars in thousands):



|                                |  |                |   |  |        |         |   |             |                |   |        |   |         |  
|------------------------------- |  | -------------- | - |  | ------ | ------- | - | ----------- | -------------- | - | ------ | - | ------- | -
|                                |  | 2004           |   |  | 2003   |        
|                                |  | Stated rate    |   |  | Amount |         |   | Stated rate |                |   | Amount |  
|Noninterest-bearing deposits    |  | 0.00           | % |  | $      | 167,798 |   |             | 0.00           | % |        | $ | 117,925 |  
|                                |  |                |   |  |        |         |   |             |                |   |        |   |         |  
|Interest-bearing deposits:      |  |                |   |  |        |         |   |             |                |   |        |   |         |  
|Interest-bearing checking       |  | 0.10-0.90      |   |  |        | 26,481  |   |             | 0.10-0.65      |   |        |   | 27,381  |  
|Savings deposits                |  | 0.25           |   |  |        | 4,155   |   |             | 0.25           |   |        |   | 3,542   |  
|Money market demand deposits    |  | 0.35-1.70      |   |  |        | 141,972 |   |             | 0.40-0.65      |   |        |   | 86,855  |  
|Certificate accounts            |  | Less than 2.00 |   |  |        | 50,595  |   |             | Less than 2.00 |   |        |   | 46,160  |  
|                                |  | 2.00-2.99      |   |  |        | 53,847  |   |             | 2.00-2.99      |   |        |   | 34,124  |  
|                                |  | 3.00-3.99      |   |  |        | 25,597  |   |             | 3.00-3.99      |   |        |   | 15,405  |  
|                                |  | 4.00-4.99      |   |  |        | 14,606  |   |             | 4.00-4.99      |   |        |   | 7,828   |  
|                                |  | 5.00-5.99      |   |  |        | 11,987  |   |             | 5.00-5.99      |   |        |   | 12,336  |  
|                                |  | 6.00-6.99      |   |  |        | 191     |   |             | 6.00-6.99      |   |        |   | 2,989   |  
|                                |  | 7.00-7.99      |   |  |        | 531     |   |             | 7.00-7.99      |   |        |   | 636     |  
|                                |  |                |   |  |        |         |   |             |                |   |        |   |         |  
|Total interest-bearing deposits |  |                |   |  |        | 329,962 |   |             |                |   |        |   | 237,256 |  
|                                |  |                |   |  |        |         |   |             |                |   |        |   |         |  
|Total deposits                  |  |                |   |  | $      | 497,760 |   |             |                |   |        | $ | 355,181 |  
|                                |  |                |   |  |        |         |   |             |                |   |        |   |         |  
|Weighted average rate           |  |                |   |  |        | 1.15    | % |             |                |   |        |   | 0.95    | %
|                                |  |                |   |  |        |         |   |             |                |   |        |   |         |  



F-19



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Interest expense on time deposits in denominations of $100,000 or more was
approximately $2,730,000 and $2,467,000 during the years ended December 31, 2004 and 2003, respectively.



Time deposits are solicited from markets served by the Bank and are not sought through brokered sources. Time deposits are a significant source of funds.
The following table presents the maturities of time deposits as of December 31, 2004:



|                                       |  |                |         |  
|-------------------------------------- |  | -------------- | ------- | -
|                                       |  | (In thousands) |        
|Maturities of time deposits            |  |                |         |  
|Three months or less                   |  | $              | 63,806  |  
|Over 3 through 6 months                |  |                | 18,462  |  
|Over 6 through 12 months               |  |                | 25,887  |  
|Over 12 months                         |  |                | 49,199  |  
|                                       |  |                |         |  
|Total                                  |  | $              | 157,354 |  
|                                       |  |                |         |  
|Weighted average rate on time deposits |  |                | 2.65    | %
|                                       |  |                |         |  



(7) Other Borrowings



Short-term borrowings ranging from one to thirty days
consist of federal funds purchased and other bank borrowings. The Companys long-term borrowings generally consist of borrowings with the Federal Home Loan Bank maturing within five years. Long-term borrowings resulted from a leverage strategy
whereby the bank borrowed funds from the Federal Home Loan Bank and used the proceeds to purchase investment securities. Of these borrowings, $20 million mature within one year and an additional $10 million within three years. A positive spread was
achieved from this transaction. Information relating to these borrowings for the years ended December 31, 2004 and 2003 is summarized as follows:



|                                        |  |                        |        |   |      |   |        |  
|--------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                        |  | December 31,           |       
|                                        |  | 2004                   |        |   | 2003 |  
|                                        |  | (Dollars in thousands) |       
|Long-term borrowings:                   |  |                        |        |   |      |   |        |  
|Average                                 |  | $                      | 31,585 |   |      | $ | 23,753 |  
|Period-end                              |  | $                      | 30,000 |   |      | $ | 35,000 |  
|Maximum month-end balance during period |  | $                      | 35,000 |   |      | $ | 35,000 |  
|Interest rate:                          |  |                        |        |   |      |   |        |  
|Weighted average for the period         |  |                        | 1.98   | % |      |   | 1.95   | %
|Weighted average at period-end          |  |                        | 2.01   | % |      |   | 1.92   | %
|Short-term borrowings:                  |  |                        |        |   |      |   |        |  
|Average                                 |  | $                      | 5,910  |   |      | $ | 4,981  |  
|Period-end                              |  | $                      |       |   |      | $ | 5,000  |  
|Maximum month-end balance during period |  | $                      | 21,000 |   |      | $ | 20,000 |  
|Interest rate:                          |  |                        |        |   |      |   |        |  
|Weighted average for the period         |  |                        | 1.31   | % |      |   | 1.14   | %
|Weighted average at period-end          |  |                        |       | % |      |   | 1.21   | %



F-20



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(8) Junior subordinated debentures



On December 19, 2002, the Companys wholly owned subsidiary trust,
Republic Bancshares Capital Trust I (the Trust), completed the private placement of 8,000 floating rate capital securities (the Capital Securities) with an aggregate liquidation value of $8,000,000. Concurrent with the
issuance of the Capital Securities, the Trust issued trust common securities to the Company in the aggregate liquidation value of $248,000. The proceeds of the issuance of the Capital Securities and trust common securities were invested in
$8,248,000 of the Companys Floating Rate Junior Subordinated Debt Securities due 2033 (the Debentures). The Debentures will mature on January 7, 2033, which date may be shortened to a date not earlier than January 7, 2008 if
certain conditions are met, including the prior approval of the Federal Reserve and any other required regulatory approvals. The Debentures, which are the only assets of the Trust, are subordinate and junior in right of payment to all present and
future senior indebtedness (as defined in the Indenture dated December 19, 2002) of the Company. The Debentures accrue interest at a floating rate equal to the three-month LIBOR plus 3.35%, payable quarterly on January 7, April 7, July 7 and October
7 of each year; provided that the rate may not exceed 12.5% through January 7, 2008. The quarterly distributions on the Capital Securities are paid at the same rate that interest is paid on the Debentures.



The Company has fully and unconditionally guaranteed the payment by the
Trust of distributions and other amounts under the Capital Securities to the extent that the Trust has funds available for such payments. The Trust must redeem the Capital Securities when the Debentures are paid at maturity or upon any earlier
prepayment of the Debentures. The Debentures may be prepaid if certain events occur, including a change in the tax status or regulatory capital treatment of the Capital Securities or a change in existing laws that requires the Trust to register as
an investment company. Under the provisions of the Debentures, the Company has the right to defer payment of interest on the Debentures at any time, or from time to time, for up to twenty consecutive quarterly periods. If interest payments on the
Debentures are deferred, the distributions on the Capital Securities will also be deferred.



The Company received net proceeds of $7.76 million. The Company invested $7.0 million of the proceeds into the Bank. The remaining funds were used for the general corporate purposes. The issuance cost of the junior
subordinated debentures was $245,000 and is carried in other assets on the consolidated balance sheets. At December 31, 2004 and 2003, the unamortized cost was $195,000 and $220,000, respectively. This cost is being amortized over ten years as
interest expense on junior subordinated debentures in the consolidated statements of income.



On December 31, 2003, the Company retroactively implemented FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,resulting in the deconsolidation of the
Trust established in 2002, which was created for the sole purpose of issuing junior subordinated debentures. As a result of the implementation of this Interpretation, the Company no longer reflects the trust preferred securities issued by the Trust
in its consolidated balance sheets. Instead, the junior subordinated debentures are shown as liabilities in the consolidated balance sheets, the $248,000 investment in the common equity of the trust is included in the consolidated balance sheets as
other assets, and the interest income received from and interest expense paid to the Trust, respectively, being included in the consolidated statements of income as interest income and interest expense. The increase to both other interest income and
interest expense totaled $12,000 for the years ended December 31, 2004 and December 31, 2003.



F-21



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(9) Federal income taxes



A net deferred tax asset of approximately $658,000 and $810,000 is included
in other assets at December 31, 2004 and 2003, respectively. The deferred tax assets relate primarily to the allowance for loan losses at December 31, 2004 and 2003.



The income tax provision (benefit) for the years ended December 31, 2004 and 2003 is composed of the following:



|         |  |      |       |      |   |       |  
|-------- |  | ---- | ----- | ---- | - | ----- | -
|         |  | 2004 |       | 2003 |  
|Current  |  | $    | 2,176 |      | $ | 2,224 |  
|Deferred |  |      | 156   |      |   | (167  | )
|         |  |      |       |      |   |       |  
|Total    |  | $    | 2,332 |      | $ | 2,057 |  
|         |  |      |       |      |   |       |  



A valuation allowance
for the deferred tax assets has not been recorded as management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.



The income tax expense for the years ended December 31, 2004 and 2003
differs from the amount computed applying the federal income tax rate of 34% to income before federal income tax provision due primarily to tax-exempt income.



The reconciliation between the Companys effective income tax rate and the statutory federal income tax rate is as follows:



|                                                 |  |                         |   |  |       |  
|------------------------------------------------ |  | ----------------------- | - |  | ----- | -
|                                                 |  | Years endedDecember 31, |  
|                                                 |  | 2004                    |   |  | 2003  |  
|Statutory federal income tax rate                |  | 34.00                   | % |  | 34.00 | %
|Tax-exempt income from Bank owned life insurance |  | (1.91                   | ) |  | (0.65 | )
|Tax-exempt interest income                       |  | (0.11                   | ) |  | (0.06 | )
|Other                                            |  | 0.66                    |   |  | 0.41  |  
|                                                 |  |                         |   |  |       |  
|Effective income tax rate                        |  | 32.64                   | % |  | 33.70 | %
|                                                 |  |                         |   |  |       |  



F-22



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(10) Off-Balance Sheet Arrangements



The contractual amount of the Companys financial instruments with
off-balance sheet risk expiring by period at December 31, 2004 is presented below:



|                                                             |  |                        |        |                                  |   |                                   |  |                 |       |       |   |       |  |   |       
|------------------------------------------------------------ |  | ---------------------- | ------ | -------------------------------- | - | --------------------------------- |  | --------------- | ----- | ----- | - | ----- |  | - | ------
|                                                             |  | Within One Year        |        | After One but Within Three Years |   | After Three but Within Five Years |  | AfterFive Years |       | Total
|                                                             |  | (Dollars in thousands)
|Unfunded loan commitments including unfunded lines of credit |  | $                      | 49,551 |                                  | $ | 3,780                             |  | $               | 3,534 |       | $ | 5,058 |  | $ | 61,923
|Standby letters of credit                                    |  |                        | 3,786  |                                  |   | 27                                |  |                 |      |       |   |      |  |   | 3,813 
|                                                             |  |                        |        |                                  |   |                                   |  |                 |       |       |   |       |  |   |       
|Total financial instruments with off-balance sheet risk      |  | $                      | 53,337 |                                  | $ | 3,807                             |  | $               | 3,534 |       | $ | 5,058 |  | $ | 65,736
|                                                             |  |                        |        |                                  |   |                                   |  |                 |       |       |   |       |  |   |       



Due to the nature of
the Companys unfunded loan commitments, including unfunded lines of credit, the amounts presented above do not necessarily represent amounts the Company anticipates funding in the periods presented above.



(11) Compensation plans



Employee stock purchase plan



The Employee Stock Purchase Plan authorizes the offer and sale of up to 300,000 shares of Common Stock to employees of the
Company and its subsidiaries, including the Bank. The Purchase Plan is implemented through three-month purchase periods beginning every January 1, April 1, July 1 and October 1. The offering price per share is an amount equal to 85% of the fair
market value of the Common Stock on the last day of the applicable purchase period. The Purchase Plan was implemented in August 2001, and for the years ended December 31, 2004 and 2003, a total of 28,951 shares and 15,308 shares respectively, were
sold. No compensation cost is recorded as a result of this plan.



401(k) plan



The Board of Directors has
approved a 401(k) plan for employees of the Bank. As of December 31, 2004, the Bank matches 50% of an employees contributions to the 401(k) plan, up to a maximum of 6% of the employees annual compensation. For the years ended December
31, 2004 and 2003 the Bank contributed approximately $145,000 and $130,000 respectively, to the plan.



F-23



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Stock-based compensation



In 1998, the Company adopted an incentive stock option plan under which
options to purchase shares of the Companys common stock may be granted to key employees at a price not less than the par value of the Companys common stock. All options that have been granted have been at fair market value on the date of
grant. The options must be exercised within ten years from the date granted and vest ratably over a period of five years.



A summary of the stock option activity for the years ended December 31, 2004 and 2003 is as follows:



|                                 |  |                  |   |      |                                 |       |                 |         |   |                                 |   |     
|-------------------------------- |  | ---------------- | - | ---- | ------------------------------- | ----- | --------------- | ------- | - | ------------------------------- | - | ----
|                                 |  | 2004             |   | 2003
|                                 |  | Number of shares |   |      | Weighted average exercise price |       | Number ofshares |         |   | Weighted average exercise price
|Outstanding at beginning of year |  | 495,900          |   |      | $                               | 5.87  |                 | 460,400 |   |                                 | $ | 5.59
|Granted                          |  | 68,500           |   |      |                                 | 10.32 |                 | 49,500  |   |                                 |   | 8.74
|Exercised                        |  | (16,800          | ) |      |                                 | 5.30  |                 | (5,200  | ) |                                 |   | 6.43
|Forfeited                        |  | (7,800           | ) |      |                                 | 8.92  |                 | (8,800  | ) |                                 |   | 6.66
|                                 |  |                  |   |      |                                 |       |                 |         |   |                                 |   |     
|Outstanding at end of year       |  | 539,800          |   |      | $                               | 6.43  |                 | 495,900 |   |                                 | $ | 5.87
|                                 |  |                  |   |      |                                 |       |                 |         |   |                                 |   |     



The following table
summarizes information regarding stock options outstanding and exercisable at December 31, 2004:



|                     |  |                                                |  |                                 |  |                                   |       |                                 |         |  |   |     
|-------------------- |  | ---------------------------------------------- |  | ------------------------------- |  | --------------------------------- | ----- | ------------------------------- | ------- |  | - | ----
|Exercise price range |  | Numberoutstanding atend of period              |  | Options outstanding             |  | Exercisable options              
|                     |  | Weighted averageremainingcontractual life(yrs) |  | Weighted average exercise price |  | Numberexercisable atend of period |       | Weighted average exercise price
|$5.00 - $  7.00      |  | 391,800                                        |  | 4.6                             |  | $                                 | 5.36  |                                 | 368,840 |  | $ | 5.31
|$7.01 - $  9.00      |  | 83,500                                         |  | 7.9                             |  | $                                 | 8.40  |                                 | 27,600  |  | $ | 8.15
|$9.01 - $11.08       |  | 64,500                                         |  | 9.5                             |  | $                                 | 10.32 |                                 |        |  |   |    
|                     |  |                                                |  |                                 |  |                                   |       |                                 |         |  |   |     
|                     |  | 539,800                                        |  | 5.7                             |  | $                                 | 6.43  |                                 | 396,440 |  | $ | 5.51
|                     |  |                                                |  |                                 |  |                                   |       |                                 |         |  |   |     



The fair value of
each option grant is estimated on the date of grant using the Black Scholes option pricing model (excluding a volatility assumption) with the following weighted average assumptions as of December 31, 2004 and 2003:



|                        |  |            |   |  |         |  
|----------------------- |  | ---------- | - |  | ------- | -
|                        |  | 2004       |   |  | 2003    |  
|Assumptions:            |  |            |   |  |         |  
|Risk-free interest rate |  | 3.24%-4.09 | % |  | 2.3     | %
|Dividend yield          |  | 0.0        | % |  | 0.0     | %
|Expected life           |  | 5 years    |   |  | 5 years |  



F-24



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(12) Earnings per common share is computed as follows:



|                                                                    |  |                                       |       |      |   |      
|------------------------------------------------------------------- |  | ------------------------------------- | ----- | ---- | - | -----
|                                                                    |  | Years endedDecember 31,              
|                                                                    |  | 2004                                  |       | 2003
|                                                                    |  | (In thousands, except per share data)
|Net income                                                          |  | $                                     | 4,813 |      | $ | 4,047
|                                                                    |  |                                       |       |      |   |      
|Divided by average common shares and common share equivalents:      |  |                                       |       |      |   |      
|Weighted average common shares                                      |  |                                       | 3,912 |      |   | 3,876
|Weighted average common shares issuable under the stock option plan |  |                                       | 174   |      |   | 170  
|                                                                    |  |                                       |       |      |   |      
|Total average common shares and common share equivalents            |  |                                       | 4,086 |      |   | 4,046
|                                                                    |  |                                       |       |      |   |      
|Basic earnings per common share                                     |  | $                                     | 1.23  |      | $ | 1.04 
|                                                                    |  |                                       |       |      |   |      
|Diluted earnings per common share                                   |  | $                                     | 1.18  |      | $ | 1.00 
|                                                                    |  |                                       |       |      |   |      



(13) Commitments and contingencies



Commitments to extend credit



In the normal course of business, the Company enters into various
transactions which, in accordance with accounting principles generally accepted in the United States of America, are not included in the consolidated balance sheets. These transactions are referred to as off-balance-sheet commitments.
The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit which involve elements of credit risk in excess of the amounts recognized
in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.



The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination
clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions.
Substantially all of the Companys commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend
credit in determining the level of the allowance for loan losses.



F-25



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Letters of credit are written conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The Companys policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements.



Cash reserves are commitments to extend credit on a customers
transaction deposit account, whereby the Company will clear draws on the account even if existing funds are insufficient. Outstanding unfunded commitments to extend credit at December 31, 2004 and 2003 are $65,736,000 and $51,704,000, respectively.
Unfunded commitments to officers and directors of the Company equaled $12.3 million and $11.4 million at December 31, 2004 and 2003, respectively.



The Company is involved in various litigation arising in the normal course of business. In the opinion of management, the ultimate liability, if any,
would not be material to the consolidated financial position or results of operations of the Company.



Lease commitments



The Company is lessee under operating leases for real estate used for various banking offices. The approximate minimum lease payments under these leases,
at December 31, 2004, for the periods shown are:



|                         |  |                |      
|------------------------ |  | -------------- | -----
|Year ending December 31, |  | Amount        
|                         |  | (In thousands)
|2005                     |  | $              | 910  
|2006                     |  |                | 890  
|2007                     |  |                | 910  
|2008                     |  |                | 916  
|2009                     |  |                | 925  
|Thereafter               |  |                | 2,551
|                         |  |                |      
|                         |  | $              | 7,102
|                         |  |                |      



It is expected that,
in the normal course of business, leases that expire will be renewed or replaced by leases on other property or equipment.



Rent expense under the noncancelable operating leases aggregated approximately $943,000 and $783,000 for the years ended December 31, 2004 and 2003,
respectively.



F-26



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(14) Regulatory matters



The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory  and possibly additional discretionary  actions by regulators that, if undertaken, could have a direct material effect on the Companys
consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Companys
and the Banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Companys and the Banks capital amounts and classification are also subject to qualitative judgements by
the regulators about components, risk weightings, and other factors.



Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).



As of December 31, 2004, the most recent notification from the Office of the Comptroller of Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based ratio of 8.0%, Tier 1 risk-based ratio of 4.0% and Tier 1 leverage ratio of 4.0% as set forth in the
following table. The Company and the Bank both maintained ratios in excess of these requirements. There are no conditions or events that management believes have changed the Companys or the Banks categories.



The Companys and Banks regulatory capital amounts and ratios in
relation to their current existing regulatory capital requirements for capital adequacy purposes are as follows:



|                                         |  |                         |        |       |                             |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ----------------------- | ------ | ----- | --------------------------- | - | ------ | --------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | As of December 31, 2004 |       
|                                         |  | Actual                  |        |       | For capitaladequacypurposes |   |        | To be wellcapitalized under prompt corrective action provisions |       
|                                         |  | Amount                  |        | Ratio |                             |   | Amount |                                                                 | Ratio  |  |      | Amount |  | Ratio |       
|                                         |  | (Dollars in thousands)  |       
|Company                                  |  |                         |        |       |                             |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk-weighted assets)  |  | $                       | 48,353 |       | 10.80                       | % |        | $                                                               | 35,802 |  | 8.00 | %      |  | $     | 44,753 |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |                         | 43,540 |       | 9.73                        | % |        |                                                                 | 17,901 |  | 4.00 | %      |  |       | 26,852 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  |                         | 43,540 |       | 8.95                        | % |        |                                                                 | 19,452 |  | 4.00 | %      |  |       | 24,316 |  | 5.00  | %
|                                         |  |                         |        |       |                             |  
|Bank                                     |  |                         |        |       |                             |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk-weighted assets)  |  | $                       | 47,147 |       | 10.55                       | % |        | $                                                               | 35,761 |  | 8.00 | %      |  | $     | 44,701 |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |                         | 42,334 |       | 9.47                        | % |        |                                                                 | 17,881 |  | 4.00 | %      |  |       | 26,821 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  |                         | 42,334 |       | 7.90                        | % |        |                                                                 | 21,429 |  | 4.00 | %      |  |       | 26,787 |  | 5.00  | %



F-27



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



|                                         |  |                         |        |       |                             |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ----------------------- | ------ | ----- | --------------------------- | - | ------ | --------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | As of December 31, 2003 |       
|                                         |  | Actual                  |        |       | For capitaladequacypurposes |   |        | To be wellcapitalized under prompt corrective action provisions |       
|                                         |  | Amount                  |        | Ratio |                             |   | Amount |                                                                 | Ratio  |  |      | Amount |  | Ratio |       
|                                         |  | (Dollars in thousands)  |       
|Company                                  |  |                         |        |       |                             |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk-weighted assets)  |  | $                       | 42,166 |       | 12.33                       | % |        | $                                                               | 27,351 |  | 8.00 | %      |  | $     | 34,189 |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |                         | 38,383 |       | 11.23                       | % |        |                                                                 | 13,675 |  | 4.00 | %      |  |       | 20,513 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  |                         | 38,383 |       | 8.87                        | % |        |                                                                 | 17,310 |  | 4.00 | %      |  |       | 21,638 |  | 5.00  | %
|                                         |  |                         |        |       |                             |  
|Bank                                     |  |                         |        |       |                             |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk-weighted assets)  |  | $                       | 41,115 |       | 12.05                       | % |        | $                                                               | 27,300 |  | 8.00 | %      |  | $     | 34,125 |  | 10.00 | %
|Tier 1 capital (to risk-weighted assets) |  |                         | 37,332 |       | 10.94                       | % |        |                                                                 | 13,650 |  | 4.00 | %      |  |       | 20,475 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  |                         | 37,332 |       | 8.24                        | % |        |                                                                 | 18,114 |  | 4.00 | %      |  |       | 22,642 |  | 5.00  | %



The $8.0 million in
trust preferred securities issued by Republic Bancshares Capital Trust I (the Trust) are currently included in the Tier 1 capital of the Company for regulatory capital purposes. On March 1, 2005, the Federal Reserve adopted final rules
that continue to allow trust preferred securities to be included in Tier 1 capital, subject to stricter quantitative and qualitative limits. Currently, trust preferred securities and qualifying perpetual preferred stock are limited in the aggregate
to no more than 25% of a bank holding companys core capital elements. The new rule amends the existing limit by providing that restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) can
be no more than 25% of core capital, net of goodwill and associated deferred tax liability. The amount of such excess trust preferred securities are includable in Tier 2 capital. The new quantitative limits will be fully effective March 31, 2009.
Assuming these final rules were effective at December 31, 2004, because the Company has no goodwill, the entire $8.0 million of trust preferred securities would count as Tier 1 capital.



The Trust that issued the trust preferred securities holds junior subordinated debentures the Company issued with a 30-year
maturity. The final rules provide that in the last five years before the junior subordinated debentures mature, the associated trust preferred securities will be excluded from Tier 1 capital and included in Tier 2 capital. In addition, under the
proposal, the trust preferred securities during this five-year period would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the debentures.



For the foreseeable future, the Company does not plan to pay dividends, but
instead will retain all earnings to support the growth of the Company.



F-28



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(15) Disclosures about fair values of financial instruments



The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value
amounts.



The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.



Cash and cash equivalents



For these short-term instruments, the carrying amount is a reasonable estimate of fair value.



Investment securities available for sale



Fair values of investment securities available for sale are estimated based
on quoted market prices. The fair value of stock in the Federal Home Loan Bank of Dallas and the Federal Reserve Bank is estimated to be equal to its carrying amount given it is not a publicly traded equity security, it has an adjustable dividend
rate, and transactions in the stock are executed at the stated par value.



Investment securities held to maturity



Fair values of investment securities held to maturity are estimated based on quoted market prices.



Loans



The fair value of loans was estimated based on the current market interest rates for similar loans, the remaining maturity, and credit risk. At December
31, 2004 and 2003, approximately 37.4% and 36.4%, respectively, of the Banks loans have variable rates that generally change with market rates. Consequently, the estimated fair value of these variable rate loans approximates the carrying
amount adjusted for anticipated losses as reflected by the allowance for credit losses. The fair value of fixed rate loans has been estimated by discounting estimated cash flows using current rates at which similar loans would be made.



The fair values of the Companys lending commitments, letters of
credit, commitments to sell loans and guarantees are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.



F-29



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Deposits



The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using a discounted cash flow analysis, using interest rates currently being offered on certificates with similar remaining
maturities.



Other Borrowings



The carrying amounts of borrowings are estimated using a discounted cash
flow analysis, using interest rates currently being offered on borrowings with similar remaining maturities.



Accrued interest receivable and payable



The carrying amounts of accrued interest approximate their fair values.



The estimated fair values of the Companys financial instruments at December 31, 2004 and 2003 are as follows:



|                                         |  |                |         |           |   |                |  |           |         |  |   |        
|---------------------------------------- |  | -------------- | ------- | --------- | - | -------------- |  | --------- | ------- |  | - | -------
|                                         |  | 2004           |         | 2003     
|                                         |  | Carryingamount |         | Fairvalue |   | Carryingamount |  | Fairvalue
|                                         |  | (In thousands)
|Financial assets:                        |  |                |         |           |   |                |  |           |         |  |   |        
|Cash and cash equivalents                |  | $              | 63,246  |           | $ | 63,246         |  | $         | 20,831  |  | $ | 20,831 
|Investment securities available for sale |  |                | 72,592  |           |   | 72,592         |  |           | 61,524  |  |   | 61,524 
|Investment securities held to maturity   |  |                | 16,853  |           |   | 16,854         |  |           | 22,398  |  |   | 22,519 
|Loans, net                               |  |                | 397,682 |           |   | 390,057        |  |           | 311,703 |  |   | 312,666
|Accrued interest receivable              |  |                | 2,092   |           |   | 2,092          |  |           | 1,561   |  |   | 1,561  
|                                         |  |                |         |          
|Financial liabilities:                   |  |                |         |           |   |                |  |           |         |  |   |        
|Deposits                                 |  | $              | 497,760 |           | $ | 501,806        |  | $         | 355,181 |  | $ | 360,460
|Other borrowings                         |  |                | 30,000  |           |   | 29,873         |  |           | 40,000  |  |   | 40,466 
|Accrued interest payable                 |  |                | 846     |           |   | 846            |  |           | 502     |  |   | 502    
|Junior subordinated debentures           |  |                | 8,248   |           |   | 8,248          |  |           | 8,248   |  |   | 8,248  



F-30



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



The fair value of the Companys off-balance sheet instruments was
immaterial at December 31, 2004 and 2003.



The fair value
estimates presented herein are based on pertinent information available to management as of December 31, 2004 and 2003. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts
have not been significantly revalued for purposes of these consolidated financial statements since these dates and, therefore, current estimates of fair value may differ from the amounts presented herein.



(16) Parent company financial information



Condensed financial information for Republic Bancshares of Texas, Inc. is as
follows:



REPUBLIC BANCSHARES OF TEXAS, INC.

CONDENSED BALANCE SHEETS



|                                           |  |                        |        |      |   |       
|------------------------------------------ |  | ---------------------- | ------ | ---- | - | ------
|                                           |  | December 31,          
|                                           |  | 2004                   |        | 2003
|                                           |  | (Dollars in thousands)
|Assets:                                    |  |                        |        |      |   |       
|Cash and cash equivalents                  |  | $                      | 660    |      | $ | 705   
|Other assets                               |  |                        | 695    |      |   | 573   
|Investment in RBT Holdings, Inc.           |  |                        | 42,151 |      |   | 37,060
|                                           |  |                        |        |      |   |       
|Total assets                               |  | $                      | 43,506 |      | $ | 38,338
|                                           |  |                        |        |      |   |       
|Liabilities and shareholders equity       |  |                        |        |      |   |       
|Liabilities:                               |  |                        |        |      |   |       
|Junior subordinated debentures             |  | $                      | 8,248  |      | $ | 8,248 
|Accrued interest payable                   |  |                        | 106    |      |   | 87    
|                                           |  |                        |        |      |   |       
|Total liabilities                          |  |                        | 8,354  |      |   | 8,335 
|Shareholders equity                       |  |                        | 35,152 |      |   | 30,003
|                                           |  |                        |        |      |   |       
|Total liabilities and shareholders equity |  | $                      | 43,506 |      | $ | 38,338
|                                           |  |                        |        |      |   |       



F-31



---

##### Table of Contents

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



REPUBLIC BANCSHARES OF TEXAS, INC.

CONDENSED STATEMENTS OF INCOME



|                                                   |  |                         |       |   |      |   |       |  
|-------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | -
|                                                   |  | Years endedDecember 31, |      
|                                                   |  | 2004                    |       |   | 2003 |  
|                                                   |  | (Dollars in thousands)  |      
|Income:                                            |  |                         |       |   |      |   |       |  
|Equity in undistributed earnings of subsidiaries   |  | $                       | 5,091 |   |      | $ | 4,338 |  
|Interest income                                    |  |                         | 12    |   |      |   | 12    |  
|Expenses:                                          |  |                         |       |   |      |   |       |  
|Interest expense on junior subordinated debentures |  |                         | 425   |   |      |   | 409   |  
|Other expense                                      |  |                         | 11    |   |      |   | 46    |  
|                                                   |  |                         |       |   |      |   |       |  
|Income before income tax benefit                   |  |                         | 4,667 |   |      |   | 3,896 |  
|Income tax benefit                                 |  |                         | (146  | ) |      |   | (151  | )
|                                                   |  |                         |       |   |      |   |       |  
|Net Income                                         |  | $                       | 4,813 |   |      | $ | 4,047 |  
|                                                   |  |                         |       |   |      |   |       |  



REPUBLIC BANCSHARES
OF TEXAS, INC.

CONDENSED STATEMENTS OF CASH FLOWS



|                                                                              |  |                         |        |   |      |   |        |  
|----------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                                                                              |  | Years endedDecember 31, |       
|                                                                              |  | 2004                    |        |   | 2003 |  
|                                                                              |  | (Dollars in thousands)  |       
|Cash flows from operating activities                                          |  |                         |        |   |      |   |        |  
|Net income                                                                    |  | $                       | 4,813  |   |      | $ | 4,047  |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |                         |        |   |      |   |        |  
|Equity in undistributed earnings of subsidiaries                              |  |                         | (5,091 | ) |      |   | (4,338 | )
|Increase in other assets                                                      |  |                         | (122   | ) |      |   | (56    | )
|Increase in accrued interest payable                                          |  |                         | 19     |   |      |   | 72     |  
|                                                                              |  |                         |        |   |      |   |        |  
|Net cash used in operating activities                                         |  |                         | (381   | ) |      |   | (275   | )
|                                                                              |  |                         |        |   |      |   |        |  
|Cash flows from financing activities                                          |  |                         |        |   |      |   |        |  
|Proceeds from sale of common stock                                            |  |                         | 256    |   |      |   | 117    |  
|Exercise of stock options                                                     |  |                         | 89     |   |      |   | 34     |  
|Other                                                                         |  |                         | (9     | ) |      |   | (10    | )
|                                                                              |  |                         |        |   |      |   |        |  
|Net cash provided by financing activities                                     |  |                         | 336    |   |      |   | 141    |  
|                                                                              |  |                         |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                     |  |                         | (45    | ) |      |   | (134   | )
|Cash and cash equivalents at beginning of year                                |  |                         | 705    |   |      |   | 839    |  
|                                                                              |  |                         |        |   |      |   |        |  
|Cash and cash equivalents at end of year                                      |  | $                       | 660    |   |      | $ | 705    |  
|                                                                              |  |                         |        |   |      |   |        |  



F-32