SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

Mark One

x	Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2005

¨	Transition Report under 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 registrant as specified in its charter)

Texas

76-0691991

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

4200 Westheimer Suite 101

Houston, Texas

(Address of principal executive offices)

77027

(Zip Code)

281-315-1100

(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act (“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 ¨

As of August 3, 2005, there were 3,967,228 shares of the registrant’s common stock, par value $1.00 per share, outstanding.

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.

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.

REPUBLIC BANCSHARES OF TEXAS, INC.

Index to Form 10-Q


		PAGE
PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Balance Sheet as of June 30, 2005 (unaudited) and December 31, 2004	4

	Consolidated Statement of Income for the Three and Six Months Ended June 30, 2005 and 2004 (unaudited)	5

	Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2005 (unaudited)	6

	Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (unaudited)	7

	Condensed Notes to the Unaudited Interim Consolidated Financial Statements	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

ITEM 3.	Controls and Procedures	28

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	29

ITEM 2.	Changes in Securities	29

ITEM 3.	Defaults Upon Senior Securities	29

ITEM 4.	Submission of Matters to a Vote of Security Holders	29

ITEM 5.	Other Information	30

ITEM 6.	Exhibits and Reports on Form 8-K	30

SIGNATURES		31

Republic Bancshares of Texas, Inc. and Subsidiaries

Consolidated Balance Sheet


(Dollars in thousands, except share data)	June 30, 2005			December 31, 2004
		(Unaudited	)
ASSETS
Cash and due from banks	$	17,866		$	17,564
Federal funds sold and other		31,984			45,682

Total cash and cash equivalents		49,850			63,246

Investment securities available for sale		69,982			72,592
Investment securities held to maturity		14,301			16,853

Loans (note 2)		444,486			402,495
Less: Allowance for loan losses (note 2)		(5,315	)		(4,813	)

Loans, net		439,171			397,682

Premises and equipment, net		8,905			8,321
Accrued interest receivable		2,143			2,092
Other assets		13,682			12,876

Total assets	$	598,034		$	573,662

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	167,151		$	167,798
Interest-bearing		372,475			329,962

Total deposits		539,626			497,760
Junior subordinated debentures		8,248			8,248
Accrued interest payable		753			846
Other borrowings (note 5)		10,000			30,000
Other liabilities		1,366			1,656

Total liabilities		559,993			538,510

Commitments and contingencies
Shareholders’ equity:
Common stock, $1 par value; 20,000,000 shares authorized, 3,967,228 issued and outstanding as of June 30, 2005 and 3,934,881 issued and outstanding as of December 31, 2004		3,967			3,935
Additional paid-in capital		18,023			17,732
Accumulated other comprehensive loss, net of tax		(492	)		(194	)
Retained earnings		16,543			13,679

Total shareholders’ equity		38,041			35,152

Total liabilities and shareholders’ equity	$	598,034		$	573,662

See accompanying condensed notes to unaudited interim consolidated financial statements.

Republic Bancshares of Texas, Inc. and Subsidiaries

Consolidated Statement of Income


	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands, except per share data)	2005		2004		2005		2004
	(Unaudited)				(Unaudited)
Interest income:
Loans, including fees	$	7,455	$	5,401	$	14,216	$	10,588
Investment securities		765		672		1,521		1,312
Federal funds sold and other		137		3		335		17

Total interest income		8,357		6,076		16,072		11,917

Interest expense:
Interest-bearing deposits		2,024		960		3,596		1,893
Other borrowings		102		197		252		375
Junior subordinated debentures		137		97		263		193

Total interest expense		2,263		1,254		4,111		2,461

Net interest income		6,094		4,822		11,961		9,456
Provision for loan losses		440		375		935		825

Net interest income after provision for loan losses		5,654		4,447		11,026		8,631

Noninterest income:
Service charges on deposits		412		446		834		871
Other noninterest income		315		212		629		615

Total noninterest income		727		658		1,463		1,486

Noninterest expense:
Salaries and employee benefits		2,686		2,227		5,355		4,310
Occupancy expense		433		384		857		733
Premises and equipment expense		135		118		267		238
Service bureau fees		159		148		316		295
Data processing fees		69		70		139		133
Other		637		526		1,303		1,051

Total noninterest expense		4,119		3,473		8,237		6,760

Income before income tax provision		2,262		1,632		4,252		3,357
Provision for income taxes		740		532		1,388		1,096

Net income	$	1,522	$	1,100	$	2,864	$	2,261

Earnings per common share:
Basic	$	0.38	$	0.28	$	0.73	$	0.58
Diluted	$	0.36	$	0.27	$	0.68	$	0.55

Shares used in computing per share data:
Basic		3,960,582		3,909,438		3,951,213		3,902,676
Diluted		4,205,640		4,113,077		4,195,541		4,100,908

See accompanying condensed notes to unaudited interim consolidated financial statements.

Republic Bancshares of Texas, Inc. and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity


	Common stock			Additional paid-in capital		Accumulated other comprehensive loss, net of tax			Retained earnings		Total shareholders’ equity
	Shares	Dollars		Additional paid-in capital		Accumulated other comprehensive loss, net of tax			Retained earnings		Total shareholders’ equity
	(Dollars in thousands)
Balance at December 31, 2004	3,934,881	$	3,935	$	17,732	$	(194	)	$	13,679	$	35,152

Issuance of common stock	32,347		32		291		—			—		323

Comprehensive income
Net income for the six months ended June 30, 2005	—		—		—		—			2,864		2,864
Net change in unrealized appreciation on securities available for sale, net of deferred taxes of $153	—		—		—		(298	)		—		(298	)

Total comprehensive income	—		—		—		—			—		2,566

Balance at June 30, 2005	3,967,228	$	3,967	$	18,023	$	(492	)	$	16,543	$	38,041

See accompanying condensed notes to unaudited interim consolidated financial statements.

Republic Bancshares of Texas, Inc. and Subsidiaries

Consolidated Statement of Cash Flows


	Six months ended June 30,
(Dollars in thousands)	2005			2004
	(Unaudited)
Cash flows from operating activities:
Net income	$	2,864		$	2,261
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		370			329
Net amortization of premium on investment securities		277			344
Amortization of issuance costs on subordinated debentures		12			12
Provision for loan losses		935			825
Increase in accrued interest receivable		(51	)		(120	)
Increase in other assets		(664	)		(210	)
(Decrease) increase in accrued interest payable		(93	)		38
Decrease in other liabilities		(290	)		(433	)

Net cash provided by operating activities		3,360			3,046

Cash flows from investing activities:
Net increase in loans		(42,424	)		(33,333	)
Principal paydowns and sales of investment securities available for sale		16,182			8,775
Principal paydowns and maturities of investment securities held to maturity		2,471			3,549
Purchase of investment securities available for sale		(14,220	)		(18,322	)
Purchases of bank premises and equipment		(954	)		(406	)

Net cash used in investing activities		(38,945	)		(39,737	)

Cash flows from financing activities:
Net increase in deposits		41,866			43,598
Decrease in other borrowings		(20,000	)		(6,000	)
Proceeds from the sale of common stock		323			142
Proceeds from exercise of stock options		—			32

Net cash provided by financing activities		22,189			37,772

Net increase (decrease) in cash and cash equivalents		(13,396	)		1,081

Cash and cash equivalents at beginning of period		63,246			20,831

Cash and cash equivalents at end of period	$	49,850		$	21,912

Supplemental disclosure of cash flow information:
Interest paid	$	4,204		$	2,423
Taxes paid	$	1,786		$	1,130

See accompanying condensed notes to unaudited interim consolidated financial statements.

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED INTERIM

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2005 AND 2004

(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. 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 Bank is a national banking association which began operations on November 13, 1998. On May 24, 2004, the Company completed a two-for-one stock split effected in the form of a 100 percent stock dividend. All prior period per share and share information has been restated to reflect this split.

In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s consolidated financial position at June 30, 2005, consolidated results of operations for the three and six months ended June 30, 2005 and 2004, cash flows for the six months ended June 30, 2005 and 2004, and the changes in shareholders’ equity for the six months ended June 30, 2005. These statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report of Republic Bancshares of Texas, Inc. on Form 10-KSB for the year ended December 31, 2004. The results of operations for the first six months of 2005 are not necessarily indicative of the results of operations for a full-year period.

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.

Use of estimates

The preparation of financial statements in conformity with U. S. generally accepted accounting principles 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.

Reclassifications

Certain previously reported amounts have been reclassified to conform to the 2005 financial statement presentation. These reclassifications had no effect on net income or shareholders’ equity.

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 three and six months ended June 30, 2005 and 2004.

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.


	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
	(In thousands, except per share amounts)
Net income as reported	$	1,522		$	1,100		$	2,864		$	2,261
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards¹, net of related tax effects		(12	)		(13	)		(23	)		(26	)

Pro forma net income	$	1,510		$	1,087		$	2,841		$	2,235

Earnings per share:
Basic—as reported	$	0.38		$	0.28		$	0.73		$	0.58

Basic—pro forma	$	0.38		$	0.28		$	0.72		$	0.57

Diluted—as reported	$	0.36		$	0.27		$	0.68		$	0.55

Diluted—pro forma	$	0.36		$	0.26		$	0.68		$	0.54

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.

(2) Provision and allowance for loan losses

The allowance for loan losses is based on management’s evaluation of the loan portfolio under current economic conditions and such other factors as, in management’s best judgement, deserve recognition in determining the allowance and resultant provision for losses.

The real estate properties securing a portion of the Bank’s loans are primarily located in the Houston, Texas area. Accordingly, the ultimate collectability of a portion of the Bank’s loan portfolio is susceptible to changes in market conditions in the area.

Management believes that the allowance for loan losses is adequate to cover losses inherent in the loan portfolio as of June 30, 2005. While management uses available information to recognize loan losses, future additions to the allowance account may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.

(3) Earnings per share

Earnings per common share is computed as follows:


	Three months ended June 30,				Six months ended June 30,
(In thousands, except per share data)	2005		2004		2005		2004
Net income	$	1,522	$	1,100	$	2,864	$	2,261
Divided by average common shares and common share equivalents:
Average common shares		3,961		3,909		3,951		3,903
Average common shares issuable under the stock option plans		245		204		245		198

Total average common shares and common share equivalents		4,206		4,113		4,196		4,101

Basic earnings per common share	$	0.38	$	0.28	$	0.73	$	0.58

Diluted earnings per common share	$	0.36	$	0.27	$	0.68	$	0.55

(4) Impaired loans

In accordance with FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, (“Statement 114”) as amended by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosure, 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 loan losses and including accrued interest, then the impairment is recognized by a charge to operations or an allocation of the allowance for loan losses.

(5) Other borrowings

Subject to certain limitations, the Bank may borrow funds from the Federal Home Loan Bank (“FHLB”) in the form of advances. Credit availability from the FHLB to the Bank is based on the Bank’s financial and operating condition, and is currently in excess of $219 million. At June 30, 2005, the contractual maturities of these borrowings are as follows:


Date of Issuance	Term	Rate	Amount
April 24, 2003	3yrs	2.534%	$	7,500
April 24, 2003	4yrs	3.028		2,500

			$	10,000

(6) 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 consolidated financial statements.

ITEM	2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

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 sheet and consolidated statement of income. These statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report of Republic Bancshares of Texas, Inc. on Form 10-KSB for the year ended December 31, 2004. The results of operations for the first six months of 2005 are not necessarily indicative of the results of operations for a full-year period.

On May 24, 2004, the Company completed a two-for-one stock split effected in the form of a 100 percent 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 Six Months Ended June 30, 2005 and 2004

OVERVIEW

For the six months ended June 30, 2005, the Company had net income of $2.9 million, diluted earnings per share of $0.68 and a return on average equity of 15.7% compared with net income of $2.3 million, diluted earnings per share of $0.55 and a return on average equity of 14.6% for the six months ended June 30, 2004. Return on average assets for the six months ended June 30, 2005 and 2004 was 0.98% and 0.99%, respectively.

For the six months ended June 30, 2005, the net interest margin and the net interest rate spread were 4.42% and 3.76%, respectively, compared with 4.49% and 4.04%, respectively, for the six months ended June 30, 2004.

At June 30, 2005, the Company had total assets of $598.0 million, total loans of $444.5 million, total deposits of $539.6 million and shareholders’ equity of $38.0 million. 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 amounts at June 30, 2005 reflect an increase of $24.4 million or 4.3% in assets, $42.0 million or 10.4% in loans, $41.9 million or 8.4% in deposits and $2.9 million or 8.2% in shareholders’ equity compared with the amounts at December 31, 2004.

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 borrowings. 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 $12.0 million for the six months ended June 30, 2005 as compared to $9.5 million for the six months ended June 30, 2004. This represents an increase of $2.5 million or 26.3%. This was the result of an increase in the average interest-earning asset base of $122.5 million which consisted of an increase of $97.9 million in loans, $2.4 million in investments, $22.2 million in fed funds sold and other. Average interest-bearing liabilities grew $75.9 million. Net interest margin declined 7 basis points during the period. Interest-earning assets contributed $2.8 million of the growth in net interest income which was partially offset $212,000 due to the decline in rates. Growth continued in all aspects of the Company’s lending and deposit-gathering efforts throughout 2005.

The Company’s average deposits grew from $377.3 million for the six months ended June 30, 2004 to $516.4 million for the six months ended June 30, 2005, an increase of $139.1 million or 36.9%. Growth in noninterest-bearing deposits accounted for $45.7 million or 37.6% of the increase. Interest-bearing demand deposits increased $50.1 million or 38.4% and time deposits increased $43.2 million or 34.5%. For the six months ended June 30, 2005 and 2004, the Company posted a net interest margin of 4.42% and 4.49%, respectively.

The following table presents, for the six months ended June 30, 2005 and 2004, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Average balances are derived from average daily balances and the yields and costs are established by dividing income or expense by the average balance or liability. At June 30, 2005 and 2004, the Bank had extended no loans for which the interest thereon was exempt from taxation and had made no investments in tax-exempt portfolio securities. Nonaccrual loans are included in the table but have no interest income reflected.


	Six Months Ended June 30, 2005							Six Months Ended June 30, 2004
	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	$	429,653		$	14,216	6.67	%	$	331,752		$	10,588	6.42	%
Securities		90,169			1,521	3.40			87,786			1,312	3.01
Federal funds sold & other		25,892			335	2.61			3,692			17	0.93

Total interest-earning assets		545,714			16,072	5.94	%		423,230			11,917	5.66	%

Less allowance for loan losses		(5,108	)						(4,004	)

Total earning assets, net of allowance		540,606							419,226
Nonearning assets		46,625							39,916

Total assets	$	587,231						$	459,142

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Money market checking accounts	$	28,998		$	93	0.65	%	$	24,509			40	0.33	%
Money market and savings deposits		151,518			1,111	1.48			105,863			317	0.60
Certificates of deposit		168,554			2,392	2.86			125,347			1,536	2.46
Other borrowings		23,625			252	2.15			41,037			375	1.84
Junior subordinated debentures		8,248			263	6.43			8,248			193	4.71

Total interest-bearing liabilities		380,943			4,111	2.18	%		305,004			2,461	1.62	%

Noninterest-bearing liabilities:
Noninterest-bearing deposits		167,326							121,619
Other liabilities		2,259							1,288

Total liabilities		550,528							427,911
Shareholders’ equity		36,703							31,231

Total liabilities and shareholders’ equity	$	587,231						$	459,142

Net interest income				$	11,961						$	9,456

Net interest spread						3.76	%						4.04	%

Net interest margin						4.42	%						4.49	%

The following table presents the effects of changes in volume, rate and rate/volume on interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities.


	Six months ended June 30, 2005 vs. 2004
(Dollars in thousands)	Increase (Decrease) due to
	Volume			Rate			Days			Total
Interest-earning assets:
Loans	$	3,146		$	540		$	(58	)	$	3,628
Securities		39			177			(7	)		209
Federal funds sold & other		102			216			—			318

Total increase (decrease) in interest income		3,287			933			(65	)		4,155

Interest-bearing liabilities:
Interest-bearing demand deposits		7			46			—			53
Money market and savings deposits		137			659			(2	)		794
Certificates of deposit		532			332			(8	)		856
Other borrowings		(158	)		37			(2	)		(123	)
Junior subordinated debentures		—			71			(1	)		70

Total increase (decrease) in interest expense		518			1,145			(13	)		1,650

Increase (decrease) in net interest income	$	2,769		$	(212	)	$	(52	)	$	2,505

Provision for loan losses

The provision for loan losses is established through charges to income in the form of a provision to bring the total allowance for loan losses to a level deemed appropriate by management based on the factors discussed below under “Allowance for loan losses” although no assurance can be given, management believes the allowance for loan losses is adequate to cover losses inherent in the loan portfolio at June 30, 2005. A provision of $935,000 and $825,000 was made for the six months ended June 30, 2005 and 2004, respectively, an increase of $110,000 or 13.3%. This increase is primarily due to loan growth between June 30, 2004 and 2005.

Noninterest income

The Company’s primary source of noninterest income is service charges on deposit accounts and other banking service-related fees. Noninterest income for both of the six month periods ended June 30, 2005 and 2004 was $1.5 million. Noninterest income as a percent of total income (total net interest income and noninterest income), was 10.9% and 13.6% for the six months ended June 30, 2005 and 2004, respectively. The decline in noninterest income as a percent of total income was due to nonrecurring fees received in 2004, particularly BOLI commissions.

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 to income (including depreciation of furniture, fixtures, and equipment), (3) data processing fees and technology-related costs, and (4) all other products used and fees incurred.

The Company’s efficiency ratio was 61.36% for the six months ended June 30, 2005 as compared to 61.78% for the same period in 2004. The efficiency ratio is calculated by dividing total noninterest expenses by net interest income plus noninterest income, excluding net security gains (losses). A decrease in the ratio indicates a more efficient allocation of resources.

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


	Six months ended June 30,
(Dollars in thousands)	2005		2004
	(Unaudited)
Salaries and employee benefits	$	5,355	$	4,310
Occupancy expense		857		733
Premises and equipment expense		267		238
Service bureau fees		316		295
Data processing fees		139		133
Other		1,303		1,051

Total noninterest expense	$	8,237	$	6,760

Salaries and benefits expense increased $1.0 million or 24.2% during the first six months of 2005 compared to the same period in 2004 and reflects growth in the Bank’s management and staff from 117 full-time-equivalent employees as of June 30, 2004 to 124 full-time equivalent employees as of June 30, 2005. The additional staff were hired to accommodate growth in all aspects of the Company’s operations. The increase is also due to increased medical insurance and other benefit expenses.

Nonstaff expenses were $2.9 million for the six months ended June 30, 2005 compared with $2.5 million for the six months ended June 30, 2004, an increase of $400,000 or 16.0%. This increase is representative of the overall growth in the Company’s operations.

For The Three Months Ended June 30, 2005 and 2004

OVERVIEW

For the three months ended June 30, 2005, the Company had net income of $1.5 million, diluted earnings per share of $0.36 and a return on average equity of 16.3% compared with net income of $1.1 million, diluted earnings per share of $0.27 and a return on average equity of 14.0% for the three months ended June 30, 2004. Return on average assets for the three months ended June 30, 2005 and 2004 was 1.03% and 0.94%, respectively.

For the three months ended June 30, 2005, the net interest margin and the net interest rate spread were 4.44% and 3.74%, respectively, compared with 4.49% and 4.02%, respectively, at June 30, 2004.

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 $6.1 million for the three months ended June 30, 2005 as compared to $4.8 million for the three months ended June 30, 2004. This represents an increase of $1.3 million or 27.1%. This was the result of an increase in the average interest-earning asset base of $118.2 million, which consisted of an increase of $102.3 million in loans and $17.6 million in fed funds sold and other which was partially offset by a decrease of $1.7 million in investment securities. The average interest-bearing liabilities grew $77.2 million. Net interest margin declined 5 basis points during the period. Interest-earning assets contributed $1.4 million of the growth in net interest income which was partially offset $161,000 due to the decline in rates. Growth continued in all aspects of the Company’s lending and deposit-gathering efforts throughout 2005.

The following table presents, for the three months ended June 30, 2005 and 2004, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Average balances are derived from average daily balances and the yields and costs are established by dividing income or expense by the average balance or liability. At June 30, 2005 and 2004, the Bank had extended no loans for which the interest thereon was exempt from taxation and had made no investments in tax-exempt portfolio securities. Nonaccrual loans are included in the table but have no interest income reflected.


	Three Months Ended June 30, 2005							Three Months Ended June 30, 2004
	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	$	442,220		$	7,455	6.76	%	$	339,916		$	5,401	6.39	%
Securities		89,660			765	3.42			91,364			672	2.96
Federal funds sold & other		18,647			137	2.95			1,069			3	1.13

Total interest-earning assets		550,527			8,357	6.09	%		432,349			6,076	5.65	%

Less allowance for loan losses		(5,258	)						(4,128	)

Total earning assets, net of allowance		545,269							428,221
Nonearning assets		44,666							40,180

Total assets	$	589,935						$	468,401

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Money market checking accounts	$	30,331		$	57	0.75	%	$	24,362			19	0.31	%
Money market and savings deposits		153,969			650	1.69			102,763			156	0.61
Certificates of deposit		176,263			1,317	3.00			129,721			785	2.43
Other borrowings		18,200			102	2.25			44,727			197	1.77
Junior subordinated debentures		8,248			137	6.66			8,248			97	4.73

Total interest-bearing liabilities		387,011			2,263	2.35	%		309,821			1,254	1.63	%

Noninterest-bearing liabilities:
Noninterest-bearing deposits		163,250							125,637
Other liabilities		2,318							1,284

Total liabilities		552,579							436,742
Shareholders’ equity		37,356							31,659

Total liabilities and shareholders’ equity	$	589,935						$	468,401

Net interest income				$	6,094						$	4,822

Net interest spread						3.74	%						4.02	%

Net interest margin						4.44	%						4.49	%


	Three months ended June 30, 2005 vs. 2004
(Dollars in thousands)	Increase (Decrease) due to
	Volume			Rate			Total
Interest-earning assets:
Loans	$	1,646		$	408		$	2,054
Securities		(11	)		104			93
Federal funds sold & other		49			85			134

Total increase in interest income		1,684			597			2,281

Interest-bearing liabilities:
Interest-bearing demand deposits		5			33			38
Money market and savings deposits		78			416			494
Certificates of deposit		285			247			532
Other borrowings		(117	)		22			(95	)
Junior subordinated debentures		—			40			40

Total increase in interest expense		251			758			1,009

Increase (decrease) in net interest income	$	1,433		$	(161	)	$	1,272

Provision for loan losses

The provision for loan losses is established through charges to income in the form of a provision to bring the total allowance for loan losses to a level deemed appropriate by management based on the factors discussed below under “Allowance for loan losses” although no assurance can be given, management believes the allowance for loan losses is adequate to cover losses inherent in the loan portfolio at June 30, 2005. A provision of $440,000 and $375,000 was made for the three months ended June 30, 2005 and 2004, respectively, an increase of $65,000 or 17.3%. This increase is primarily due to loan growth between June 30, 2004 and 2005.

Noninterest income

The Company’s primary source of noninterest income is service charges on deposit accounts and other banking service-related fees. Noninterest income for the three months ended June 30, 2005 and 2004 was $727,000 and $658,000, respectively, an increase of $69,000 or 10.5%. The increase is primarily due to growth in the number of customers and services rendered. Noninterest income as a percent of total income (total net interest income and noninterest income), was 10.7% and 12.0% for the three months ended June 30, 2005 and 2004, respectively. The decline in noninterest income as a percent of total income was due primarily to a decline in service charge income.

Noninterest expense

The Company’s efficiency ratio was 60.4% for the three months ended June 30, 2005 as compared to 63.4% for the same period in 2004. The efficiency ratio is calculated by dividing total noninterest expenses by net interest income before provision for loan losses plus noninterest income, excluding net security gains (losses). An increase in the ratio indicates a less efficient allocation of resources.

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


	Three months ended June 30,
(Dollars in thousands)	2005		2004
	(Unaudited)
Salaries and employee benefits	$	2,686	$	2,227
Occupancy expense		433		384
Premises and equipment expense		135		118
Service bureau fees		159		148
Data processing fees		69		70
Other		637		526

Total noninterest expense	$	4,119	$	3,473

Salaries and benefits expense increased $459,000 or 20.6% during the second three months of 2005 compared to the same period in 2004 and reflects growth in the Bank’s management and staff from 117 employees as of June 30, 2004 to 124 employees as of June 30, 2005. The additional staff were hired to accommodate growth in all aspects of the Company’s operations. The increase is also due to increased medical insurance and other benefit expenses.

Nonstaff expenses were $1.4 million for the three months ended June 30, 2005 compared with $1.2 million for the three months ended June 30, 2004, an increase of $200,000 or 16.7%. This increase is representative of the overall growth in the Company’s operations.

FINANCIAL CONDITION

Total assets increased to $598.0 million at June 30, 2005, up $24.3 million or 4.2% from $573.7 million at December 31, 2004. Total loans of $444.5 million at June 30, 2004 represented a $42.0 million or 10.4% increase compared with $402.5 million in loans at December 31, 2004.

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 $500,000. 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.

The purpose of a particular loan generally determines its structure. In almost all cases, the Bank requires personal guarantees on commercial loans to help assure repayment.

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.

1-4 Family Residential

The Bank offers a variety of mortgage loan products. The Bank’s loans collateralized by one-to-four 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 June 30, 2005, 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 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 daily with commercial and consumer lenders to identify potential underwriting or technical exception variances. In addition, the Bank emphasizes 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 June 30, 2005 and December 31, 2004:


	June 30, 2005				December 31, 2004
(Dollars in thousands)	Amount		Percent		Amount		Percent
Commercial	$	134,167	30.2	%	$	130,896	32.5	%
Real estate:
Commercial owner occupied and multi-family		163,783	36.8			143,415	35.6
Construction, land development and other land loans		78,600	17.7			68,028	16.9
Residential 1-4 family		29,680	6.7			26,901	6.7
Consumer and other		38,256	8.6			33,255	8.3

Total loans	$	444,486	100.0	%	$	402,495	100.0	%

The increase in total loans from $402.5 million at December 31, 2004 to $444.5 million at June 30, 2005 was primarily due the contributions from several new lenders.

Nonperforming assets

The Bank has several procedures in place to assist it in maintaining the overall quality of its loan portfolio. The Bank has established underwriting guidelines to be followed by its officers, and, when applicable, will also monitor delinquency levels for any negative or adverse trends. The Bank’s loan review procedures include approval of lending policies and underwriting guidelines by the Board of Directors, annual independent loan review, approval of large credit relationships by the Bank’s loan committee and loan quality documentation procedures. There can be no assurance, however, that the Bank’s loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.


	June 30, 2005			December 31, 2004
	(Dollars in thousands)
Nonaccrual loans	$	139		$	289
Accruing loans 90 or more days past due		77			329
Other real estate and foreclosed property		175			14

Total nonperforming assets	$	391		$	632

Nonperforming assets to total loans and other real estate		0.09	%		0.16	%

A loan is placed on nonaccrual status when the loan reaches a past due status of at least 90 days or the loan officer believes the loan may be partially uncollectible. At June 30, 2005, the Bank had nonaccrual loans totaling $139,000, compared to nonaccrual loans at December 31, 2004 of $289,000. Accruing loans 90 or more days past due have been reduced to $77,000 since year end resulting from payments to make current and to a lesser extent charge-offs.

Allowance for loan losses – Critical Accounting Policy

The Company considers its Allowance for Loan Losses as a policy critical to the sound operations of the Bank. The Company provides for loan losses each period by an amount resulting from both (a) an estimate by management of loan losses that occurred during the period and (b) the ongoing adjustment of prior estimates of 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 sheet. As losses are confirmed, the loan is written down, reducing the allowance for loan losses. See Note 3 to the December 31, 2004 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 six months ended June 30, 2005 and the year ended December 31, 2004:


	Six months Ended June 30,			Year ended December 31,
(Dollars in thousands)	2005			2004
Balance, beginning of period	$	4,813		$	3,783
Provision for loan losses		935			1,450
Loans charged off:
Commercial loans		(278	)		(519	)
1-4 family residential		(39	)		—
Real estate commercial		(117	)
Consumer loans		(18	)		(85	)
Recoveries:
Commercial loans		19			171
Consumer loans		—			13

Net charge offs		(433	)		(420	)

Balance, end of period	$	5,315		$	4,813

Ratios:
Allowance to end of period loans		1.20	%		1.20	%
Net charge-offs to average loans outstanding during the period		0.20	%		0.12	%

The following table describes the allocation 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 credit portfolio. The balance of the allowance for loan losses at June 30, 2005 and December 31, 2004 is as follows:


	June 30, 2005				December 31, 2004
(Dollars in thousands)	Amount		Percent of loans to total loans		Amount		Percent of loans to total loans
Commercial and industrial	$	1,605	30.2	%	$	1,564	32.5	%
Real estate		3,253	61.2			2,849	59.2
Consumer and other		457	8.6			400	8.3

Total	$	5,315	100.0	%	$	4,813	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 probable losses based on management’s perception of economic conditions, loan portfolio growth, historical charge-off experience and exposure concentrations. Management of the Bank will monitor these conditions and is committed to maintaining an adequate allowance.

Investment securities

At the date of purchase, the Bank 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 shareholders’ equity until realized. Gains and losses on sales of securities are determined using the specific-identification method.

The amortized cost and fair value of investment securities classified as available for sale at June 30, 2005 and December 31, 2004 is as follows:


	June 30, 2005
			Gross Unrealized
	Amortized Cost		Gain		Loss		Fair Value
	(Dollars in thousands)
U.S. Government and agency securities	$	7,400	$	—	$	12	$7,388
Mortgage-backed securities		59,499		—		709	58,790
Municipal securities		982		—		25	957
Federal Reserve Bank stock		815		—		—	815
Federal Home Loan Bank stock		2,032		—		—	2,032

	$	70,728	$	—	$	746	$69,982


	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

	$	72,887	$	6	$	301	$	72,592

The amortized cost and gross market value of investment securities classified as held to maturity at June 30, 2005 and December 31, 2004 is as follows:


	June 30, 2005
			Gross Unrealized				Gross
	Amortized Cost		Gain		Loss		Market Value
	(Dollars in thousands)
U.S. Government and agency securities	$	8,141	$	—	$	80	$	8,061
Mortgage-backed securities		6,160		—		9		6,151

	$	14,301	$	—	$	89	$	14,212


	December 31, 2004
			Gross Unrealized				Gross
	Amortized Cost		Gain		Loss		Market 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

There were $4.1 million at June 30, 2005 and December 31, 2004 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 June 30, 2005. 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 other comprehensive income.


	June 30, 2005
	Within One Year				After One Year but 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	$	—	—	%	$	7,388	3.90	%	$	—	$	—		$	—	$	—		$	7,388	3.90	%
Mortgage-backed securities		—	—			—	—			15,411		4.04	%		43,379		4.30	%		58,790	4.23
Municipal securities		—	—			957	2.93			—		—			—		—			957	2.93

	$	—	—	%	$	8,345	3.78	%	$	15,411		4.04	%	$	43,379		4.30	%	$	67,135	4.18	%

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 June 30, 2005.


	June 30, 2005
	Within One Year				After One Year but 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	$	3,020	2.41	%	$	5,121	3.03	%	$	—	—	%	$	—	—	%	$	8,141	2.80	%
Mortgage-backed securities		—	—			432	4.54			—	—			5,728	4.72			6,160	4.71

	$	3,020	2.41	%	$	5,553	3.15	%	$	—	—	%	$	5,728	4.72	%	$	14,301	3.62	%

Deposits

The Bank’s deposits increased to $539.6 million at June 30, 2005, up from $497.8 million at December 31, 2004, an increase of $41.8 million or 8.4%. Noninterest-bearing deposits were $167.2 million at June 30, 2005, down from $167.8 million at December 31, 2004. For the six months ended June 30, 2005, interest-bearing deposits increased 12.9% from $330.0 million at December 31, 2004 to $372.5 million at June 30, 2005.

The following table presents the daily average balance and weighted average rate for the indicated periods.


	Six months ended June 30, 2005				Year ended December 31, 2004
(Dollars in thousands)	*Amount*		*Rate*		*Amount*		*Rate*

Money market checking accounts	$	28,998	0.65	%	$	25,401	0.36	%
Money market and savings		151,518	1.48			114,368	0.73
Certificates of deposit		168,554	2.86			134,678	2.52

Total interest-bearing deposits		349,070	2.08			274,447	1.57
Noninterest-bearing deposits		167,326	—			131,801	—

Total deposits	$	516,396	1.40	%	$	406,248	1.06	%

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 June 30, 2005:


	(In thousands)
Maturities of time deposits
Three months or less	$	71,347
Over 3 through 6 months		18,278
Over 6 through and 12 months		27,983
Over 12 months		59,801

Total	$	177,409

Weighted average rate on time deposits		3.14	%

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.

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 $10 million at June 30, 2005. In addition to creditworthiness, the Bank must own a minimum amount of FHLB capital stock. This minimum is 5.00% of outstanding FHLB advances. Unused borrowing capacity at June 30, 2005 was in excess of $219 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 is a holding company and does not conduct operations; its primary sources of liquidity are dividends upstreamed from Republic National Bank.

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.

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 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.

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 June 30, 2005 and December 31, 2004 are $87.6 million and $65.7 million, 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.

Capital resources

Shareholders’ equity increased during the six months ended June 30, 2005 and during the year ended December 31, 2004 due primarily to the net income. Shareholders’ equity stood at $38.0 million at June 30, 2004, up $2.9 million or 8.2% from $35.2 million at December 31, 2004.

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.

As of June 30, 2005, the Bank and the Company were well capitalized, based on the OCC prompt corrective action ratios and guidelines. The Bank’s risk-based capital ratios including Tier 1 leverage ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratio were 7.70%, 9.33% and 10.42%, respectively, at June 30, 2005.

ITEM 3. 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.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company expects from time to time to become a party to or otherwise involved in legal proceedings arising in the normal course of business. Management does not believe that there is any pending or threatened proceeding against the Company which, if upon resolution, would have a material adverse effect on the Company’s business, consolidated financial position or results of operations.

ITEM 2. CHANGES IN SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

(a)

The Company’s Annual Meeting of Shareholders (the “Annual Meeting”) was held on April 19, 2005. All share information has been restated to give effect to the two-for-one stock split effective May 24, 2004.

(b)

The following directors were elected until the Company’s 2006 annual meeting of shareholders: The results of the vote for the election of the five nominees listed below as Directors of the Bank were as indicated opposite their respective name:


Director	For	Against	Abstain
C. P. Bryan	2,709,572	20,340	0
Gerald W. Bodzy	2,709,898	20,014	0
Donn C. Fullenweider	2,709,898	20,014	0
James H. Hassell	2,709,898	20,014	0
Wayne C. Owen	2,709,898	20,014	0

(c)

The shareholders ratified the appointment of KPMG LLP as independent auditors for the 2005 fiscal year. A total of 2,698,210 shares voted in favor of the appointment, 19,822 shares were voted against the appointment and 11,880 shares abstained from voting.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:


Exhibit Number		Description

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

No reports on Form 8-K were filed by Republic Bancshares of Texas, Inc. during the six months ended June 30, 2005.

SIGNATURES

Pursuant to 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 thereunto duly authorized.


Republic Bancshares of Texas, Inc.
(Registrant)

By		/s/ C.P. Bryan
		C. P. Bryan
		Chairman of the Board, President and
		Chief Executive Officer

By:		/s/ R. John McWhorter
		R. John McWhorter
		Executive Vice President and
		Chief Financial Officer

Dated:		August 3, 2005

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REPUBLIC BANCSHARES OF TEXAS INC 10-Q