##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2005
 OR
 o
    
    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: 000-50904
 SNB Bancshares, Inc.
 (Exact name of Registrant as specified in its charter)
 Texas
    
    76-0472829(State or other jurisdiction of
    
    (IRS EmployerIncorporation or organization)
    
    Identification No.)
 14060 Southwest Freeway
Sugar Land, Texas 77478  (Address of principal executive office)
 (Registrants telephone number)
(281) 269-7200
 Securities registered pursuant to Section 12(b) of the Act:
None
 Securities registered pursuant to section 12(g) of the Act:
 Common Stock, $0.01 par value per share  (Title of Class)
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
  
 DOCUMENTS INCORPORATED BY REFERENCE




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##### Table of Contents



SNB BANCSHARES, INC.
 2005 ANNUAL REPORT ON FORM 10-K
 TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    3General
    
    
    3Available Information
    
    
    3Pending Acquisition by Prosperity Bancshares, Inc.
    
    
    3Subsequent Event
    
    
    3Our Community Banking Strategy
    
    
    3Banking Activities
    
    
    4Officers and Employees
    
    
    4Competition
    
    
    4Supervision and Regulation
    
    
    5Item 1A. Risk Factors
    
    
    11Item 1B. Unresolved Staff Comments
    
    
    15Item 2. Properties
    
    
    16Item 3. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
    
    
    16Item 6. Selected Consolidated Financial Data
    
    
    18Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Overview
    
    
    21Critical Accounting Policies
    
    
    21Results of Operations
    
    
    22Financial Condition
    
    
    27Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item 8. Financial Statements and Supplementary Data
    
    
    44Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    45Item 9A. Controls and Procedures
    
    
    45Item 9B. Other Information
    
    
    47PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    47Item 11. Executive Compensation
    
    
    50Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
    
    
    52Item 13. Certain Relationships and Related Transactions
    
    
    54Item 14. Principal Accounting Fees and Services
    
    
    55PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    55Consent of Deloitte & Touche LLPCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
 2




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PART I.
 
 Item 1. Business
 
 General
   
 Available Information
 www.snbtx.com
 
 Pending Acquisition by Prosperity Bancshares, Inc.
   
 Subsequent Event
  
 Our Community Banking Strategy
   3




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Banking Activities
    
 Officers and Employees
   
 Competition
  4




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Supervision and Regulation
    SNB Bancshares, Inc.
  Regulatory Restrictions on Dividends; Source of Strength.
   Scope of Permissible Activities.
 5




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Safe and Sound Banking Practices.
  Anti-Tying Restrictions.
 Capital Adequacy Requirements.
   Imposition of Liability for Undercapitalized Subsidiaries.
  6




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Acquisitions by Bank Holding Companies.
 Control Acquisitions.
  Sarbanes-Oxley Act of 2002.
   
    
    audit committees for all listed companies;
    
    certification of financial statements by the chief executive officer and the chief financial officer;
    
    the forfeiture of bonuses or other incentive-based compensation and profits from the sale
of an issuers securities by directors and senior officers in the twelve month period
following initial publication of any financial statements that later require restatements
due to material noncompliance of the issuer or misconduct;
    
    a prohibition on insider trading during pension plan black-out periods;
    
    disclosure of off-balance sheet transactions;
    
    a prohibition on personal loans to directors and officers except for financial institutions;
    
    expedited filing requirements for Form 4s;
    
    disclosure of a code of ethics, if applicable, and filing a Form 8-K for a change or waiver of such code;
    
    accelerated filing of periodic reports;
    
    the formation of a public accounting oversight board;
    
    auditor independence; and
    
    increased criminal penalties for violations of securities laws.
 7




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Southern National Bank of Texas
  Financial Modernization.
 Branching.
 Restrictions on Transactions with Affiliates and Insiders.
   Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
  8




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Examinations.
 Audit Reports.
 Capital Adequacy Requirements.
   Corrective Measures for Capital Deficiencies.
   9




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Deposit Insurance Assessments.
   Enforcement Powers.
 Brokered Deposit Restrictions.
 Cross-Guarantee Provisions.
 Community Reinvestment Act.
 Consumer Laws and Regulations.
 10




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Privacy.
 USA PATRIOT Act of 2001.
 Expanding Enforcement Authority
  Effect on Economic Environment
   
 Item 1A. Risk Factors
  11




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Risks Associated with our Pending Merger with Prosperity Bancshares, Inc.
 Failure to complete the pending merger with Prosperity Bancshares, Inc. could materially and
adversely affect our stock price and our results of operations.
  
    
    the market price of our common stock may decline to the extent that the current market
price includes a market assumption that the merger will be completed;
    
    we will remain liable for significant transaction costs, including legal, accounting,
financial advisory and other costs related to the merger, and may not receive any
termination fee from Prosperity;
    
    the inability to retain employees in the interim period may be significant and we may
find it difficult to continue as a stand-alone entity; and
    
    we may experience a negative reaction to the termination of the merger from our
customers, employees or affiliates which may adversely impact our future results of
operations as a stand-alone entity.
  Fluctuations in market prices of Prosperity common stock will affect the value that our
shareholders receive for their shares of our common stock and Class B stock.
   If the price of Prosperity common stock falls and the decrease exceeds certain pre-agreed levels,
and if Prosperity does not elect to alter the exchange ratio to provide more shares and/or alter
the amount of the per share cash consideration to provide more cash, we have the right to terminate
the merger agreement and the merger will not occur.
  12




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Prosperity may have difficulty combining our operations with its own operations or realizing the
anticipated benefits of the merger.
  Risks Associated with Our Business
 A large percentage of our loans are collateralized by real estate, and an adverse change in the
real estate market may result in losses and adversely affect our profitability.
  Our business is subject to interest rate risk and fluctuations in interest rates may adversely
affect our financial performance.
  
    
    inflation;
    
    recession;
    
    changes in unemployment;
    
    the money supply; and
    
    international disorder and instability in domestic and foreign financial markets.
  13




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Our profitability depends significantly on economic conditions in our primary market.
  Our allowance for loan losses may not be sufficient to cover actual loan losses, which could
adversely affect our financial performance.
   We may not be able to maintain our historical growth rate, which may adversely impact our results
of operations and financial condition.
  Risks Associated with Our Stock
 Holders of our Class B stock have significant control over our company. We have two classes of
voting stock  common stock and Class B stock  and the holders of Class B have, and are expected
to maintain, the right to elect 60% of the members of our board of directors. Consequently, the
holders of Class B stock control a majority of our board of directors. In addition, certain
significant corporate actions, such as a merger with another institution, require the approval of
both classes of stock, each voting separately as a class, which means that the holders of Class B
stock could prohibit a transaction favored by the holders of common stock
   14




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The trading volume in our common stock is less than that of larger financial services companies.
  We currently do not intend to pay dividends on our common stock or Class B stock. In addition, our
future ability to pay dividends is subject to restrictions.
    
 Item 1B. Unresolved Staff Comments
  15




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Item 2. Properties
   Deposits atDecember 31,Facility
    
    Address
    
    2005(In thousands)Main Office
    
    14060 Southwest Freeway, Sugar Land, Texas 77478
    
    $
    542,510Memorial Hermann Southwest Hospital Branch
    
    7737 Southwest Freeway, Houston, Texas 77074
    
    
    81,164Uptown/Post Oak
    
    1101 Post Oak Boulevard, Houston, Texas 77056
    
    
    202,066Old Town Katy
    
    5733 Second Street, Katy, Texas 77493
    
    
    62,587Pecan Grove(1)
    
    2035 FM 359, Suite D, Richmond, Texas 77469
    
    
    3,623
 
 (1)
    
    Opened September 30, 2005.  Monticello. Poplar Forest. Farmington
 
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II.
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
   16




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2005
    
    High
    
    LowFourth Quarter
    
    $
    18.15
    
    
    $
    9.77Third Quarter
    
    
    11.90
    
    
    
    10.85Second Quarter
    
    
    11.49
    
    
    
    9.21First Quarter
    
    
    15.00
    
    
    
    10.25
 2004
    
    High
    
    LowFourth Quarter
    
    $
    15.49
    
    
    $
    11.76Third Quarter (8/18/04 through 9/30/04)
    
    
    12.00
    
    
    
    10.00
  2004
    
    High
    
    LowThird Quarter (7/1/04 though 8/17/04)
    
    $
    19.00
    
    
    $
    11.00Second Quarter
    
    
    19.00
    
    
    
    11.00First Quarter
    
    
    16.00
    
    
    
    10.00
 Dividends
    Recent Sales of Unregistered Securities
  Issuer Purchases of Equity Securities
  17




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Item 6. Selected Consolidated Financial Data
  As
of and for the Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands,
except per share data)Earnings Statement Data:Interest income
    
    $
    60,142
    
    
    $
    46,653
    
    
    $
    33,238
    
    
    $
    29,371
    
    
    $
    28,459Interest expense
    
    
    27,370
    
    
    
    18,006
    
    
    
    12,059
    
    
    
    11,519
    
    
    
    14,245Net interest income
    
    
    32,772
    
    
    
    28,647
    
    
    
    21,179
    
    
    
    17,852
    
    
    
    14,214Provision for loan losses
    
    
    10,351
    
    
    
    2,950
    
    
    
    2,821
    
    
    
    1,590
    
    
    
    900Net interest income after provision for loan losses
    
    
    22,421
    
    
    
    25,697
    
    
    
    18,358
    
    
    
    16,262
    
    
    
    13,314Noninterest income (loss)
    
    
    (11,991
    )
    
    
    2,120
    
    
    
    2,309
    
    
    
    1,893
    
    
    
    1,523Noninterest expense
    
    
    21,508
    
    
    
    18,821
    
    
    
    15,489
    
    
    
    13,351
    
    
    
    11,245Earnings (loss) before income taxes
    
    
    (11,078
    )
    
    
    8,996
    
    
    
    5,178
    
    
    
    4,804
    
    
    
    3,592Provision (benefit) for income tax expense
    
    
    (3,766
    )
    
    
    3,049
    
    
    
    1,761
    
    
    
    1,642
    
    
    
    1,135Net earnings (loss)
    
    $
    (7,312
    )
    
    $
    5,947
    
    
    $
    3,417
    
    
    $
    3,162
    
    
    $
    2,457Per Share Data:Basic earnings (loss) per share
    
    $
    (0.59
    )
    
    $
    0.67
    
    
    $
    0.49
    
    
    $
    0.56
    
    
    $
    0.59Diluted earnings (loss) per share
    
    
    (0.59
    )
    
    
    0.65
    
    
    
    0.48
    
    
    
    0.56
    
    
    
    0.59Book value per share
    
    
    6.63
    
    
    
    6.95
    
    
    
    4.40
    
    
    
    4.35
    
    
    
    2.76Tangible book value per share
    
    
    6.63
    
    
    
    6.95
    
    
    
    4.40
    
    
    
    4.35
    
    
    
    2.76Weighted average shares outstanding (in thousands):Class B stock
    
    
    2,663
    
    
    
    2,900
    
    
    
    3,286
    
    
    
    3,498
    
    
    
    3,719Common stock
    
    
    9,772
    
    
    
    5,999
    
    
    
    3,708
    
    
    
    2,182
    
    
    
    455Total
    
    
    12,435
    
    
    
    8,899
    
    
    
    6,994
    
    
    
    5,680
    
    
    
    4,174Shares outstanding at end of period (in thousands):Class B stock
    
    
    2,652
    
    
    
    2,679
    
    
    
    3,258
    
    
    
    3,306
    
    
    
    3,719Common stock
    
    
    9,784
    
    
    
    9,754
    
    
    
    3,736
    
    
    
    3,688
    
    
    
    455Total
    
    
    12,436
    
    
    
    12,433
    
    
    
    6,994
    
    
    
    6,994
    
    
    
    4,174
 18




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As
of and for the Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(Dollars in thousands,
except per share data)Period-End Balance Sheet Data:Total assets
    
    $
    1,025,336
    
    
    $
    1,130,088
    
    
    $
    883,841
    
    
    $
    574,594
    
    
    $
    461,229Total securities
    
    
    266,511
    
    
    
    488,523
    
    
    
    412,620
    
    
    
    177,200
    
    
    
    128,865Loans held for sale
    
    
    37,613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loans held for investment
    
    
    615,204
    
    
    
    598,292
    
    
    
    424,479
    
    
    
    342,085
    
    
    
    280,921Allowance for loan losses
    
    
    6,965
    
    
    
    8,121
    
    
    
    5,650
    
    
    
    4,006
    
    
    
    3,371Total deposits
    
    
    891,950
    
    
    
    868,386
    
    
    
    733,971
    
    
    
    526,171
    
    
    
    420,765Other borrowed funds
    
    
    15,500
    
    
    
    132,900
    
    
    
    77,800
    
    
    
    7,580
    
    
    
    18,520Shareholders equity
    
    
    82,511
    
    
    
    86,401
    
    
    
    30,767
    
    
    
    30,429
    
    
    
    11,534Average Balance Sheet Data:Total assets
    
    $
    1,109,895
    
    
    $
    1,041,949
    
    
    $
    730,252
    
    
    $
    522,189
    
    
    $
    387,974Total securities
    
    
    415,353
    
    
    
    482,626
    
    
    
    302,590
    
    
    
    157,562
    
    
    
    82,542Loans held for sale
    
    
    611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loans held for investment
    
    
    644,738
    
    
    
    509,142
    
    
    
    383,844
    
    
    
    305,912
    
    
    
    265,342Allowance for loan losses
    
    
    9,029
    
    
    
    6,868
    
    
    
    4,788
    
    
    
    3,629
    
    
    
    2,944Total deposits
    
    
    812,268
    
    
    
    807,605
    
    
    
    591,070
    
    
    
    474,588
    
    
    
    354,760Other borrowed funds
    
    
    167,664
    
    
    
    142,498
    
    
    
    79,714
    
    
    
    15,998
    
    
    
    12,194Shareholders equity
    
    
    87,292
    
    
    
    50,156
    
    
    
    30,709
    
    
    
    21,765
    
    
    
    10,922Performance Ratios:Return on average assets
    
    
    (0.66
    )%
    
    
    0.57
    %
    
    
    0.47
    %
    
    
    0.61
    %
    
    
    0.63
    %Return on average equity
    
    
    (8.38
    )
    
    
    11.86
    
    
    
    11.13
    
    
    
    14.53
    
    
    
    22.50Net interest margin(1)
    
    
    3.11
    
    
    
    2.85
    
    
    
    3.07
    
    
    
    3.69
    
    
    
    3.96Efficiency ratio(2)
    
    
    62.47
    
    
    
    62.60
    
    
    
    68.51
    
    
    
    69.21
    
    
    
    72.64Asset Quality Ratios(3):Nonperforming assets to total loans and other real estate owned
    
    
    1.76
    %
    
    
    0.80
    %
    
    
    1.07
    %
    
    
    0.76
    %
    
    
    0.27
    %Net charge-offs to average loans
    
    
    1.78
    
    
    
    0.09
    
    
    
    0.31
    
    
    
    0.31
    
    
    
    0.01Allowance for loan losses to period-end loans
    
    
    1.07
    
    
    
    1.36
    
    
    
    1.33
    
    
    
    1.17
    
    
    
    1.20Allowance for loan losses to nonperforming loans
    
    
    67.98
    
    
    
    234.17
    
    
    
    125.25
    
    
    
    153.25
    
    
    
    437.79Capital Ratios:Leverage ratio(4)
    
    
    9.95
    %
    
    
    10.87
    %
    
    
    5.09
    %
    
    
    6.33
    %
    
    
    3.78
    %Average shareholders equity to average total assets
    
    
    7.86
    
    
    
    4.81
    
    
    
    4.21
    
    
    
    4.17
    
    
    
    2.82Tier 1 risk-based capital ratio
    
    
    15.50
    
    
    
    17.72
    
    
    
    8.84
    
    
    
    10.15
    
    
    
    5.56Total risk-based capital ratio
    
    
    16.77
    
    
    
    19.86
    
    
    
    15.35
    
    
    
    11.27
    
    
    
    7.83
 
 (1)
    
    Calculated on a tax-equivalent basis using a 34% tax rate for all periods presented.(2)
    
    The efficiency ratio is computed by dividing noninterest expense by net interest income plus
noninterest income, excluding securities gains and losses. Additionally, taxes are not part of
this calculation.(3)
    
    At period end, except net charge-offs to average loans.(4)
    
    Computed by dividing period-end equity by fourth quarter average assets. 19




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Cautionary Notice Regarding Forward-Looking Statements
  
    
    the effects of future economic and business conditions on us and our customers;
    
    changes in statues and governmental regulations or their interpretations including changes in tax requirements and tax rates;
    
    changes in interest rates which could reduce our net interest margins, asset valuations and expense expectations;
    
    increased competition from other banks and financial institutions for customer deposits and loans;
    
    changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;
    
    the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses;
    
    increased credit risk in our assets and increased operating risk caused by a material
change in commercial, consumer and/or real estate loans as a percentage of the total loan
portfolio;
    
    changes in the availability of funds resulting in increased costs or reduced liquidity;
    
    the effect of changes in accounting policies and practices which may be adopted by
regulatory agencies and/or the Financial Accounting Standards Board;
    
    our ability to acquire, operate and maintain cost effective and efficient systems without
incurring unexpectedly difficult or expensive technological changes;
    
    the loss of senior management or operating personnel and the potential inability to hire
qualified personnel at reasonable compensation levels;
    
    acts of terrorism, hostilities or other international or domestic calamities; and
    
    other risks and uncertainties listed from time to time in our reports and documents filed
with the Securities and Exchange Commission.
  20




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For the Years Ended December 31, 2005, 2004 and 2003
  
 Overview
   
 Critical Accounting Policies
  Allowance for Loan Losses
 Stock-based Compensation
  21




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Results of Operations
        22




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Net Interest Income
  2005 versus 2004.
   2004 versus 2003.
   23




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For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    AverageOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    Rate(Dollars in thousands)ASSETS:Interest-earning assets:Loans
    
    $
    645,349
    
    
    $
    44,134
    
    
    
    6.75
    %
    
    $
    509,142
    
    
    $
    30,770
    
    
    
    5.94
    %
    
    $
    383,844
    
    
    $
    24,200
    
    
    
    6.22
    %Investment securities(1)
    
    
    415,353
    
    
    
    15,784
    
    
    
    3.89
    
    
    
    482,626
    
    
    
    15,729
    
    
    
    3.28
    
    
    
    302,590
    
    
    
    9,000
    
    
    
    2.97Federal funds sold
    
    
    2,782
    
    
    
    101
    
    
    
    3.59
    
    
    
    8,945
    
    
    
    87
    
    
    
    0.96
    
    
    
    1,058
    
    
    
    11
    
    
    
    1.03Interest-earning deposits in other financial
institutions
    
    
    3,413
    
    
    
    123
    
    
    
    3.56
    
    
    
    5,830
    
    
    
    67
    
    
    
    1.13
    
    
    
    2,387
    
    
    
    27
    
    
    
    1.12Total interest-earning assets
    
    
    1,066,897
    
    
    
    60,142
    
    
    
    5.61
    %
    
    
    1,006,543
    
    
    
    46,653
    
    
    
    4.56
    %
    
    
    689,879
    
    
    
    33,238
    
    
    
    4.75
    %Less allowance for loan losses
    
    
    (9,029
    )
    
    
    
    
    
    
    
    
    
    
    (6,868
    )
    
    
    
    
    
    
    
    
    
    
    (4,788
    )Total interest-earning assets, net of allowance
    
    
    1,057,868
    
    
    
    
    
    
    
    
    
    
    
    999,675
    
    
    
    
    
    
    
    
    
    
    
    685,091Non-earning assets:Cash and due from banks
    
    
    18,574
    
    
    
    
    
    
    
    
    
    
    
    15,533
    
    
    
    
    
    
    
    
    
    
    
    26,543Premises and equipment
    
    
    19,643
    
    
    
    
    
    
    
    
    
    
    
    13,466
    
    
    
    
    
    
    
    
    
    
    
    11,784Accrued interest receivable and other assets
    
    
    13,810
    
    
    
    
    
    
    
    
    
    
    
    13,275
    
    
    
    
    
    
    
    
    
    
    
    6,834Total noninterest-earning assets
    
    
    52,027
    
    
    
    
    
    
    
    
    
    
    
    42,274
    
    
    
    
    
    
    
    
    
    
    
    45,161Total assets
    
    $
    1,109,895
    
    
    
    
    
    
    
    
    
    
    $
    1,041,949
    
    
    
    
    
    
    
    
    
    
    $
    730,252LIABILITIES AND SHAREHOLDERS EQUITY:Interest-bearing liabilities:NOW, savings, and money market accounts
    
    $
    350,177
    
    
    $
    7,709
    
    
    
    2.20
    %
    
    $
    334,865
    
    
    $
    4,514
    
    
    
    1.35
    %
    
    $
    236,022
    
    
    $
    2,757
    
    
    
    1.17
    %Time deposits
    
    
    343,774
    
    
    
    11,044
    
    
    
    3.21
    
    
    
    368,015
    
    
    
    9,041
    
    
    
    2.46
    
    
    
    259,968
    
    
    
    6,753
    
    
    
    2.60Other borrowed funds
    
    
    167,664
    
    
    
    5,911
    
    
    
    3.48
    
    
    
    142,498
    
    
    
    2,256
    
    
    
    1.56
    
    
    
    78,063
    
    
    
    941
    
    
    
    1.19Notes payable to bank
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,651
    
    
    
    53
    
    
    
    3.21Junior subordinated debentures
    
    
    37,729
    
    
    
    2,706
    
    
    
    7.07
    
    
    
    38,250
    
    
    
    2,195
    
    
    
    5.64
    
    
    
    25,934
    
    
    
    1,555
    
    
    
    6.00Total interest-bearing liabilities
    
    
    899,344
    
    
    
    27,370
    
    
    
    3.04
    %
    
    
    883,628
    
    
    
    18,006
    
    
    
    2.04
    %
    
    
    601,638
    
    
    
    12,059
    
    
    
    2.00
    %Noninterest-bearing liabilities:Demand deposits
    
    
    118,317
    
    
    
    
    
    
    
    
    
    
    
    104,725
    
    
    
    
    
    
    
    
    
    
    
    95,080Accrued interest payable and other liabilities
    
    
    4,942
    
    
    
    
    
    
    
    
    
    
    
    3,440
    
    
    
    
    
    
    
    
    
    
    
    2,825Total noninterest-bearing liabilities
    
    
    123,259
    
    
    
    
    
    
    
    
    
    
    
    108,165
    
    
    
    
    
    
    
    
    
    
    
    97,905Total liabilities
    
    
    1,022,603
    
    
    
    
    
    
    
    
    
    
    
    991,793
    
    
    
    
    
    
    
    
    
    
    
    699,543Shareholders equity
    
    
    87,292
    
    
    
    
    
    
    
    
    
    
    
    50,156
    
    
    
    
    
    
    
    
    
    
    
    30,709Total liabilities and shareholders equity
    
    $
    1,109,895
    
    
    
    
    
    
    
    
    
    
    $
    1,041,949
    
    
    
    
    
    
    
    
    
    
    $
    730,252Net interest income
    
    
    
    
    
    $
    32,772
    
    
    
    
    
    
    
    
    
    
    $
    28,647
    
    
    
    
    
    
    
    
    
    
    $
    21,179Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.57
    %
    
    
    
    
    
    
    
    
    
    
    2.52
    %
    
    
    
    
    
    
    
    
    
    
    2.75
    %Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    3.11
    %
    
    
    
    
    
    
    
    
    
    
    2.85
    %
    
    
    
    
    
    
    
    
    
    
    3.07
    %
 
 (1)
    
    The tax equivalent yield is based on amortized cost and does not include any component of
unrealized gains or losses. It is calculated using a 34% tax rate for all periods presented.(2)
    
    The net interest margin is equal to net interest income, on a tax equivalent basis using a
34% tax rate for all periods presented, divided by average interest-earning assets. 24




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##### Table of Contents



For the Years Ended December 31,2005 vs. 2004
    
    
    2004 vs. 2003Increase (Decrease)
    
    
    
    
    
    
    Increase (Decrease)Due to Change in
    
    
    
    
    
    
    Due to Change inVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    8,097
    
    
    $
    5,267
    
    
    $
    13,364
    
    
    $
    7,784
    
    
    $
    (1,214
    )
    
    $
    6,570Securities
    
    
    (2,207
    )
    
    
    2,262
    
    
    
    55
    
    
    
    5,355
    
    
    
    1,374
    
    
    
    6,729Federal funds sold
    
    
    (59
    )
    
    
    73
    
    
    
    14
    
    
    
    79
    
    
    
    (3
    )
    
    
    76Interest-bearing deposits in other financial institutions
    
    
    (27
    )
    
    
    83
    
    
    
    56
    
    
    
    40
    
    
    
    
    
    
    
    40Total increase in interest income
    
    
    5,804
    
    
    
    7,685
    
    
    
    13,489
    
    
    
    13,258
    
    
    
    157
    
    
    
    13,415Interest-bearing liabilities:NOW, savings and money market accounts
    
    
    206
    
    
    
    2,989
    
    
    
    3,195
    
    
    
    1,154
    
    
    
    603
    
    
    
    1,757Time deposits
    
    
    (596
    )
    
    
    2,599
    
    
    
    2,003
    
    
    
    2,807
    
    
    
    (519
    )
    
    
    2,288Other borrowed funds
    
    
    392
    
    
    
    3,263
    
    
    
    3,655
    
    
    
    776
    
    
    
    539
    
    
    
    1,315Notes payable to bank
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    (53
    )Junior subordinated debentures
    
    
    (29
    )
    
    
    540
    
    
    
    511
    
    
    
    729
    
    
    
    (89
    )
    
    
    640Total increase (decrease) in interest expense
    
    
    (27
    )
    
    
    9,391
    
    
    
    9,364
    
    
    
    5,413
    
    
    
    534
    
    
    
    5,947Increase (decrease) in net interest income
    
    $
    5,831
    
    
    $
    (1,706
    )
    
    $
    4,125
    
    
    $
    7,845
    
    
    $
    (377
    )
    
    $
    7,468
 Provision for Loan Losses
   Noninterest Income
  For the Years EndedDecember 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Service charges on deposit accounts
    
    $
    889
    
    
    $
    786
    
    
    $
    873Gains on sales of securities, net
    
    
    128
    
    
    
    700
    
    
    
    880Impairment writedown of securities
    
    
    (13,777
    )
    
    
    
    
    
    
    Other noninterest income
    
    
    769
    
    
    
    634
    
    
    
    556Total noninterest income
    
    $
    (11,991
    )
    
    $
    2,120
    
    
    $
    2,309
  25




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##### Table of Contents



Noninterest Expense
  For the Years EndedDecember 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    11,850
    
    
    $
    11,365
    
    
    $
    9,328Non-staff expenses:Net occupancy expense
    
    
    2,132
    
    
    
    1,862
    
    
    
    1,725Data processing expense
    
    
    1,739
    
    
    
    1,218
    
    
    
    1,163Legal and professional fees
    
    
    1,483
    
    
    
    653
    
    
    
    571FDIC deposit insurance premium
    
    
    116
    
    
    
    115
    
    
    
    83Other
    
    
    4,188
    
    
    
    3,608
    
    
    
    2,619Total non-staff expenses
    
    
    9,658
    
    
    
    7,456
    
    
    
    6,161Total noninterest expense
    
    $
    21,508
    
    
    $
    18,821
    
    
    $
    15,489
     26




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##### Table of Contents



Income Taxes
  
 Financial Condition
 Loan Portfolio
  As of December 31,2005
    
    
    2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Loans held for sale, at fair value:Business and industrial
    
    $
    6,407
    
    
    
    1.0
    %
    
    $
    
    
    
    
    
    %Real estate:Construction and land development
    
    
    7,704
    
    
    
    1.2
    
    
    
    
    
    
    
    Residential mortgages
    
    
    11,310
    
    
    
    1.7
    
    
    
    
    
    
    
    Commercial mortgages
    
    
    12,024
    
    
    
    1.8
    
    
    
    
    
    
    
    Consumer
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    Total loans held for sale
    
    
    37,613
    
    
    
    5.7
    
    
    
    
    
    
    
    Loans held for investment:Business and industrial
    
    
    73,473
    
    
    
    11.3
    
    
    
    70,101
    
    
    
    11.7Real estate:Construction and land development
    
    
    137,348
    
    
    
    21.0
    
    
    
    123,655
    
    
    
    20.7Residential mortgages
    
    
    107,844
    
    
    
    16.5
    
    
    
    126,200
    
    
    
    21.1Commercial mortgages
    
    
    284,521
    
    
    
    43.6
    
    
    
    267,158
    
    
    
    44.7Consumer
    
    
    13,413
    
    
    
    2.1
    
    
    
    12,592
    
    
    
    2.1Other
    
    
    229
    
    
    
    
    
    
    
    227
    
    
    
    Total loans held for investment
    
    
    616,828
    
    
    
    94.5
    
    
    
    599,933
    
    
    
    100.3Total gross loans
    
    
    654,441
    
    
    
    100.2
    
    
    
    599,933
    
    
    
    100.3Less unearned discounts and fees
    
    
    (1,624
    )
    
    
    (0.2
    )
    
    
    (1,641
    )
    
    
    (0.3
    )Total loans
    
    $
    652,817
    
    
    
    100.0
    %
    
    $
    598,292
    
    
    
    100.0
    %
 As of December 31,2003
    
    
    2002
    
    
    2001Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Business and industrial
    
    $
    55,218
    
    
    
    13.0
    %
    
    $
    52,284
    
    
    
    15.3
    %
    
    $
    58,450
    
    
    
    20.8
    %Real estate:Construction and land development
    
    
    65,628
    
    
    
    15.5
    
    
    
    53,788
    
    
    
    15.7
    
    
    
    50,392
    
    
    
    17.9Residential mortgages
    
    
    117,593
    
    
    
    27.7
    
    
    
    99,087
    
    
    
    29.0
    
    
    
    79,412
    
    
    
    28.3Commercial mortgages
    
    
    175,686
    
    
    
    41.4
    
    
    
    126,252
    
    
    
    36.9
    
    
    
    80,402
    
    
    
    28.6Consumer
    
    
    11,092
    
    
    
    2.6
    
    
    
    11,165
    
    
    
    3.3
    
    
    
    12,200
    
    
    
    4.4Other
    
    
    198
    
    
    
    0.1
    
    
    
    210
    
    
    
    0.1
    
    
    
    372
    
    
    
    0.1Gross loans
    
    
    425,415
    
    
    
    100.3
    
    
    
    342,786
    
    
    
    100.3
    
    
    
    281,228
    
    
    
    100.1Less unearned discounts and fees
    
    
    (936
    )
    
    
    (0.3
    )
    
    
    (701
    )
    
    
    (0.3
    )
    
    
    (307
    )
    
    
    (0.1
    )Total loans
    
    $
    424,479
    
    
    
    100.0
    %
    
    $
    342,085
    
    
    
    100.0
    %
    
    $
    280,921
    
    
    
    100.0
    %
  27




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##### Table of Contents



Business and Industrial.
 Construction and Land Development.
 Residential Mortgage.
  Commercial Mortgage.
 28




---



##### Table of Contents



Consumer.
 Loans Held For Sale.
 Underwriting Strategy.
 
    
    granting loans on a sound and collectible basis;
    
    serving the legitimate needs of the community and our general market area while obtaining
a balance between maximum yield and minimum risk;
    
    ensuring that primary and secondary sources of repayment are adequate in relation to the
amount of the loan;
    
    developing and maintaining adequate diversification of the loan portfolio as a whole and
of the loans within each category; and
    
    ensuring that each loan is properly documented and, if appropriate, insurance coverage is
adequate.
  29




---



##### Table of Contents



As of December 31, 2005After OneOne Year
    
    
    through
    
    
    After Fiveor Less
    
    
    Five Years
    
    
    Years
    
    
    Total(Dollars in thousands)Business and industrial
    
    $
    39,096
    
    
    $
    28,933
    
    
    $
    5,444
    
    
    $
    73,473Real estate:Construction and land development
    
    
    53,024
    
    
    
    63,728
    
    
    
    20,596
    
    
    
    137,348Residential mortgages
    
    
    7,063
    
    
    
    69,202
    
    
    
    31,579
    
    
    
    107,844Commercial mortgages
    
    
    14,261
    
    
    
    217,226
    
    
    
    53,034
    
    
    
    284,521Consumer and other
    
    
    5,061
    
    
    
    8,369
    
    
    
    212
    
    
    
    13,642Held for sale, at fair value
    
    
    11,826
    
    
    
    16,735
    
    
    
    9,052
    
    
    
    37,613Total
    
    $
    130,331
    
    
    $
    404,193
    
    
    $
    119,917
    
    
    $
    654,441Loans with a predetermined interest rate
    
    $
    29,597
    
    
    $
    218,833
    
    
    $
    73,715
    
    
    $
    322,145Loans with a floating interest rate
    
    
    100,734
    
    
    
    185,360
    
    
    
    46,202
    
    
    
    332,296Total
    
    $
    130,331
    
    
    $
    404,193
    
    
    $
    119,917
    
    
    $
    654,441
  Nonperforming Assets
     As of December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Nonaccrual loans
    
    $
    8,881
    
    
    $
    1,489
    
    
    $
    2,496
    
    
    $
    2,526
    
    
    $
    467Accruing loans past due 90 days or more
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    20Restructured loans
    
    
    1,365
    
    
    
    1,917
    
    
    
    2,015
    
    
    
    88
    
    
    
    283Other real estate
    
    
    1,275
    
    
    
    1,320
    
    
    
    40
    
    
    
    
    
    
    
    Total nonperforming assets
    
    $
    11,521
    
    
    $
    4,788
    
    
    $
    4,551
    
    
    $
    2,614
    
    
    $
    770Nonperforming assets to total loans and other real estate
    
    
    1.76
    %
    
    
    0.80
    %
    
    
    1.07
    %
    
    
    0.76
    %
    
    
    0.27
    %
 30




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##### Table of Contents



Allowance for Loan Losses
 Accounting by Creditors for
Impairment of a Loan.
   31




---



##### Table of Contents



As of December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Watch
    
    $
    212
    
    
    $
    142
    
    
    $
    327
    
    
    $
    31
    
    
    $
    49Special mention
    
    
    6
    
    
    
    430
    
    
    
    132
    
    
    
    214
    
    
    
    12Substandard
    
    
    23
    
    
    
    74
    
    
    
    409
    
    
    
    262
    
    
    
    9Business and industrial
    
    
    928
    
    
    
    1,156
    
    
    
    901
    
    
    
    556
    
    
    
    558Construction and land development
    
    
    3,037
    
    
    
    1,904
    
    
    
    1,086
    
    
    
    908
    
    
    
    869Residential mortgages
    
    
    644
    
    
    
    763
    
    
    
    184
    
    
    
    178
    
    
    
    144Commercial mortgages
    
    
    2,001
    
    
    
    2,787
    
    
    
    1,842
    
    
    
    1,380
    
    
    
    913Consumer and other
    
    
    63
    
    
    
    110
    
    
    
    82
    
    
    
    60
    
    
    
    88Total unallocated portion of allowance
    
    $
    6,914
    
    
    $
    7,366
    
    
    $
    4,963
    
    
    $
    3,589
    
    
    $
    2,642
       32




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##### Table of Contents



As of and for the Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Average loans outstanding
    
    $
    645,349
    
    
    $
    509,142
    
    
    $
    383,844
    
    
    $
    305,912
    
    
    $
    265,342Total loans outstanding at end of period
    
    $
    652,817
    
    
    $
    598,292
    
    
    $
    424,479
    
    
    $
    342,085
    
    
    $
    280,921Allowance for loan losses at beginning of period
    
    $
    8,121
    
    
    $
    5,650
    
    
    $
    4,006
    
    
    $
    3,371
    
    
    $
    2,501Provision for loan losses
    
    
    10,351
    
    
    
    2,950
    
    
    
    2,821
    
    
    
    1,590
    
    
    
    900Charge-offs:Business and industrial
    
    
    (902
    )
    
    
    (242
    )
    
    
    (516
    )
    
    
    (580
    )
    
    
    Real estate
    
    
    (33
    )
    
    
    (262
    )
    
    
    (673
    )
    
    
    (313
    )
    
    
    (25
    )Consumer
    
    
    (114
    )
    
    
    (110
    )
    
    
    (337
    )
    
    
    (115
    )
    
    
    (86
    )Adjust loans held for sale to fair value
    
    
    (10,584
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (11,633
    )
    
    
    (614
    )
    
    
    (1,526
    )
    
    
    (1,008
    )
    
    
    (111
    )Recoveries:Business and industrial
    
    
    76
    
    
    
    50
    
    
    
    185
    
    
    
    41
    
    
    
    37Real estate
    
    
    34
    
    
    
    63
    
    
    
    51
    
    
    
    1
    
    
    
    21Consumer
    
    
    16
    
    
    
    22
    
    
    
    113
    
    
    
    11
    
    
    
    23Total recoveries
    
    
    126
    
    
    
    135
    
    
    
    349
    
    
    
    53
    
    
    
    81Net charge-offs
    
    
    (11,507
    )
    
    
    (479
    )
    
    
    (1,177
    )
    
    
    (955
    )
    
    
    (30
    )Allowance for loan losses at end of period
    
    
    6,965
    
    
    $
    8,121
    
    
    $
    5,650
    
    
    $
    4,006
    
    
    $
    3,371Allowance for loan losses to end of period loans
    
    
    1.07
    %
    
    
    1.36
    %
    
    
    1.33
    %
    
    
    1.17
    %
    
    
    1.20
    %Net charge-offs to average loans
    
    
    1.78
    
    
    
    0.09
    
    
    
    0.31
    
    
    
    0.31
    
    
    
    0.01Allowance for loan losses to end of period nonperforming loans
    
    
    67.98
    
    
    
    234.17
    
    
    
    125.25
    
    
    
    153.25
    
    
    
    437.79
    33




---



##### Table of Contents



As of December 31,2005
    
    
    2004Percent ofLoans toTotal Loans
    
    
    
    
    
    
    Percent ofHeld for
    
    
    
    
    
    
    Loans toAmount
    
    
    Investment
    
    
    Amount
    
    
    Gross Loans(Dollars in thousands)Balance of allowance for loan losses applicable to:Business and industrial
    
    $
    14
    
    
    
    11.9
    %
    
    $
    208
    
    
    
    11.7
    %Real estate:Construction and land development
    
    
    
    
    
    
    22.3
    
    
    
    100
    
    
    
    20.6Residential mortgages
    
    
    6
    
    
    
    17.5
    
    
    
    7
    
    
    
    21.0Commercial mortgages
    
    
    
    
    
    
    46.1
    
    
    
    352
    
    
    
    44.6Consumer and other
    
    
    31
    
    
    
    2.2
    
    
    
    88
    
    
    
    2.1Unallocated
    
    
    6,914
    
    
    
    
    
    
    
    7,366
    
    
    
    Total allowance for loan losses
    
    $
    6,965
    
    
    
    100.0
    %
    
    $
    8,121
    
    
    
    100.0
    %
 As of December 31,2003
    
    
    2002
    
    
    2001Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans toAmount
    
    
    Gross Loans
    
    
    Amount
    
    
    Gross Loans
    
    
    Amount
    
    
    Gross Loans(Dollars in thousands)Balance of allowance for loan losses applicable to:Business and industrial
    
    $
    
    
    
    
    13.0
    %
    
    $
    395
    
    
    
    15.3
    %
    
    $
    483
    
    
    
    20.8
    %Real estate:Construction and land development
    
    
    
    
    
    
    15.4
    
    
    
    
    
    
    
    15.7
    
    
    
    
    
    
    
    17.8Residential mortgages
    
    
    92
    
    
    
    27.6
    
    
    
    
    
    
    
    28.9
    
    
    
    45
    
    
    
    28.3Commercial mortgages
    
    
    519
    
    
    
    41.3
    
    
    
    
    
    
    
    36.8
    
    
    
    160
    
    
    
    28.6Consumer and other
    
    
    76
    
    
    
    2.7
    
    
    
    22
    
    
    
    3.3
    
    
    
    41
    
    
    
    4.5Unallocated
    
    
    4,963
    
    
    
    
    
    
    
    3,589
    
    
    
    
    
    
    
    2,642
    
    
    
    Total allowance for loan losses
    
    $
    5,650
    
    
    
    100.0
    %
    
    $
    4,006
    
    
    
    100.0
    %
    
    $
    3,371
    
    
    
    100.0
    %
 Securities
    34




---



##### Table of Contents



As of December 31, 2005Due within
    
    
    After One but
    
    
    After Five butOne Year
    
    
    within Five Years
    
    
    within Ten Years
    
    
    After Ten Years
    
    
    TotalAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield(Dollars in thousands)U.S. government agency securities
    
    $
    39,651
    
    
    
    4.29
    %
    
    $
    27,914
    
    
    
    4.87
    %
    
    $
    6,994
    
    
    
    4.55
    %
    
    $
    
    
    
    
    
    %
    
    $
    74,559
    
    
    
    4.53
    %Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    8,287
    
    
    
    4.48
    
    
    
    35,369
    
    
    
    4.14
    
    
    
    38,610
    
    
    
    4.83
    
    
    
    82,266
    
    
    
    4.49Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    917
    
    
    
    4.19
    
    
    
    15,552
    
    
    
    4.71
    
    
    
    62,918
    
    
    
    4.55
    
    
    
    79,387
    
    
    
    4.57Obligations of state and political
subdivisions
    
    
    155
    
    
    
    5.49
    
    
    
    1,868
    
    
    
    2.90
    
    
    
    692
    
    
    
    3.59
    
    
    
    18,195
    
    
    
    4.49
    
    
    
    20,910
    
    
    
    4.32Total
    
    $
    39,806
    
    
    
    4.29
    %
    
    $
    38,986
    
    
    
    4.67
    %
    
    $
    58,607
    
    
    
    4.33
    %
    
    $
    119,723
    
    
    
    4.63
    %
    
    $
    257,122
    
    
    
    4.51Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,749
    
    
    
    7.10
    %
    
    
    
    
    
    
    
    
    
    
    1,749
    
    
    
    7.10Equities(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,029Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    267,900
 
 (1)
    
    Includes Federal Home Loan Bank stock, Federal Reserve Bank stock, investment in Community
Reinvestment Act funds and the common securities of our wholly-owned subsidiary trusts.  35




---



##### Table of Contents



As of December 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Available-for-Sale:U.S. government agency securities
    
    $
    74,559
    
    
    $
    
    
    
    $
    (335
    )
    
    $
    74,224Mortgage-backed securities
    
    
    42,897
    
    
    
    57
    
    
    
    (196
    )
    
    
    42,758Collateralized mortgage obligations
    
    
    36,248
    
    
    
    
    
    
    
    (814
    )
    
    
    35,434Obligations of state and political subdivisions
    
    
    3,556
    
    
    
    35
    
    
    
    (46
    )
    
    
    3,545Other securities
    
    
    10,778
    
    
    
    43
    
    
    
    (133
    )
    
    
    10,688Total
    
    $
    168,038
    
    
    $
    135
    
    
    $
    (1,524
    )
    
    $
    166,649Held-to-Maturity:Mortgage-backed securities
    
    $
    39,369
    
    
    $
    
    
    
    $
    (477
    )
    
    $
    38,892Collateralized mortgage obligations
    
    
    43,139
    
    
    
    
    
    
    
    (561
    )
    
    
    42,578Obligations of state and political subdivisions
    
    
    17,354
    
    
    
    176
    
    
    
    (194
    )
    
    
    17,336Total
    
    $
    99,862
    
    
    $
    176
    
    
    $
    (1,232
    )
    
    $
    98,806
 As of December 31, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Available-for-Sale:U.S. government agency securities
    
    $
    278,972
    
    
    $
    6
    
    
    $
    (4,220
    )
    
    $
    274,758Mortgage-backed securities
    
    
    101,320
    
    
    
    250
    
    
    
    (1,682
    )
    
    
    99,888Collateralized mortgage obligations
    
    
    78,627
    
    
    
    4
    
    
    
    (1,031
    )
    
    
    77,600Obligations of state and political subdivisions
    
    
    2,630
    
    
    
    44
    
    
    
    (16
    )
    
    
    2,658Other securities
    
    
    20,244
    
    
    
    63
    
    
    
    (56
    )
    
    
    20,251Total
    
    $
    481,793
    
    
    $
    367
    
    
    $
    (7,005
    )
    
    $
    475,155Held-to-Maturity:Collateralized mortgage obligations
    
    $
    5,275
    
    
    $
    
    
    
    $
    (14
    )
    
    $
    5,261Obligations of state and political subdivisions
    
    
    8,093
    
    
    
    146
    
    
    
    (7
    )
    
    
    8,232Total
    
    $
    13,368
    
    
    $
    146
    
    
    $
    (21
    )
    
    $
    13,493
 As of December 31, 2003Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Available-for-Sale:U.S. government agency securities
    
    $
    245,977
    
    
    $
    374
    
    
    $
    (2,376
    )
    
    $
    243,975Mortgage-backed securities
    
    
    71,419
    
    
    
    639
    
    
    
    (277
    )
    
    
    71,781Collateralized mortgage obligations
    
    
    83,308
    
    
    
    151
    
    
    
    (970
    )
    
    
    82,489Obligations of state and political subdivisions
    
    
    2,525
    
    
    
    60
    
    
    
    (269
    )
    
    
    2,316Other securities
    
    
    12,040
    
    
    
    19
    
    
    
    
    
    
    
    12,059Total
    
    $
    415,269
    
    
    $
    1,243
    
    
    $
    (3,892
    )
    
    $
    412,620
   36




---



##### Table of Contents



Accounting for Certain Investments in
Debt and Equity Securities.
 Deposits
   For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in thousands)Regular savings
    
    $
    7,432
    
    
    
    0.86
    %
    
    $
    7,192
    
    
    
    0.39
    %
    
    $
    7,175
    
    
    
    0.41
    %NOW accounts
    
    
    187,266
    
    
    
    2.29
    
    
    
    192,362
    
    
    
    1.19
    
    
    
    115,001
    
    
    
    0.98Money market accounts
    
    
    155,479
    
    
    
    2.16
    
    
    
    135,311
    
    
    
    1.63
    
    
    
    113,846
    
    
    
    1.40Time deposits less than $100,000
    
    
    92,378
    
    
    
    3.06
    
    
    
    107,491
    
    
    
    2.44
    
    
    
    74,894
    
    
    
    2.65Time deposits $100,000 and over
    
    
    251,396
    
    
    
    3.27
    
    
    
    260,524
    
    
    
    2.46
    
    
    
    185,074
    
    
    
    2.59Total interest-bearing deposits
    
    
    693,951
    
    
    
    2.70
    
    
    
    702,880
    
    
    
    1.93
    
    
    
    495,990
    
    
    
    1.92Noninterest bearing deposits
    
    
    118,317
    
    
    
    
    
    
    
    104,725
    
    
    
    
    
    
    
    95,080
    
    
    
    Total deposits
    
    $
    812,268
    
    
    
    2.31
    %
    
    $
    807,605
    
    
    
    1.68
    %
    
    $
    591,070
    
    
    
    1.61
    %
     37




---



##### Table of Contents



As of December 31, 2005(Dollars in thousands)Three months or less
    
    $
    88,138Over three months through six months
    
    
    30,463Over six months through one year
    
    
    44,962Over one year
    
    
    33,391Total
    
    $
    196,954
  Borrowings
   As of and for theYears EndedDecember 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Ending balance
    
    
    
    
    
    
    
    
    
    $
    Average balance for the period
    
    
    
    
    
    
    
    
    
    
    1,651Maximum month-end balance during the period
    
    
    
    
    
    
    
    
    
    
    7,080Average interest rate for the period
    
    
    
    
    
    
    
    
    
    
    3.15
    %Weighted average interest rate at the end of the period
    
    
    
    
    
    
    
    
    
    
    3.10
    %
 38




---



##### Table of Contents



Junior
    
    
    JuniorSubordinated
    
    
    SubordinatedInterest
    
    
    
    
    
    
    
    
    
    
    Debt Owed
    
    
    Debt OwedRate at
    
    
    
    
    
    
    Interest
    
    
    to Trusts at
    
    
    to Trusts at
    
    
    FinalIssuance
    
    
    
    
    
    
    December 31,
    
    
    Fixed/
    
    
    Rate
    
    
    December 31,
    
    
    December 31,
    
    
    MaturityDescription
    
    Date
    
    
    Call Date
    
    
    2005
    
    
    Adjustable
    
    
    Basis
    
    
    2005
    
    
    2004
    
    
    Date(Dollars in thousands)SNB Capital Trust I
    
    
    12/6/2000
    
    
    
    12/6/2005
    
    
    
    
    %
    
    Fixed
    
    
    N/A
    
    
    $
    
    
    
    $
    7,320
    
    
    
    12/6/2030SNB Statutory Trust II
    
    
    3/26/2003
    
    
    
    3/26/2008
    
    
    
    7.67
    %
    
    Adjustable Quarterly
    
    3 mo LIBOR + 3.15%
    
    
    10,310
    
    
    
    10,310
    
    
    
    3/26/2033SNB Capital Trust III.
    
    
    3/27/2003
    
    
    
    3/27/2008
    
    
    
    7.30
    %
    
    Adjustable Quarterly
    
    3 mo LIBOR + 3.15%
    
    
    10,310
    
    
    
    10,310
    
    
    
    3/27/2033SNB Capital Trust IV
    
    
    9/25/2003
    
    
    
    9/25/2008
    
    
    
    7.53
    %
    
    Adjustable Quarterly
    
    3 mo LIBOR + 3.00%
    
    
    10,310
    
    
    
    10,310
    
    
    
    9/25/2033
    Consolidation of Variable Interest Entities, an interpretation of Accounting Research
Bulletin No. 51 (Revised December 2003).
   39




---



##### Table of Contents



Liquidity
   Contractual Obligations
  Payments Due in:Fiscal
    
    
    Fiscal2006
    
    
    2007-2009
    
    
    2010-2011
    
    
    Thereafter
    
    
    Total(Dollars in thousands)FHLB advances
    
    $
    15,500
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15,500Junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,930
    
    
    
    30,930Operating leases
    
    
    244
    
    
    
    576
    
    
    
    175
    
    
    
    259
    
    
    
    1,254Building construction
    
    
    776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    776Total
    
    $
    16,520
    
    
    $
    576
    
    
    $
    175
    
    
    $
    31,189
    
    
    $
    48,460
 Off-Balance Sheet Arrangements
   Payments Due in:Fiscal
    
    
    Fiscal2006
    
    
    2007-2008
    
    
    2009-2010
    
    
    Thereafter
    
    
    Total(Dollars in thousands)Standby letters of credit
    
    $
    2014
    
    
    $
    77
    
    
    $
    27
    
    
    $
    
    
    
    $
    2,118Commitments to extend credit
    
    
    87,406
    
    
    
    17,210
    
    
    
    4,445
    
    
    
    14,381
    
    
    
    123,442Total
    
    $
    89,420
    
    
    $
    17,287
    
    
    $
    4,472
    
    
    $
    14,381
    
    
    $
    125,560
 Standby Letters of Credit.
 40




---



##### Table of Contents



Commitments to Extend Credit.
 Interest Rate Sensitivity and Market Risk
        41




---



##### Table of Contents



Volumes Subject to Repricing withinGreater0-30
    
    
    31-180
    
    
    181-365
    
    
    1-3
    
    
    3-5
    
    
    ThanDays
    
    
    Days
    
    
    Days
    
    
    Years
    
    
    Years
    
    
    5 Years
    
    
    Total(Dollars in thousands)Interest-earning assets:Securities
    
    $
    9,244
    
    
    $
    40,315
    
    
    $
    342
    
    
    $
    11,106
    
    
    $
    30,667
    
    
    $
    174,837
    
    
    $
    266,511Loans
    
    
    305,988
    
    
    
    40,970
    
    
    
    29,512
    
    
    
    112,785
    
    
    
    108,409
    
    
    
    56,777
    
    
    
    654,441Federal funds sold
    
    
    17,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,495Total interest-earning assets
    
    
    332,727
    
    
    
    81,285
    
    
    
    29,854
    
    
    
    123,891
    
    
    
    139,076
    
    
    
    231,614
    
    
    
    938,447Interest-bearing liabilities:NOW, money market and savings
deposits
    
    $
    464,511
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    464,511Certificates of deposit and other
time deposits
    
    
    41,119
    
    
    
    113,562
    
    
    
    64,790
    
    
    
    21,431
    
    
    
    33,812
    
    
    
    
    
    
    
    274,714Borrowed funds
    
    
    15,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,500Junior subordinated debentures
    
    
    10,310
    
    
    
    20,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,930Total interest-bearing liabilities
    
    
    531,440
    
    
    
    134,182
    
    
    
    64,790
    
    
    
    21,431
    
    
    
    33,812
    
    
    
    
    
    
    
    785,655Cumulative GAP
    
    $
    (198,713
    )
    
    $
    (251,610
    )
    
    $
    (286,546
    )
    
    $
    (184,086
    )
    
    $
    (78,822
    )
    
    $
    152,792Cumulative GAP to total assets
    
    
    (19.38
    )%
    
    
    (24.54
    )%
    
    
    (27.95
    )%
    
    
    (17.95
    )%
    
    
    (7.69
    )%
    
    
    14.90
    %Cumulative interest- earning assets
to cumulative interest- bearing
liabilities
    
    
    62.61
    %
    
    
    62.20
    %
    
    
    60.77
    %
    
    
    75.52
    %
    
    
    89.97
    %
    
    
    119.45
    %
    % Change inChange in Rates
    
    Net Income-100 bp
    
    
    0.68
    %0 bp
    
    
    +100 bp
    
    
    3.35
    %+200 bp
    
    
    (11.39
    )%
  42




---



##### Table of Contents



Shareholders Equity
  Regulatory Capital
     43




---



##### Table of Contents



To be Categorized asWell-CapitalizedMinimum Required for
    
    under PromptCapital Adequacy
    
    Corrective Action
    
    Actual Ratio atPurposes
    
    Provisions
    
    December 31, 2005SNB Bancshares, Inc.Leverage ratio
    
    
    4.00
    %(1)
    
    
    N/A
    
    
    
    9.95
    %Tier 1 risk-based capital ratio
    
    
    4.00
    
    
    
    N/A
    
    
    
    15.50Risk-based capital ratio
    
    
    8.00
    
    
    
    N/A
    
    
    
    16.77Southern National Bank of TexasLeverage ratio
    
    
    4.00
    %(2)
    
    
    5.00
    %
    
    
    9.49
    %Tier 1 risk-based capital ratio
    
    
    4.00
    
    
    
    6.00
    
    
    
    14.77Risk-based capital ratio
    
    
    8.00
    
    
    
    10.00
    
    
    
    15.74
 
 (1)
    
    The Federal Reserve may require us to maintain a leverage ratio above the required minimum.(2)
    
    The OCC may require the Bank to maintain a leverage ratio above the required minimum.   
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  44




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##### Table of Contents



Quarterly Financial Data (Unaudited)
  2005
    
    
    2004Fourth
    
    
    Third
    
    
    Second
    
    
    First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(Dollars in thousands, except per share data)Interest income
    
    $
    16,020
    
    
    $
    15,634
    
    
    $
    14,618
    
    
    $
    13,870
    
    
    $
    13,275
    
    
    $
    12,279
    
    
    $
    11,156
    
    
    $
    9,943Interest expense
    
    
    8,206
    
    
    
    7,171
    
    
    
    6,032
    
    
    
    5,961
    
    
    
    5,295
    
    
    
    4,713
    
    
    
    4,188
    
    
    
    3,810Net interest income
    
    
    7,814
    
    
    
    8,463
    
    
    
    8,586
    
    
    
    7,909
    
    
    
    7,980
    
    
    
    7,566
    
    
    
    6,968
    
    
    
    6,133Provision for loan losses
    
    
    8,501
    
    
    
    600
    
    
    
    650
    
    
    
    600
    
    
    
    675
    
    
    
    625
    
    
    
    900
    
    
    
    750Net interest income (loss) after provision for loan losses
    
    
    (687
    )
    
    
    7,863
    
    
    
    7,936
    
    
    
    7,309
    
    
    
    7,305
    
    
    
    6,941
    
    
    
    6,068
    
    
    
    5,383Noninterest income (loss)
    
    
    (7,193
    )
    
    
    391
    
    
    
    545
    
    
    
    (5,734
    )
    
    
    345
    
    
    
    543
    
    
    
    488
    
    
    
    744Noninterest expense
    
    
    6,762
    
    
    
    4,947
    
    
    
    4,904
    
    
    
    4,895
    
    
    
    5,461
    
    
    
    4,731
    
    
    
    4,410
    
    
    
    4,219Income (loss) before income taxes
    
    
    (14,642
    )
    
    
    3,307
    
    
    
    3,577
    
    
    
    (3,320
    )
    
    
    2,189
    
    
    
    2,753
    
    
    
    2,146
    
    
    
    1,908Provision (benefit) for income taxes
    
    
    (4,987
    )
    
    
    1,133
    
    
    
    1,222
    
    
    
    (1,134
    )
    
    
    736
    
    
    
    935
    
    
    
    729
    
    
    
    649Net income (loss)
    
    $
    (9,655
    )
    
    $
    2,174
    
    
    $
    2,355
    
    
    $
    (2,186
    )
    
    $
    1,453
    
    
    $
    1,818
    
    
    $
    1,417
    
    
    $
    1,259Earnings (loss) per share:Basic
    
    $
    (0.78
    )
    
    $
    0.17
    
    
    $
    0.19
    
    
    $
    (0.18
    )
    
    $
    0.12
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.18Diluted
    
    
    (0.78
    )
    
    
    0.17
    
    
    
    0.19
    
    
    
    (0.18
    )
    
    
    0.11
    
    
    
    0.19
    
    
    
    0.20
    
    
    
    0.17Weighted average shares outstanding:Basic
    
    
    12,435
    
    
    
    12,435
    
    
    
    12,435
    
    
    
    12,434
    
    
    
    12,432
    
    
    
    9,137
    
    
    
    6,994
    
    
    
    6,994Diluted
    
    
    12,435
    
    
    
    12,640
    
    
    
    12,598
    
    
    
    12,434
    
    
    
    12,833
    
    
    
    9,347
    
    
    
    7,233
    
    
    
    7,197
  
 Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclosures
  
 Item 9A. Controls and Procedures
   MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  Internal ControlIntegrated
Framework,
 45




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##### Table of Contents



Compliance with Designated Laws and Regulations
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control-Integrated Framework
    46




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##### Table of Contents



Internal Control-Integrated Framework Internal Control-Integrated
Framework
   
 
 Item 9B. Other Information
  
 PART III.
 
 Item 10. Directors and Executive Officers of the Registrant
 Board of Directors
   Name
    
    Age
    
    Positions with the Company and the BankClass B Directors:Stewart Morris
    
    
    86
    
    
    Director and Senior Chairman of the
Board of the Company and the BankCaralisa Morris Simon
    
    
    53
    
    
    Director and Chairman of the Board of
the Company and the BankJames W. Stevens
    
    
    58
    
    
    Director of the Company and the BankDan Wilford
    
    
    65
    
    
    Director of the Company and the BankHarvey E. Zinn
    
    
    58
    
    
    Director, President and Chief
Executive Officer of the Company and
the BankCommon Stock Directors:Colonel Wallace J. McKenzie
    
    
    80
    
    
    Director of the Company and the BankRichard D. Parker
    
    
    60
    
    
    Director of the Company and the BankGeneral Edmond S. Solymosy
    
    
    67
    
    
    Director of the Company and the BankRobert P. Viles, M.D.
    
    
    60
    
    
    Director of the Company and the Bank
 47




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##### Table of Contents



Wallace J. McKenzie
 Stewart Morris
 Richard D. Parker
 Caralisa Morris Simon
 Edmond S. Solymosy
 James W. Stevens
 Robert P. Viles, M.D
 Dan Wilford
 Harvey E. Zinn
 48




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##### Table of Contents



Executive Officers
  Name
    
    Age
    
    PositionsDaniel S. Agnew
    
    
    51
    
    
    Chief Lending Officer of the Company;
President, Lending Services of the BankR. Darrell Brewer
    
    
    59
    
    
    Treasurer and Chief Financial Officer of the
Company; President, Financial Services and
Chief Financial Officer of the BankHarvey E. Zinn, Jr.
    
    
    35
    
    
    President of Branch Banking of the Bank
 Dan Agnew.
 R. Darrell Brewer.
 Harvey E. Zinn, Jr.
 Audit Committee
    Section 16(a) Beneficial Ownership Reporting Compliance
  49




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##### Table of Contents



Codes of Ethics
 www.snbtx.com
 
 Item 11. Executive Compensation
 Summary Compensation Table
  Annual CompensationLong TermCompensationSecuritiesUnderlying
    
    All OtherName and Principal Position
    
    Year
    
    Salary(1)
    
    Bonus
    
    Options
    
    Compensation(2)Harvey E. ZinnPresident and Chief Executive Officer
    
    
    2005
    
    
    $
    271,077
    
    
    $
    114,700
    
    
    
    
    
    
    $
    32,515
    (3)of the Company and the Bank
    
    
    2004
    
    
    
    242,021
    
    
    
    213,288
    
    
    
    77,000
    
    
    
    29,858
    (3)Caralisa Morris Simon
    
    
    2005
    
    
    $
    209,115
    
    
    $
    89,918
    
    
    
    
    
    
    $
    43,436
    (4)Chairman of the Board of the Company and the Bank
    
    
    2004
    
    
    
    189,968
    
    
    
    169,411
    
    
    
    77,000
    
    
    
    44,295
    (4)Daniel S. AgnewChief Lending Officer of the Company, President,
    
    
    2005
    
    
    $
    171,780
    
    
    $
    36,340
    
    
    
    
    
    
    $
    24,943
    (5)Lending Services of the Bank
    
    
    2004
    
    
    
    153,241
    
    
    
    64,703
    
    
    
    51,000
    
    
    
    22,463
    (5)R. Darrell BrewerTreasurer and Chief Financial Officer of the Company,
    
    
    2005
    
    
    $
    152,392
    
    
    $
    31,198
    
    
    
    
    
    
    $
    21,191
    (6)President of Financial Services of the
Bank
    
    
    2004
    
    
    
    149,992
    
    
    
    34,532
    
    
    
    51,000
    
    
    
    21,220
    (6)Harvey E. Zinn, Jr.
    
    
    2005
    
    
    $
    151,312
    
    
    $
    29,700
    
    
    
    President, Branch Banking of the Bank
    
    
    2004
    
    
    
    145,119
    
    
    
    38,533
    
    
    
    50,000
    
    
    $
    18,276
    (7)
 
 (1)
    
    Does not include amounts attributable to miscellaneous benefits received by
executive officers. In the opinion of management of the Company, the costs to
the Company of providing such benefits to any individual executive officer did
not exceed the lesser of $50,000 or 10% of the total annual salary and bonus
reported for the officer.(2)
    
    Includes matching contributions by the Company to the Companys 401(k) Profit
Sharing Plan for the benefit of the respective individuals.(3)
    
    A car allowance of $9,600 and $8,400 was paid to Harvey E. Zinn in 2005 and
2004, respectively. Private club membership dues of $4,915 and $5,458 were paid
for the benefit of Mr. Zinn in 2005 and 2004, respectively.(4)
    
    A car allowance of $9,600 and $8,400 was paid to Caralisa Morris Simon in 2005
and 2004, respectively. Private club membership dues of $15,836 and $22,895 were
paid for the benefit of Ms. Simon in 2005 and 2004, respectively.(5)
    
    A car allowance of $9,600 was paid to Daniel S. Agnew in each of 2004 and 2005.(6)
    
    A car allowance of $9,600 was paid to R. Darrell Brewer in each of 2004 and 2005.(7)
    
    A car allowance of $9,600 was paid to Harvey E. Zinn, Jr. in 2005. Private club
membership dues of $6,820 were paid for the benefit of Mr. Zinn in 2005. 50




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##### Table of Contents



Option Grants in Last Fiscal Year
  Stock Options Exercises and Fiscal Year-End Option Values
  Number of SecuritiesShares
    
    
    
    
    
    Underlying Unexercised
    
    Value of UnexercisedAcquired on
    
    Value
    
    Options at
    
    In-the Money OptionsName
    
    Exercise
    
    Realized(1)
    
    December 31, 2005
    
    at December 31, 2005(2)Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableHarvey E. Zinn
    
    
    
    
    
    $
    
    
    
    
    25,600
    
    
    
    68,400
    
    
    $
    227,812
    
    
    $
    717,460Caralisa Morris Simon
    
    
    
    
    
    
    
    
    
    
    25,600
    
    
    
    68,400
    
    
    
    227,812
    
    
    
    717,460R. Darrell Brewer
    
    
    
    
    
    
    
    
    
    
    19,800
    
    
    
    47,200
    
    
    
    186,156
    
    
    
    347,824Daniel S. Agnew
    
    
    
    
    
    
    
    
    
    
    19,800
    
    
    
    47,200
    
    
    
    186,156
    
    
    
    347,824Harvey E. Zinn, Jr.
    
    
    
    
    
    
    
    
    
    
    19,000
    
    
    
    46,000
    
    
    
    177,400
    
    
    
    337,600
 
 (1)
    
    The value realized represents the difference between the
exercise price of the option shares and the market price of the
option shares on the date of exercise without considering any
taxes which may have been owed.(2)
    
    The value is based on the positive spread between the exercise
price of the applicable stock options and $17.40 per share, which
was the closing sale price of the Common Stock reported on the
Nasdaq Stock Market on December 30, 2005, the last trading day of
the year. Director Compensation
  Employment and Change in Control Agreements
   51




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  Percentage
    
    
    
    
    
    PercentageNumber of Shares
    
    Beneficially
    
    Number of Shares
    
    BeneficiallyName of Beneficial Owner
    
    of Common Stock
    
    Owned(1)
    
    of Class B Stock
    
    Owned(2)Principal Shareholders:1992 Morris Family Trust(3)
    
    
    911,451
    
    
    
    9.31
    %
    
    
    476,805
    
    
    
    18.00
    %Caralisa Morris Simon Family Trust(4)
    
    
    
    
    
    
    
    
    
    
    355,555
    
    
    
    13.42Westport Asset Management, Inc.(5)
    
    
    1,079,293
    
    
    
    11.03
    
    
    
    
    
    
    
    Directors:Wallace J. McKenzie
    
    
    42,600
    (6)
    
    
    *
    
    
    
    
    
    
    
    Stewart Morris
    
    
    27,018
    (7)
    
    
    *
    
    
    
    1,713,404
    (8)
    
    
    64.68Richard D. Parker
    
    
    1,600
    (9)
    
    
    *
    
    
    
    1,000
    
    
    
    *Caralisa Morris Simon
    
    
    1,048,090
    (10)
    
    
    10.71
    
    
    
    833,360
    (11)
    
    
    31.46Edmond S. Solymosy
    
    
    2,600
    (12)
    
    
    *
    
    
    
    
    
    
    
    James W. Stevens
    
    
    133,600
    (13)
    
    
    1.37
    
    
    
    
    
    
    
    Robert P. Viles, M.D.
    
    
    37,900
    (14)
    
    
    *
    
    
    
    
    
    
    
    Dan Wilford
    
    
    6,600
    (15)
    
    
    *
    
    
    
    
    
    
    
    Harvey E. Zinn
    
    
    462,932
    (16)
    
    
    4.73
    
    
    
    
    
    
    
    Executive Officers:Daniel S.
Agnews
    
    
    19,800
    (17)
    
    
    *
    
    
    
    
    
    
    
    R. Darrell Brewer
    
    
    31,864
    (18)
    
    
    *
    
    
    
    
    
    
    
    Harvey E. Zinn, Jr.
    
    
    235,456
    (19)
    
    
    2.41
    
    
    
    
    
    
    
    Directors and executive officers as a
group (12 persons)
    
    
    1,846,404
    
    
    
    18.87
    %
    
    
    2,547,764
    
    
    
    96.18
    %
 
 *
    
    Indicates beneficial ownership of less than 1.0%.(1)
    
    The percentage of common stock beneficially owned was calculated based on 9,786,878 shares of
common stock issued and outstanding as of February 28, 2006. The percentage assumes the
exercise by the shareholder or group named in each row of all options for the purchase of
common stock held by such shareholder or group and exercisable within 60 days.(2)
    
    The percentage of Class B stock beneficially owned was calculated based on 2,648,975 shares
of Class B stock issued and outstanding as of February 28, 2006.(3)
    
    The trustees of this trust, Caralisa Morris Simon, Carlotta Barker and Stewart Morris, Jr.,
vote the shares held by the trust. The address of the 1992 Morris Family Trust is c/o Stewart
Title Company, 1980 Post Oak Blvd., Houston, Texas 77056. Under SEC rules, the trust is
also deemed to beneficially own 476,805 shares of common stock that may be acquired upon the
conversion of the Class B stock owned by 52




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##### Table of Contents



the trust presented in the table. These additional
shares of common stock are not reflected in the common stock columns of the ownership table.
If these shares were included, the percent of shares of common stock beneficially owned would
be 13.53%.(4)
    
    Caralisa Morris Simon is the trustee of the Caralisa Morris Simon Family Trust and she votes
all of the shares held by the trust. Under SEC rules, the trust is also deemed to beneficially
own 355,555 shares of common stock that may be acquired upon the conversion of the Class B
stock owned by the trust presented in the table. These additional shares of common stock are
not reflected in the common stock columns of the ownership table. If these shares were
included, the percent of shares of common stock beneficially owned would be 3.51%.(5)
    
    The information regarding beneficial ownership is included in reliance on a Schedule 13G
filed with the Securities and Exchange Commission on February 13, 2006 by Westport Asset
Management, Inc. Westport Asset Management, as an investment advisor, may be deemed to have
beneficial ownership of the shares reflected in the table as of December 31, 2005. Westport
Asset Management reported that it had shared dispositive power with respect to the shares
reflected in the table and shared voting power with respect to 967,824 of such shares.
According to the Schedule 13G, the shares reflected in the table are owned of record by
clients of Westport Asset Management.(6)
    
    Includes 800 shares of common stock that may be acquired pursuant to the exercise of fully
vested options.(7)
    
    Consists of 1,418 shares of common stock held of record and 25,600 shares of common stock
that may be acquired pursuant to fully vested options. Under SEC rules, Mr. Morris is also
deemed to beneficially own 1,713,404 shares of common stock that may be acquired upon the
conversion of the Class B stock beneficially owned by Mr. Morris presented in the table. These
additional shares of common stock are not reflected in the common stock columns of the
ownership table. If these shares were included, the percent of shares of common stock
beneficially owned would be 15.13%.(8)
    
    Includes 1,000 shares of Class B stock held of record by Mr. Morriss spouse.(9)
    
    Includes 1,100 shares of common stock that may be acquired pursuant to fully vested options.
Under SEC rules, Mr. Parker is also deemed to beneficially own 1,000 shares of common stock
that may be acquired upon the conversion of the Class B stock owned by Mr. Parker presented in
the table. These additional shares of common stock are not reflected in the common stock
columns of the ownership table. If these shares were included, the percent of shares of common
stock beneficially owned would be less than 1.0%.(10)
    
    Consists of 911,451 shares of common stock held of record by the 1992 Morris Family Trust, of
which Ms. Simon is a trustee, 47,815 shares of common stock held of record by the Stewart
Morris, Jr. Family Investment Trust, of which Ms. Simon is the trustee, 35,862 shares of
common stock held of record by the Caralisa Morris Simon Revocable Trust, of which Ms. Simon
is the trustee, 27,362 shares jointly owned by Ms. Simon and her spouse, and 25,600 shares of
common stock that may be acquired pursuant to fully vested options. Under SEC rules, Ms. Simon
is also deemed to beneficially own 833,360 shares of common stock that may be acquired upon
the conversion of the Class B stock beneficially owned by Ms. Simon presented in the table.
These additional shares of common stock are not reflected in the common stock columns of the
ownership table. If these shares were included, the percent of shares of common stock
beneficially owned would be 17.72%.(11)
    
    Consists of 476,805 shares of Class B stock held of record by the 1992 Morris Family Trust,
of which Ms. Simon is a trustee, 355,555 shares of Class B stock held of record by the
Caralisa Morris Simon Family Trust, of which Ms. Simon is the trustee, and 1,000 shares of
Class B stock held directly.(12)
    
    Includes 1,600 shares of common stock that may be acquired pursuant to the exercise of fully
vested options.(13)
    
    Includes 20,000 shares of common stock held of record by Brazoria County Abstract Company, in
which Mr. Stevens is a partner, and 1,600 shares of common stock that may be acquired pursuant
to the exercise of fully vested options.(14)
    
    Includes 1,600 shares of common stock that may be acquired pursuant to the exercise of fully
vested options.(15)
    
    Includes 1,600 shares of common stock that may be acquired pursuant to the exercise of fully
vested options.(16)
    
    Includes 203,656 shares of common stock owned of record by H. Zinn Limited Partnership, LP,
of which Harvey E. Zinn is the general and limited partner, and 25,600 shares of common stock
that may be acquired pursuant to the exercise of fully vested options. The shares held of
record by the H. Zinn Limited Partnership, LP are also reported in this table by Harvey E.
Zinn, Jr.(17)
    
    Consists of 19,800 shares of common stock that may be acquired pursuant to the exercise of
fully vested options.(18)
    
    Includes 19,800 shares of common stock that may be acquired pursuant to fully vested options
and 64 shares of common stock held of record by Mr. Brewers adult son. Mr. Brewer expressly
disclaims beneficial ownership of the shares held of record by his son. 53




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##### Table of Contents



(19)
    
    Includes 200 shares of common stock held of record by Harvey E. Zinn, Jr. as custodian for
his minor son, 203,656 shares of common stock owned of record by H. Zinn Limited Partnership,
LP, of which Harvey E. Zinn, Jr. is a limited partner, and 19,000 shares of common stock that
may be acquired pursuant to fully vested options. The shares held of record by H. Zinn Limited
Partnership, LP are also reported in this table by Harvey E. Zinn. Securities Authorized for Issuance under Equity Compensation Plans
  Number of SecuritiesRemaining Availablefor Future IssuanceNumber of Securities
    
    
    
    
    
    
    under Equityto be Issued upon
    
    
    
    
    
    
    Compensation PlansExercise of
    
    
    Weighted Average
    
    
    (ExcludingOutstanding Options,
    
    
    Exercise Price of
    
    
    Securities ReflectedWarrants and Rights
    
    
    Outstanding Options
    
    
    in Column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by security holders
    
    
    1,254,900
    
    
    $
    9.38
    
    
    
    41,900Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,254,900
    
    
    $
    9.38
    
    
    
    41,900
 
 Item 13. Certain Relationships and Related Transactions
  
    
    made available by a company in the ordinary course of a companys consumer credit business;
    
    of a type generally made available by such company to the public; and
    
    made by a company on market terms, or terms that are no more favorable than those offered
by such company to the general public.
    54




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##### Table of Contents



Item 14. Principal Accounting Fees and Services
  2005
    
    2004Audit fees (1)
    
    $
    590,319
    
    
    $
    233,619Audit related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees (2)
    
    $
    
    
    
    $
    198,221
 
 (1)
    
    Includes fees billed for professional services rendered in connection with the
audit and quarterly reviews of the Companys consolidated financial statements and
the audit of internal control over financial reporting as required by the
Sarbanes-Oxley Act of 2002.(2)
    
    Includes fees for assistance with securities filings other than periodic reports.  
 PART IV.
 
 Item 15. Exhibits and Financial Statement Schedules
 Financial Statements and Schedules
  
    
    Report of Independent Registered Public Accounting Firm
    
    Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003
    
    Consolidated Statements of Changes in Shareholders Equity and Other Comprehensive Income
for the Years Ended December 31, 2005, 2004 and 2003
    
    Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
    
    Notes to Consolidated Financial Statements
 Financial Statement Schedules
  55




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##### Table of Contents



Exhibits
 
 ExhibitNumber(1)
    
    Description2.1
    
    Agreement and Plan of Reorganization dated as of November
16, 2005 by and between Prosperity Bancshares, Inc. and
the Company (incorporated herein by reference to Exhibit
2.1 to the Companys Current Report on Form 8-K filed
November 17, 2005).3.1
    
    Amended and Restated Articles of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.1
to the Companys Registration Statement on Form S-1
(Registration No. 333-116366)).3.2
    
    Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.2 to the Companys
Registration Statement on Form S-1 (Registration
No.333-116366)).4.1
    
    Specimen Certificate Representing Shares of the Companys
Common Stock (incorporated herein by reference to Exhibit
4.1 to the Companys Registration Statement on Form S-1
(Registration No. 333-116366)).10.1
    
    SNB Bancshares, Inc. 2002 Stock Option Plan, as amended
and restated (incorporated herein by reference to Exhibit
10.1 to the Companys Registration Statement on Form S-1
(Registration No. 333-116366)).10.2
    
    Employment Agreement between the Company and Harvey E.
Zinn (incorporated herein by reference to Exhibit 10.2 to
the Companys Registration Statement on Form S-1
(Registration No. 333-116366)).10.3
    
    Employment Agreement between the Company and Daniel S.
Agnew (incorporated herein by reference to Exhibit 10.3 to
the Companys Registration Statement on Form S-1
(Registration No. 333-116366)).10.4
    
    Employment Agreement between the Company and R. Darrell
Brewer (incorporated herein by reference to Exhibit 10.4
to the Companys Registration Statement on Form S-1
(Registration No. 333-116366)).21.1
    
    Subsidiaries of the Company (incorporated herein by
reference to Exhibit 10.4 to the Companys Registration
Statement on Form S-1 (Registration No. 333-116366)).23.1*
    
    Consent of Deloitte & Touche 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 the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, 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, adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed with this Annual Report on Form 10-K.**
    
    Furnished with this Annual Report on Form 10-K.
    
    Management contract or compensatory plan or arrangement.(1)
    
    The Company has other long-term debt agreements that meet the exclusion set forth in Section
601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such
agreements to the Commission upon request. 
 56




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##### Table of Contents



SIGNATURES
  SNB BANCSHARES, INC.By:
    /s/ Harvey ZinnHarvey ZinnPresident and Chief Executive Officer   Name
    
    Title
    
    Date/s/ Stewart Morris
    
    Senior Chairman of the Board
    
    March 16, 2006Stewart Morris/s/ Caralisa Morris Simon
    
    Chairman of the Board
    
    March 16, 2006Caralisa Morris Simon/s/ Harvey E. Zinn
    
    President and Chief Executive Officer
    
    March 16, 2006Harvey E. Zinn
    
    and Director
(principal executive officer)/s/ R. Darrell Brewer
    
    Treasurer and Chief Financial Officer
    
    March 16, 2006R. Darrell Brewer
    
    (principal financial officer andprincipal accounting officer/s/ Wallace J. McKenzie
    
    Director
    
    March 16, 2006Wallace J. McKenzie/s/ Richard D. Parker
    
    Director
    
    March 16, 2006Richard D. Parker/s/ Edmond S. Solymosy
    
    Director
    
    March 16, 2006Edmond S. Solymosy/s/ James W. Stevens
    
    Director
    
    March 16, 2006James W. Stevens/s/ Robert Viles, M.D.
    
    Director
    
    March 16, 2006Robert Viles, M.D./s/ Dan Wilford
    
    Director
    
    March 16, 2006Dan Wilford
 57




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 SNB Bancshares, Inc.
 PageReport of Independent Registered Public Accounting Firm
    
    59Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    60Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003
    
    61Consolidated Statements of Changes in Shareholders Equity and Other Comprehensive Income
for the Years Ended December 31, 2005, 2004 and 2003
    
    62Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
    
    63Notes to Consolidated Financial Statements
    
    64
 58




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal Control  Integrated
Framework
  
 59




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##### Table of Contents



SNB BANCSHARES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 As of December 31, 2005 and 2004
 December 31,
    
    
    December 31,2005
    
    
    2004(In thousands, except share data)ASSETSCash and cash equivalents (Note 2)
    
    $
    58,073
    
    
    $
    21,235Federal funds sold
    
    
    17,495
    
    
    
    Available for sale securities (Note 3), at fair value (amortized cost of $168,038 and $481,793
at December 31, 2005 and 2004, respectively)
    
    
    166,649
    
    
    
    475,155Held to maturity securities (Note 3), at amortized cost (fair value of $98,806 and $13,493 at
December 31, 2005 and 2004, respectively)
    
    
    99,862
    
    
    
    13,368Loans held for sale, at fair value
    
    
    37,613
    
    
    
    Loans (Notes 4 and 5)
    
    
    615,204
    
    
    
    598,292Total loans
    
    
    652,817
    
    
    
    598,292Less allowance for loan losses (Note 6)
    
    
    (6,965
    )
    
    
    (8,121
    )Net loans
    
    
    645,852
    
    
    
    590,171Premises and equipment  Net (Note 7)
    
    
    22,138
    
    
    
    16,137Accrued interest receivable
    
    
    3,827
    
    
    
    4,485Other assets, net
    
    
    11,440
    
    
    
    9,537TOTAL
    
    $
    1,025,336
    
    
    $
    1,130,088LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing
    
    $
    152,725
    
    
    $
    110,858Interest-bearing (Note 8)
    
    
    739,225
    
    
    
    757,528Total deposits
    
    
    891,950
    
    
    
    868,386Other borrowings (Note 9)
    
    
    15,500
    
    
    
    132,900Accrued interest payable
    
    
    2,824
    
    
    
    2,724Junior subordinated debentures (Note 17)
    
    
    30,930
    
    
    
    38,250Other liabilities
    
    
    1,621
    
    
    
    1,427Total liabilities
    
    
    942,825
    
    
    
    1,043,687COMMITMENTS AND CONTINGENCIES (Notes 13 and 15)SHAREHOLDERS EQUITY (Notes 11 and 16):Preferred stock, $0.01 par value  20,000,000 shares authorized, no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value  50,000,000 shares authorized, 9,784,378 and 9,753,612 shares
issued and outstanding at December 31, 2005 and 2004, respectively
    
    
    98
    
    
    
    98Class B stock, $0.01 par value  3,216,781 shares authorized, 2,651,475 and 2,679,041 shares
issued and outstanding at December 31, 2005 and 2004, respectively
    
    
    27
    
    
    
    27Capital surplus
    
    
    66,197
    
    
    
    66,173Accumulated other comprehensive loss  net unrealized losses on available-for-sale securities 
net of taxes (Note 3)
    
    
    (917
    )
    
    
    (4,315
    )Retained earnings
    
    
    17,106
    
    
    
    24,418Total shareholders equity
    
    
    82,511
    
    
    
    86,401TOTAL
    
    $
    1,025,336
    
    
    $
    1,130,088
  60




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SNB BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 Years Ended December 31, 2005, 2004 and 2003
 Years Ended December 31,2005
    
    
    2004
    
    
    2003(In thousands, except per shareamounts)INTEREST INCOME:Loans-including fees
    
    $
    44,134
    
    
    $
    30,770
    
    
    $
    24,200Securities:Taxable
    
    
    15,070
    
    
    
    15,527
    
    
    
    8,904Nontaxable
    
    
    714
    
    
    
    202
    
    
    
    96Federal funds sold and earning deposits
    
    
    224
    
    
    
    154
    
    
    
    38Total interest income
    
    
    60,142
    
    
    
    46,653
    
    
    
    33,238INTEREST EXPENSE:Demand deposits
    
    
    7,709
    
    
    
    4,514
    
    
    
    2,757Certificates and other time deposits
    
    
    11,044
    
    
    
    9,041
    
    
    
    6,753Other borrowings
    
    
    8,617
    
    
    
    4,451
    
    
    
    2,549Total interest expense
    
    
    27,370
    
    
    
    18,006
    
    
    
    12,059NET INTEREST INCOME
    
    
    32,772
    
    
    
    28,647
    
    
    
    21,179PROVISION FOR LOAN LOSSES
    
    
    10,351
    
    
    
    2,950
    
    
    
    2,821NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    22,421
    
    
    
    25,697
    
    
    
    18,358NONINTEREST INCOME:Service charges on deposit accounts
    
    
    889
    
    
    
    786
    
    
    
    873Gains on sales of securities-net
    
    
    128
    
    
    
    700
    
    
    
    880Impairment write-down of securities
    
    
    (13,777
    )
    
    
    
    
    
    
    Other
    
    
    769
    
    
    
    634
    
    
    
    556Total
noninterest income (loss)
    
    
    (11,991
    )
    
    
    2,120
    
    
    
    2,309NONINTEREST EXPENSE:Salaries and employee benefits
    
    
    11,850
    
    
    
    11,365
    
    
    
    9,328Net occupancy expense
    
    
    2,132
    
    
    
    1,862
    
    
    
    1,725Data processing
    
    
    1,739
    
    
    
    1,218
    
    
    
    1,163Legal and professional fees
    
    
    1,483
    
    
    
    653
    
    
    
    571FDIC deposit insurance premium
    
    
    116
    
    
    
    115
    
    
    
    83Other
    
    
    4,188
    
    
    
    3,608
    
    
    
    2,619Total noninterest expense
    
    
    21,508
    
    
    
    18,821
    
    
    
    15,489EARNINGS (LOSS) BEFORE INCOME TAXES
    
    
    (11,078
    )
    
    
    8,996
    
    
    
    5,178PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    (3,766
    )
    
    
    3,049
    
    
    
    1,761NET EARNINGS (LOSS)
    
    $
    (7,312
    )
    
    $
    5,947
    
    
    $
    3,417EARNINGS (LOSS) PER SHARE:Basic
    
    $
    (0.59
    )
    
    $
    0.67
    
    
    $
    0.49Diluted
    
    $
    (0.59
    )
    
    $
    0.65
    
    
    $
    0.48
  61




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SNB BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND
 OTHER COMPREHENSIVE INCOME
 Years Ended December 31, 2005, 2004 and 2003
 AccumulatedOtherComprehensive
    
    
    
    
    
    
    TotalCommon
    
    
    Class B
    
    
    Capital
    
    
    Income
    
    
    Retained
    
    
    ShareholdersStock
    
    
    Stock
    
    
    Surplus
    
    
    (Loss)
    
    
    Earnings
    
    
    Equity(In thousands, except share data)BALANCE  December 31, 2002
    
    $
    37
    
    
    $
    33
    
    
    $
    13,974
    
    
    $
    1,331
    
    
    $
    15,054
    
    
    $
    30,429Change in unrealized gain (loss) on available-for-sale securities  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,499
    )
    
    
    
    
    
    
    (2,499
    )Less reclassification adjustment for gains included in net earnings 
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (580
    )
    
    
    
    
    
    
    (580
    )Net Earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,417
    
    
    
    3,417Total comprehensive income (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    338Conversion of 47,645 shares of Class B stock into 47,645 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE  December 31, 2003
    
    
    37
    
    
    
    33
    
    
    
    13,974
    
    
    
    (1,748
    )
    
    
    18,471
    
    
    
    30,767Change in unrealized gain (loss) on available-for-sale securities  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,105
    )
    
    
    
    
    
    
    (2,105
    )Less reclassification adjustment for gains included in net earnings 
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (462
    )
    
    
    
    
    
    
    (462
    )Net Earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,947
    
    
    
    5,947Total comprehensive income (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,380Conversion of 610,425 shares of Class B stock into 610,425 shares of
common stock
    
    
    6
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 5,438,664 shares of common stock
    
    
    55
    
    
    
    
    
    
    
    52,199
    
    
    
    
    
    
    
    
    
    
    
    52,254BALANCE  December 31, 2004
    
    
    98
    
    
    
    27
    
    
    
    66,173
    
    
    
    (4,315
    )
    
    
    24,418
    
    
    
    86,401Change in unrealized gain (loss) on available-for-sale securities  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,610
    )
    
    
    
    
    
    
    (5,610
    )Less reclassification adjustment for losses included in net earnings 
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,008
    
    
    
    
    
    
    
    9,008Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,312
    )
    
    
    (7,312
    )Total comprehensive income (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,914
    )Conversion of 27,566 shares of Class B stock into 27,566 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 3,200 shares of common stock
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    16Tax benefit related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8BALANCE  December 31, 2005
    
    $
    98
    
    
    $
    27
    
    
    $
    66,197
    
    
    $
    (917
    )
    
    $
    17,106
    
    
    $
    82,511
  62




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##### Table of Contents



SNB BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31, 2005, 2004 and 2003
 Year Ended December 31,2005
    
    
    2004
    
    
    2003(In thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings (loss)
    
    $
    (7,312
    )
    
    $
    5,947
    
    
    $
    3,417Adjustments to reconcile net earnings to net cash provided by operating
activities: Depreciation and amortization
    
    
    1,456
    
    
    
    1,293
    
    
    
    1,416Provision for loan losses
    
    
    10,351
    
    
    
    2,950
    
    
    
    2,815Amortization and accretion of premiums and discounts on investment
securities  net
    
    
    486
    
    
    
    841
    
    
    
    1,682Gain on sales of securities  net
    
    
    (128
    )
    
    
    (700
    )
    
    
    (880
    )Impairment write-down of securities
    
    
    13,777
    
    
    
    
    
    
    
    Tax benefit related to exercise of stock options
    
    
    8
    
    
    
    
    
    
    
    Loss on sale of real estate acquired by foreclosure
    
    
    2
    
    
    
    88
    
    
    
    Decrease (increase) in accrued interest receivable
    
    
    658
    
    
    
    (985
    )
    
    
    (1,522
    )Increase in other assets
    
    
    (3,293
    )
    
    
    (1,088
    )
    
    
    (6,151
    )Increase in accrued interest payable
    
    
    100
    
    
    
    635
    
    
    
    402Increase (decrease) in other liabilities
    
    
    194
    
    
    
    463
    
    
    
    (442
    )Net cash provided by operating activities
    
    
    16,299
    
    
    
    9,444
    
    
    
    737CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of held-to-maturity securities
    
    
    (97,903
    )
    
    
    (13,517
    )
    
    
    Purchases of available-for-sale securities
    
    
    (76,975
    )
    
    
    (296,100
    )
    
    
    (582,641
    )Proceeds from sales of available-for-sale securities
    
    
    339,038
    
    
    
    188,250
    
    
    
    282,874Proceeds from maturities, calls or principal repayments of investment securities
    
    
    48,966
    
    
    
    41,334
    
    
    
    59,854Proceeds from sales of real estate acquired by foreclosure
    
    
    893
    
    
    
    1,578
    
    
    
    Net increase in loans
    
    
    (67,584
    )
    
    
    (177,588
    )
    
    
    (83,572
    )Decrease (increase) in federal funds sold
    
    
    (17,495
    )
    
    
    3,195
    
    
    
    Purchase of bank premises and equipment
    
    
    (7,261
    )
    
    
    (5,058
    )
    
    
    (1,534
    )Net cash provided by (used in) investing activities
    
    
    121.679
    
    
    
    (257,906
    )
    
    
    (325,019
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    23,564
    
    
    
    134,415
    
    
    
    207,800Net increase (decrease) in other borrowings
    
    
    (117,400
    )
    
    
    55,100
    
    
    
    70,220Issuance of junior subordinated debentures, net
    
    
    
    
    
    
    
    
    
    
    30,000Repayment of junior subordinated debentures
    
    
    (7,320
    )
    
    
    
    
    
    
    Proceeds from sale of common stock
    
    
    16
    
    
    
    52,254
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (101,140
    )
    
    
    241,769
    
    
    
    308,020INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    36,838
    
    
    
    (6,693
    )
    
    
    (16,262
    )CASH AND EQUIVALENTS  Beginning of year
    
    
    21,235
    
    
    
    27,928
    
    
    
    44,190CASH AND EQUIVALENTS  End of period
    
    $
    58,073
    
    
    $
    21,235
    
    
    $
    27,928SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    27,270
    
    
    $
    17,371
    
    
    $
    11,610Income taxes paid
    
    
    701
    
    
    
    4,193
    
    
    
    3,079Other real estate owned acquired through foreclosure
    
    
    1,552
    
    
    
    3,296
    
    
    
    40
  63




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##### Table of Contents



SNB BANCSHARES, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years Ended December 31, 2005, 2004 and 2003
 1. Organization, Nature of Operations and Summary of Significant Accounting and Reporting Policies
 Organization
 Nature of Operations
 Summary of Significant Accounting and Reporting Policies
 Basis of Presentation
 Use of Estimates
 Securities
  Loans
   Nonaccrual, Past Due and Restructured Loans
 64




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##### Table of Contents



Allowance for Loan Losses
     Premises and Equipment
 Real Estate Acquired by Foreclosure
 Income Taxes
  65




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##### Table of Contents



Recent Accounting Standards Share-Based Payment (Revised 2004).
 No.
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
 Accounting Changes and Error Corrections  a
Replacement of APB Opinion No. 20 and FASB Statement No. 3
 , The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.
 66




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##### Table of Contents



Impairment of Long-Lived Assets
 Statements of Cash Flows
 Reclassifications
 Comprehensive Income
 Stock-Based Compensation
 Share-Based Payment (Revised
2004), Recent Accounting Standards
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Net earnings
(loss) as reported
    
    $
    (7,312
    )
    
    $
    5,947
    
    
    $
    3,417Less total stock-based
employee compensation
expense determined under the
fair value based method 
net of related tax effects
    
    
    573
    
    
    
    254
    
    
    
    60$
    (7,885
    )
    
    $
    5,693
    
    
    $
    3,357Earnings
(loss) per share:Basic:As reported
    
    $
    (0.59
    )
    
    $
    0.67
    
    
    $
    0.49Pro forma
    
    
    (0.63
    )
    
    
    0.64
    
    
    
    0.48Diluted:As reported
    
    $
    (0.59
    )
    
    $
    0.65
    
    
    $
    0.48Pro forma
    
    
    (0.63
    )
    
    
    0.62
    
    
    
    0.47
 67




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##### Table of Contents



Earnings Per Share
 For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Net earnings (loss)
    
    $
    (7,312
    )
    
    $
    5,947
    
    
    $
    3,417Basic:Weighted average shares outstanding
    
    
    12,435
    
    
    
    8,899
    
    
    
    6,994Basic earnings (loss) per share
    
    $
    (0.59
    )
    
    $
    0.67
    
    
    $
    0.49Diluted:Weighted average shares outstanding
    
    
    12,435
    
    
    
    8,899
    
    
    
    6,994Potentially dilutive shares from options
    
    
    
    
    
    
    261
    
    
    
    169Weighted average shares and potentially dilutive shares outstanding
    
    
    12,435
    
    
    
    9,160
    
    
    
    7,163Diluted earnings (loss) per share
    
    $
    (0.59
    )
    
    $
    0.65
    
    
    $
    0.48
  For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Stock options
    
    
    285
    
    
    
    
    
    
    
    
 2. Restricted Cash Balances
  3. Securities
  As of December 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-Sale:U.S. government agency securities
    
    $
    74,559
    
    
    $
    
    
    
    $
    (335
    )
    
    $
    74,224Mortgage-backed securities
    
    
    42,897
    
    
    
    57
    
    
    
    (196
    )
    
    
    42,758Collateralized mortgage obligations
    
    
    36,248
    
    
    
    
    
    
    
    (814
    )
    
    
    35,434Obligations of state and political subdivisions
    
    
    3,556
    
    
    
    35
    
    
    
    (46
    )
    
    
    3,545Other securities
    
    
    10,778
    
    
    
    43
    
    
    
    (133
    )
    
    
    10,688Total
    
    $
    168,038
    
    
    $
    135
    
    
    $
    (1,524
    )
    
    $
    166,649Held-to-Maturity:Mortgage-backed securities
    
    $
    39,369
    
    
    $
    
    
    
    $
    (477
    )
    
    $
    38,892Collateralized mortgage obligations
    
    
    43,139
    
    
    
    
    
    
    
    (561
    )
    
    
    42,578Obligations of state and political subdivisions
    
    
    17,354
    
    
    
    176
    
    
    
    (194
    )
    
    
    17,336Total
    
    $
    99,862
    
    
    $
    176
    
    
    $
    (1,232
    )
    
    $
    98,806
 68




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##### Table of Contents



As of December 31, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-Sale:U.S. government agency securities
    
    $
    278,972
    
    
    $
    6
    
    
    $
    (4,220
    )
    
    $
    274,758Mortgage-backed securities
    
    
    101,320
    
    
    
    250
    
    
    
    (1,682
    )
    
    
    99,888Collateralized mortgage obligations
    
    
    78,627
    
    
    
    4
    
    
    
    (1,031
    )
    
    
    77,600Obligations of state and political subdivisions
    
    
    2,630
    
    
    
    44
    
    
    
    (16
    )
    
    
    2,658Other securities
    
    
    20,244
    
    
    
    63
    
    
    
    (56
    )
    
    
    20,251Total
    
    $
    481,793
    
    
    $
    367
    
    
    $
    (7,005
    )
    
    $
    475,155Held-to-Maturity:Collateralized mortgage obligations
    
    $
    5,275
    
    
    $
    
    
    
    $
    (14
    )
    
    $
    5,261Obligations of state and political subdivisions
    
    
    8,093
    
    
    
    146
    
    
    
    (7
    )
    
    
    8,232Total
    
    $
    13,368
    
    
    $
    146
    
    
    $
    (21
    )
    
    $
    13,493
     Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossAvailable-for-Sale:U.S. Treasury/Agency securities
    
    $
    66,448
    
    
    $
    (192
    )
    
    $
    3,851
    
    
    $
    (143
    )
    
    $
    70,299
    
    
    $
    (335
    )Mortgage-backed securities
    
    
    5,230
    
    
    
    (32
    )
    
    
    6,127
    
    
    
    (164
    )
    
    
    11,357
    
    
    
    (196
    )Collateralized mortgage obligations
    
    
    3,199
    
    
    
    (75
    )
    
    
    24,432
    
    
    
    (739
    )
    
    
    27,631
    
    
    
    (814
    )Obligations of state and political subdivisions
    
    
    1,058
    
    
    
    (1
    )
    
    
    1,344
    
    
    
    (45
    )
    
    
    2,402
    
    
    
    (46
    )Other securities
    
    
    249
    
    
    
    (1
    )
    
    
    3,164
    
    
    
    (132
    )
    
    
    3,413
    
    
    
    (133
    )Total
    
    $
    76,184
    
    
    $
    (301
    )
    
    $
    38,918
    
    
    $
    (1,223
    )
    
    $
    115,102
    
    
    $
    (1,524
    )Held-to-Maturity:Mortgage-backed securities
    
    $
    38,891
    
    
    $
    (477
    )
    
    $
    
    
    
    $
    
    
    
    $
    38,891
    
    
    $
    (477
    )Collateralized mortgage obligations
    
    
    38,232
    
    
    
    (448
    )
    
    
    4,346
    
    
    
    (113
    )
    
    
    42,578
    
    
    
    (561
    )Obligations of state and political subdivisions
    
    
    9,231
    
    
    
    (194
    )
    
    
    
    
    
    
    
    
    
    
    9,231
    
    
    
    (194
    )Total
    
    $
    86,354
    
    
    $
    (1,119
    )
    
    $
    4,346
    
    
    $
    (113
    )
    
    $
    90,700
    
    
    $
    (1,232
    )
 69




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##### Table of Contents



As of December 31, 2005Available-for-sale
    
    
    Held-to-maturityAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    39,806
    
    
    $
    39,795
    
    
    $
    
    
    
    $
    Due after one year through five years
    
    
    29,782
    
    
    
    29,599
    
    
    
    
    
    
    
    Due after five years through ten years
    
    
    6,994
    
    
    
    6,824
    
    
    
    692
    
    
    
    685Due after ten years
    
    
    1,533
    
    
    
    1,551
    
    
    
    16,662
    
    
    
    16,651Subtotal
    
    
    78,115
    
    
    
    77,769
    
    
    
    17,354
    
    
    
    17,336Mortgage-backed securities and collateralized mortgage obligations
    
    
    79,145
    
    
    
    78,192
    
    
    
    82,508
    
    
    
    81,470Other securities
    
    
    10,778
    
    
    
    10,688
    
    
    
    
    
    
    
    Total
    
    $
    168,038
    
    
    $
    166,649
    
    
    $
    99,862
    
    
    $
    98,806
    4. Loans
  As of December 31,2005
    
    
    2004Loans held for sale, at fair value:Business and industrial
    
    $
    6,407
    
    
    $
    Real estate:Construction and land development
    
    
    7,704
    
    
    
    Residential mortgages
    
    
    11,310
    
    
    
    Commercial mortgages
    
    
    12,024
    
    
    
    Consumer
    
    
    168
    
    
    
    Total loans held for sale
    
    
    37,613
    
    
    
    Loans held for investment:Business and industrial
    
    
    73,473
    
    
    
    70,101Real estate:Construction and land development
    
    
    137,348
    
    
    
    123,655Residential mortgages
    
    
    107,844
    
    
    
    126,200Commercial mortgages
    
    
    284,521
    
    
    
    267,158Consumer
    
    
    13,413
    
    
    
    12,592Other
    
    
    229
    
    
    
    227Total loans held for investment
    
    
    616,828
    
    
    
    599,933Gross loans
    
    
    654,441
    
    
    
    599,933Less unearned discounts and fees
    
    
    (1,624
    )
    
    
    (1,641
    )Total loans
    
    $
    652,817
    
    
    $
    598,292
  70




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##### Table of Contents



As of December 31, 2005After OneOne Year
    
    
    through
    
    
    After Fiveor Less
    
    
    Five Years
    
    
    Years
    
    
    TotalBusiness and industrial
    
    $
    39,096
    
    
    $
    28,933
    
    
    $
    5,444
    
    
    $
    73,473Real estate:Construction and land development
    
    
    53,024
    
    
    
    63,728
    
    
    
    20,596
    
    
    
    137,348Residential mortgages
    
    
    7,063
    
    
    
    69,202
    
    
    
    31,579
    
    
    
    107,844Commercial mortgages
    
    
    14,261
    
    
    
    217,226
    
    
    
    53,034
    
    
    
    284,521Consumer and other
    
    
    5,061
    
    
    
    8,369
    
    
    
    212
    
    
    
    13,642Held for sale, at fair value
    
    
    11,826
    
    
    
    16,735
    
    
    
    9,052
    
    
    
    37,613Total
    
    $
    130,331
    
    
    $
    404,193
    
    
    $
    119,917
    
    
    $
    654,441Loans with a predetermined interest rate
    
    $
    29,597
    
    
    $
    219,833
    
    
    $
    74,715
    
    
    $
    322,145Loans with a floating interest rate
    
    
    100,734
    
    
    
    185,360
    
    
    
    46,202
    
    
    
    332,296Total
    
    $
    130,331
    
    
    $
    404,193
    
    
    $
    119,917
    
    
    $
    654,441
   December 31,2005
    
    
    2004Balance  beginning of period
    
    $
    864
    
    
    $
    1,048New loans including renewals and extensions
    
    
    23
    
    
    
    490Repayments/reductions/transfers
    
    
    (142
    )
    
    
    (674
    )Balance  end of period
    
    $
    745
    
    
    $
    864
 5. Nonaccrual, Past Due and Restructured Loans
  As of December 31,2005
    
    
    2004Nonaccrual loans
    
    $
    8,881
    
    
    $
    1,489Accruing loans past due 90 days or more
    
    
    
    
    
    
    62Restructured loans
    
    
    1,365
    
    
    
    1,917Total nonperforming loans
    
    $
    10,246
    
    
    $
    3,468
  71




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##### Table of Contents



December 31,2005
    
    
    2004
    
    
    2003Foregone income
    
    $
    576
    
    
    $
    65
    
    
    $
    258
 6. Allowance for Loan Losses
  For the Years EndedDecember 31,2005
    
    
    2004Balance  beginning of period
    
    $
    8,121
    
    
    $
    5,650Provision charged to operations
    
    
    10,351
    
    
    
    2,950Charged off to adjust loans held for sale to fair value
    
    
    (10,584
    )
    
    
    Loans charged off
    
    
    (1,049
    )
    
    
    (614
    )Loan recoveries
    
    
    126
    
    
    
    135Balance  end of period
    
    $
    6,965
    
    
    $
    8,121
 7. Premises and Equipment
  December 31,2005
    
    
    2004Building and improvements
    
    $
    14,877
    
    
    $
    8,907Furniture, fixtures and equipment
    
    
    8,244
    
    
    
    6,615Leasehold improvements
    
    
    781
    
    
    
    435Automobiles
    
    
    79
    
    
    
    58Land
    
    
    4,624
    
    
    
    4,624Construction-in-process
    
    
    1,051
    
    
    
    2,186Total
    
    
    29,656
    
    
    
    22,825Accumulated depreciation
    
    
    (7,518
    )
    
    
    (6,688
    )Premises and equipment  net
    
    $
    22,138
    
    
    $
    16,137
   8. Interest-Bearing Deposits
  December 31, 2005Three months or less
    
    $
    88,138Over three months through six months
    
    
    30,463Over six months through one year
    
    
    44,962Over one year through two years
    
    
    11,830Over two years through three years
    
    
    1,834Over three years through four years
    
    
    939Over four years through five years
    
    
    18,788Over five years
    
    
    Total
    
    $
    196,954
 72




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##### Table of Contents



9. Other Borrowings
  December 31,2005
    
    
    2004FHLB Purchased Overnight
    
    $
    15,000
    
    
    $
    57,400FHLB Long Term Borrowing
    
    
    
    
    
    
    75,000Treasury, Tax and Loan (TT&L) Note Option
    
    
    500
    
    
    
    500Total
    
    $
    15,500
    
    
    $
    132,900
 FHLB Purchased Overnight and Long Term Borrowings
 TT&L Note Option
 10. Income Taxes
  December 31,2005
    
    
    2004
    
    
    2003Current expense (benefit)
    
    $
    (18
    )
    
    $
    4,397
    
    
    $
    2,353Deferred benefit
    
    $
    (3,748
    )
    
    $
    (1,348
    )
    
    $
    (592
    )Total
    
    $
    (3,766
    )
    
    $
    3,049
    
    
    $
    1,761
  December 31,2005
    
    
    2004Deferred tax assets:Allowance for loan losses
    
    $
    2,368
    
    
    $
    2,805Valuation loss on securities held for sale
    
    
    496
    
    
    
    Valuation loss on loans held for sale
    
    
    3,588
    
    
    
    Deferral of loan origination income
    
    
    552
    
    
    
    575Unrealized loss on available for sale securities
    
    
    472
    
    
    
    2,323Accrued bonus
    
    
    
    
    
    
    213Net operating loss and contributions carryforward
    
    
    204
    
    
    
    Other
    
    
    281
    
    
    
    218Total deferred tax assets
    
    
    7,961
    
    
    
    6,134Deferred tax liabilities:Depreciable assets
    
    
    (267
    )
    
    
    (271
    )FHLB and FRB stock dividends
    
    
    (35
    )
    
    
    (100
    )Total deferred tax liabilities
    
    
    (302
    )
    
    
    (371
    )Net deferred tax assets
    
    $
    7,659
    
    
    $
    5,763
 73




---



##### Table of Contents



December 31,2005
    
    
    2004Taxes calculated at statutory rate
    
    $
    (3,766
    )
    
    $
    3,059Increase (decrease) resulting from:Tax-exempt interest
    
    
    (243
    )
    
    
    (70
    )Interest expense limitation
    
    
    129
    
    
    
    25Other  net
    
    
    114
    
    
    
    35Total
    
    $
    (3,766
    )
    
    $
    3,049
 11. Shareholders Equity
 Common Stock
  Stock Options
  2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceShares under option  beginning of year
    
    
    1,265,700
    
    
    $
    9.32
    
    
    
    340,500
    
    
    $
    5.00
    
    
    
    363,000
    
    
    $
    5.00Shares granted
    
    
    25,000
    
    
    
    12.06
    
    
    
    945,500
    
    
    
    10.82
    
    
    
    
    
    
    
    Shares forfeited
    
    
    (32,600
    )
    
    
    9.37
    
    
    
    (18,000
    )
    
    
    6.94
    
    
    
    (22,500
    )
    
    
    5.00Shares exercised
    
    
    (3,200
    )
    
    
    5.00
    
    
    
    (2,300
    )
    
    
    5.00
    
    
    
    
    
    
    
    Shares under option  end of period
    
    
    1,254,900
    
    
    
    9.38
    
    
    
    1,265,700
    
    
    
    9.32
    
    
    
    340,500
    
    
    
    5.00Shares exercisable  end of period
    
    
    370,100
    
    
    
    7.88
    
    
    
    132,400
    
    
    
    5.00
    
    
    
    68,100
    
    
    
    5.00Weighted average fair value of options granted during the year
    
    
    
    
    
    $
    10.01
    
    
    
    
    
    
    $
    4.57
    
    
    
    
    
    
    
    Remaining authorized shares under approved plan  end of year
    
    
    39,600
    
    
    
    
    
    
    
    32,000
    
    
    
    
    
    
    
    159,500
  2005
    
    
    2004
    
    
    2003
    
    
    2002Expected life (years)
    
    
    9
    
    
    
    7
    
    
    
    
    
    
    
    7Risk free interest rate
    
    
    4.18
    %
    
    
    4.23
    %
    
    
    
    
    
    
    4.19
    %Volatility
    
    
    81.90
    %
    
    
    31.00
    %
    
    
    
    
    
    
    31.00
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
 74




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeighted-
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Exercise
    
    
    Remaining
    
    
    Number
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Price
    
    
    Years
    
    
    Exercisable
    
    
    Price$5.00
    
    
    314,900
    
    
    $
    5.00
    
    
    
    6.9
    
    
    
    187,100
    
    
    $
    5.00$10.82
    
    
    915,000
    
    
    
    10.82
    
    
    
    8.6
    
    
    
    183,000
    
    
    
    10.82$12.06
    
    
    25,000
    
    
    
    12.06
    
    
    
    9.1
    
    
    
    
    
    
    
    N/A
 12. Employee 401(k) Savings Plan
  13. Commitments and Contingencies
 Leases 
 2006
    
    $
    2442007
    
    
    2102008
    
    
    1922009
    
    
    1732010
    
    
    106Thereafter
    
    
    329Total
    
    $
    1,254
   Building Contracts
  14. Disclosures about Fair Value of Financial Information
   Cash and Short-Term Investments
 75




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##### Table of Contents



Securities
 Loans
 Loans Held for Sale
 Deposits
 Junior Subordinated Debentures
 Other Borrowings
 Off-Balance-Sheet Financial Instruments
  December 31,2005
    
    
    2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and short-term investments
    
    $
    75,568
    
    
    $
    75,568
    
    
    $
    21,235
    
    
    $
    21,235Investment securities
    
    
    266,511
    
    
    
    265,122
    
    
    
    488,523
    
    
    
    488,648Loans held for sale
    
    
    37,613
    
    
    
    37,664
    
    
    
    
    
    
    
    Loans
    
    
    615,204
    
    
    
    602,285
    
    
    
    598,292
    
    
    
    599,836Less allowance for loan losses
    
    
    (6,965
    )
    
    
    (6,965
    )
    
    
    (8,121
    )
    
    
    (8,121
    )Total
    
    $
    987,931
    
    
    $
    973,674
    
    
    $
    1,099,929
    
    
    $
    1,101,598Financial liabilities:Deposits
    
    $
    891,950
    
    
    $
    893,986
    
    
    $
    868,386
    
    
    $
    867,820Junior subordinated debentures
    
    
    30,930
    
    
    
    34,446
    
    
    
    38,250
    
    
    
    38,521Other borrowings
    
    
    15,500
    
    
    
    15,493
    
    
    
    132,900
    
    
    
    132,880Total
    
    $
    938,380
    
    
    $
    943,925
    
    
    $
    1,039,536
    
    
    $
    1,039,221
  15. Financial Instruments with Off-Balance-Sheet Risk
  76




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December 31,2005
    
    
    2004Financial instruments whose contract amounts represent credit risk:Commitments to extend credit
    
    $
    123,442
    
    
    $
    97,325Standby letters of credit
    
    
    2,118
    
    
    
    2,113
   16. Regulatory Matters
    77




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##### Table of Contents



Minimum RequiredTo be Categorizedas Well-CapitalizedMinimum Required
    
    
    under PromptFor Capital
    
    
    Corrective ActionActual
    
    
    Adequacy Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioCONSOLIDATED*:As of December 31, 2005Total Capital (to Risk-Weighted Assets)
    
    $
    120,501
    
    
    
    16.77
    %
    
    $
    57,489
    
    
    
    8.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    111,381
    
    
    
    15.50
    
    
    
    28,745
    
    
    
    4.00Tier I Capital (to Total Assets)
    
    
    111,381
    
    
    
    9.95
    
    
    
    44,770
    
    
    
    4.00As of December 31, 2004Total Capital (to Risk-Weighted Assets)
    
    $
    136,756
    
    
    
    19.86
    %
    
    $
    55,091
    
    
    
    8.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    122,049
    
    
    
    17.72
    
    
    
    27,545
    
    
    
    4.00Tier I Capital (to Total Assets)
    
    
    122,049
    
    
    
    10.87
    
    
    
    44,913
    
    
    
    4.00BANK:As of December 31, 2005Total Capital (to Risk-Weighted Assets)
    
    $
    113,076
    
    
    
    15.74
    %
    
    $
    57,474
    
    
    
    8.00
    %
    
    $
    71,843
    
    
    
    10.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    106,111
    
    
    
    14.77
    
    
    
    28,737
    
    
    
    4.00
    
    
    
    43,106
    
    
    
    6.00Tier I Capital (to Total Assets)
    
    
    106,111
    
    
    
    9.49
    
    
    
    44,717
    
    
    
    4.00
    
    
    
    55,896
    
    
    
    5.00As of December 31, 2004Total Capital (to Risk-Weighted Assets)
    
    $
    119,017
    
    
    
    17.35
    %
    
    $
    54,881
    
    
    
    8.00
    %
    
    $
    68,601
    
    
    
    10.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    110,896
    
    
    
    16.17
    
    
    
    27,440
    
    
    
    4.00
    
    
    
    41,161
    
    
    
    6.00Tier I Capital (to Total Assets)
    
    
    110,896
    
    
    
    9.89
    
    
    
    44,854
    
    
    
    4.00
    
    
    
    56,068
    
    
    
    5.00
 
 *
    
    At December 31, 2005 and December 31, 2004, Tier I Capital (for purposes of determining the
Tier I Capital to Total Assets ratio and the Tier I Capital to Risk-Weighted Assets ratio)
includes a portion of the trust preferred securities as allowed by regulatory capital
guidelines. Trust Preferred Securities amounts not included in Tier I Capital are included in
Tier II Capital for purposes of determining the Total Capital to Risk-Weighted Assets ratio.  78




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17. Junior Subordinated Debentures
  Trust
    
    
    Trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Junior
    
    
    JuniorPreferred
    
    
    Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subordinated
    
    
    SubordinatedSecurities
    
    
    Securities
    
    
    Interest
    
    
    
    
    
    
    Interest
    
    
    Debt Owed
    
    
    Debt Owed
    
    
    FinalIssuance and
    
    
    Outstanding
    
    
    Outstanding
    
    
    Rate at
    
    
    Fixed/
    
    
    Rate
    
    
    to Trusts
    
    
    to Trusts
    
    
    MaturityDescription
    
    Call Dates(1)
    
    
    12/31/05
    
    
    12/31/04
    
    
    12/31/05
    
    
    Adjustable
    
    
    Basis
    
    
    12/31/05
    
    
    12/31/04
    
    
    DateSNB Capital Trust I
    
    
    12/6/2000
    
    
    $
    
    
    
    $
    7,098
    
    
    
    
    %
    
    Fixed
    
    
    N/A
    
    
    $
    
    
    
    $
    7,320
    
    
    
    12/6/2030SNB Statutory Trust II
    
    
    3/26/2003
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    7.67
    %
    
    Adjustable
    
    3 mo
    
    
    10,310
    
    
    
    10,310
    
    
    
    3/26/2033Quarterly
    
    LIBOR +3.15
    %SNB Capital Trust III
    
    
    3/27/2003
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    7.30
    %
    
    Adjustable
    
    3 mo
    
    
    10,310
    
    
    
    10,310
    
    
    
    3/27/2033Quarterly
    
    LIBOR +3.15
    %SNB Capital Trust IV
    
    
    9/25/2003
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    7.53
    %
    
    Adjustable
    
    3 mo
    
    
    10,310
    
    
    
    10,310
    
    
    
    9/25/2033Quarterly
    
    LIBOR +3.00
    %
 
 (1)
    
    Each issue of junior subordinated debentures is callable by us after five years from the
issuance date.   79




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##### Table of Contents



18. Parent Company Only Financial Statements
 SNB BANCSHARES, INC.
(Parent Company Only)
 CONDENSED BALANCE SHEETS
 December 31,
    
    
    December 31,2005
    
    
    2004(In thousands)ASSETSCash and cash equivalents
    
    $
    6,765
    
    
    $
    17,369Investment in subsidiaries
    
    
    106,258
    
    
    
    107,822Accrued interest receivable
    
    
    6
    
    
    
    26Other assets
    
    
    619
    
    
    
    347TOTAL
    
    $
    113,648
    
    
    $
    125,564LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:Junior subordinated debentures
    
    $
    30,930
    
    
    $
    38,250Accrued interest payable
    
    
    195
    
    
    
    858Other liabilities
    
    
    12
    
    
    
    55Total liabilities
    
    
    31,137
    
    
    
    39,163SHAREHOLDERS EQUITYCapital stock
    
    
    125
    
    
    
    125Capital surplus
    
    
    66,197
    
    
    
    66,173Accumulated other comprehensive income
(loss)  net unrealized losses on
available-for-sale securities  net of
taxes
    
    
    (917
    )
    
    
    (4,315
    )Retained earnings
    
    
    17,106
    
    
    
    24,418Total shareholders equity
    
    
    82,511
    
    
    
    86,401TOTAL
    
    $
    113,648
    
    
    $
    125,564
 SNB BANCSHARES, INC.
(Parent Company Only)
 CONDENSED STATEMENTS OF INCOME
 For the Years EndedDecember 31,2005
    
    
    2004
    
    
    2003(In thousands)INTEREST INCOME:Securities
    
    $
    82
    
    
    $
    67
    
    
    $
    47Dividend income
    
    
    
    
    
    
    1,497
    
    
    
    1,600Total interest income
    
    
    82
    
    
    
    1,564
    
    
    
    1,647INTEREST EXPENSE:Other borrowings
    
    
    2,706
    
    
    
    2,195
    
    
    
    1,609Total interest expense
    
    
    2,706
    
    
    
    2,195
    
    
    
    1,609NET INTEREST (LOSS) INCOME
    
    
    (2,624
    )
    
    
    (631
    )
    
    
    38NONINTEREST EXPENSE:Salaries and employee benefits
    
    
    432
    
    
    
    371
    
    
    
    264Net occupancy expense
    
    
    72
    
    
    
    63
    
    
    
    46Other
    
    
    757
    
    
    
    291
    
    
    
    114Total noninterest expense
    
    
    1,261
    
    
    
    725
    
    
    
    424EQUITY IN UNDISTRIBUTED EARNINGS (LOSS) OF SUBSIDIARY
    
    
    (4,747
    )
    
    
    6,333
    
    
    
    3,128EARNINGS (LOSS) BEFORE INCOME TAXES
    
    
    (8,632
    )
    
    
    4,977
    
    
    
    2,742PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    (1,320
    )
    
    
    (970
    )
    
    
    (675
    )NET EARNINGS (LOSS)
    
    $
    (7,312
    )
    
    $
    5,947
    
    
    $
    3,417
 80




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##### Table of Contents



SNB BANCSHARES, INC.
(Parent Company Only)
 CONDENSED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2005
    
    
    2004
    
    
    2003(In thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net Earnings
    
    $
    (7,312
    )
    
    $
    5,947
    
    
    $
    3,417Equity in undistributed earnings of subsidiaries
    
    
    4,747
    
    
    
    (6,333
    )
    
    
    (3,128
    )Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:Decrease (increase) in accrued interest receivable
    
    
    20
    
    
    
    (1
    )
    
    
    (3
    )Decrease (increase) in other assets
    
    
    (271
    )
    
    
    205
    
    
    
    (440
    )Increase (decrease) in accrued interest payable
    
    
    (663
    )
    
    
    25
    
    
    
    100Increase (decrease) in other liabilities
    
    
    (43
    )
    
    
    55
    
    
    
    Net cash used in operating activities
    
    
    (3,522
    )
    
    
    (102
    )
    
    
    (54
    )CASH FLOWS FROM INVESTING ACTIVITIESProceeds from sales of securities
    
    
    222
    
    
    
    
    
    
    
    Net cash provided by investing activities
    
    
    222
    
    
    
    
    
    
    
    CASH FLOWS FROM FINANCING ACTIVITIES:Net decrease in other borrowings
    
    
    
    
    
    
    
    
    
    
    (7,080
    )Capital contribution to subsidiaries
    
    
    
    
    
    
    (35,000
    )
    
    
    (23,735
    )Issuance of junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    30,930Repayment of junior subordinated debentures
    
    
    (7,320
    )
    
    
    
    
    
    
    Proceeds from sale of common stock
    
    
    16
    
    
    
    52,254
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (7,304
    )
    
    
    17,254
    
    
    
    115INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (10,604
    )
    
    
    17,152
    
    
    
    61CASH AND EQUIVALENTS  Beginning of year
    
    
    17,369
    
    
    
    217
    
    
    
    156CASH AND EQUIVALENTS  End of period
    
    $
    6,765
    
    
    $
    17,369
    
    
    $
    217
 19. Subsequent Events (unaudited)
    81




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber(1)
    
    Description2.1
    
    Agreement and Plan of Reorganization dated as of November 16,
2005 by and between Prosperity Bancshares, Inc. and the
Company (incorporated herein by reference to Exhibit 2.1 to
the Companys current Report on Form 8-K filed November 17,
2005).3.1
    
    Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the
Companys Registration Statement on Form S-1 (Registration No.
333-116366)).3.2
    
    Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.2 to the Companys
Registration Statement on Form S-1 (Registration No.
333-116366)).4.1
    
    Specimen Certificate Representing Shares of the Companys
Common Stock (incorporated herein by reference to Exhibit 4.1
to the Companys Registration Statement on Form S-1
(Registration No. 333-116366)).10.1
    
    SNB Bancshares, Inc. 2002 Stock Option Plan, as amended and
restated (incorporated herein by reference to Exhibit 10.1 to
the Companys Registration Statement on Form S-1 (Registration
No. 333-116366)).10.2
    
    Employment Agreement between the Company and Harvey E. Zinn
(incorporated herein by reference to Exhibit 10.2 to the
Companys Registration Statement on Form S-1 (Registration No.
333-116366)).10.3
    
    Employment Agreement between the Company and Daniel S.
Agnew(incorporated herein by reference to Exhibit 10.3 to the
Companys Registration Statement on Form S-1 (Registration No.
333-116366)).10.4
    
    Employment Agreement between the Company and R. Darrell Brewer
(incorporated herein by reference to Exhibit 10.4 to the
Companys Registration Statement on Form S-1 (Registration No.
333-116366)).21.1
    
    Subsidiaries of the Company (incorporated herein by reference
to Exhibit 10.4 to the Companys Registration Statement on
Form S-1 (Registration No. 333-116366)).23.1*
    
    Consent of Deloitte & Touche LLP31.1*
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended31.2*
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended32.1**
    
    Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2**
    
    Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    Filed with this Annual Report on Form 10-K.**
    
    Furnished with this Annual Report on Form 10-K.
    
    Management contract or compensatory plan or arrangement.(1)
    
    The Company has other long-term debt agreements that meet the exclusion set forth in Section
601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such
agreements to the Commission upon request. 82