##### 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: 000-51548
 STATE NATIONAL BANCSHARES, INC.
  Texas
    
    75-2641879(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 4500 Mercantile Plaza Drive, Suite 300, Fort Worth, TX 76137
 (817) 547-1150
  Name of each exchangeTitle of each class
    
    on which registeredNONE
    
    NONE
  Common Stock, par value $1.00 per share
  Yes o
    
    No þ
  Yes o
    
    No þ
  Yes þ
    
    No o
 o þ
 o o þ
  Yes o
    
    No þ
    Documents Incorporated by Reference




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##### 



STATE NATIONAL BANCSHARES, INC.
  PAGEPART I
    
    
    1ITEM 1. BUSINESS.
    
    
    1ITEM 1A. RISK FACTORS
    
    
    18ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    23ITEM 2. PROPERTIES.
    
    
    23ITEM 3. LEGAL PROCEEDINGS.
    
    
    25ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
    
    
    25PART II
    
    
    25ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
    
    
    25ITEM 6. SELECTED FINANCIAL DATA.
    
    
    26ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
    
    
    29ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
    
    
    55ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
    
    
    55ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
    
    
    55ITEM 9A. CONTROLS AND PROCEDURES.
    
    
    55ITEM 9B. OTHER INFORMATION.
    
    
    56PART III
    
    
    56ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
    
    
    56ITEM 11. EXECUTIVE COMPENSATION.
    
    
    56ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
    
    
    56ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
    
    
    56ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
    
    
    56PART IV
    
    
    57ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
    
    
    57List of SubsidiariesConsent of Deloitte & Touche LLPCertification of CEO Pursuant to Rule 13a-14 or 15d-14Certification of CFO Pursuant to Rule 13a-14 or 15d-14Certification of CEO Pursuant to Rule 13a-14(b) or 15d-14(b)Certification of CFO Pursuant to Rule 13a-14(b) or 15d-14(b)
  i




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##### Table of Contents



PART I
 SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
   
 ITEM 1. Business.
 Overview
   Organizational Structure
 Supervision and Regulation .
 History and Management Team
  1




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##### Table of Contents








    
    Tom C. Nichols.Mr. Nichols, our Chairman, Chief Executive
Officer and President, has over 35 years of experience in the
commercial banking industry. From 1978 to 1994, Mr. Nichols was an
executive with the Ford Bank Group, later First United Bank Group,
where he last served as President and Chief Operating Officer
until it was acquired by Norwest in 1994. Prior to its
acquisition, First United Bank Group operated banks in Texas and
New Mexico and had total assets of approximately $4.0 billion.
    
    Don E. Cosby.Mr. Cosby, our Chief Financial Officer, also was
an executive officer with the Ford Bank Group. Mr. Cosby worked
from 1981 to 1989 with the Ford Bank Group as Chief Financial
Officer. Mr. Cosby was responsible for acquisition analysis and
coordination, regulatory applications and compliance, tax planning
and compliance, and debt structuring. From 1989 to 1996, Mr. Cosby
served as Chief Fiscal (Financial) Officer at Texas Tech
University.
    
    F. James Volk. Mr. Volk is one of our directors and regional President of our West Texas
and Rio Grande markets. From 1984 to 1995, Mr. Volk served as President and Chief Executive
Officer of United New Mexico Bank in Las Cruces, New Mexico (a part of First United Bank
Group). Further, from 1985 to 1996, Mr. Volk was a director of First Sierra Bancshares, Inc.
in Truth or Consequences, New Mexico, and served as Chief Executive Officer and President of
First Sierra Bancshares from 1996 to 1998, when it was acquired by us. Mr. Volk also currently
serves as an advisory director of the Federal Reserve Bank of Dallas-El Paso Branch.
    
    Alan L. Lackey.Mr. Lackey serves as our Executive Vice
President and Chief Credit Officer. Mr. Lackey worked for MCorp.,
a regional bank holding company with approximately $20.0 billion
in total assets headquartered in Dallas, from 1982 to 1991, and
was Manager of Correspondent Banking when MBank, N.A., the
subsidiary bank of MCorp., was acquired by Bank One. In 1991, Mr.
Lackey joined First National Bank of Lubbock (a part of the Ford
Bank Group), later acquired by Norwest, then Wells Fargo, where he
ultimately managed commercial and real estate lending for the
Lubbock office. Mr. Lackey became an officer of our organization
in 1996.
    
    Edwin L. Schulz.Mr. Schulz serves as our Executive Vice
President and Chief Operations Officer. Mr. Schulz has extensive
banking experience in all administrative and operations areas and
has been with our organization since 1996. From 1976 to 1992, Mr.
Schulz worked for Texas Commerce Bancshares in management and
oversight of the West Texas chartered banks where he managed
budgeting, forecasting and operations, including loan, branch
administration, and deposits. From 1992 to 1996, Mr. Schulz served
with First National Bank in a variety of management positions.


Growth Strategy and Operating Philosophy




Growth Strategy


2




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##### Table of Contents




    
    Expand through acquisitions with a focus on the Tarrant County
market. A significant part of our growth strategy is to continue
our pursuit of opportunistic acquisitions. In evaluating
acquisition opportunities, we are currently focusing on the
Tarrant County market because its competitive landscape, large
population, and wealth and growth demographics are attractive to
us. We also believe that we have allocated our resources to serve
small and medium-sized businesses more effectively than the larger
regional and out-of-state banks in this market. These customers
generally have the size and sophistication to demand customized
products and services, which we believe our bankers are well
equipped to understand and address as a result of their
experience. To a lesser extent, we believe there are also
opportunities for additional expansion in the West Texas and Rio
Grande market, which has been positively impacted by the North
American Free Trade Agreement (NAFTA) and the enhanced
cross-border trade with Mexico.
 
    
    Continued focus on internal growth and de novo branching.
Another important part of our growth strategy is to augment our
expansion efforts through internal growth and de novo branching.
To do so, we intend to evaluate and consider opening de novo
banking centers in our current footprint and in other nearby
market areas when opportunities arise. We currently are in the
process of opening two de novo banking centers, one in downtown
Fort Worth and one in northwest Lubbock. We also anticipate
opening de novo banking centers in the Rio Grande market area as
needed to service the continued population growth. We believe that
the back office and technology systems we have in place will
accommodate additional growth within our existing market area and
into new markets in nearby regions to achieve economies of scale.
  Acquired Entity
    
    Consummation Date
    
    LocationHeritage Financial Corporation
    
    October 6, 2005
    
    Granbury, TexasMercantile Bank Texas
    
    July 30, 2004
    
    Fort Worth, TexasRuidoso Bank Corporation
    
    January 31, 2001
    
    Ruidoso, New MexicoIndependent Bankshares, Inc
    
    August 11, 2000
    
    Abilene, TexasValley Bancorp, Inc
    
    April 1, 1999
    
    El Paso, TexasContinental National Bancshares, Inc
    
    March 23, 1999
    
    El Paso, TexasUB&T Holding Company
    
    March 1, 1999
    
    Abilene, TexasFirst Sierra Bancshares, Inc
    
    April 1, 1998
    
    Las Cruces, New MexicoBank of America (three branches)
    
    November 6, 1996
    
    Big Spring, Texas
 Operating Philosophy
  
    
    Leveraging our existing infrastructure to create additional
operational efficiencies. We believe that as we grow, we will
be able to benefit from the economies of scale typically enjoyed
by larger banking organizations, including efficiencies related to
data processing, compliance and technology. We also believe the
investments we have made in our banking center network and
technology infrastructure are sufficient to support a larger
banking organization, and therefore believe increases in our
expense base going forward should be lower than our proportional
increase in assets and revenues. The support services we provide
to our banking centers are centralized in our office located in
Lubbock, Texas. These services include back office operations,
credit administration, human resources, internal audit,
compliance, training and data processing. As a result of these
network and technology improvements and the centralization of our
support services, we believe our operations enhance efficiencies,
maintain consistency in policies and procedures and enable our
employees to focus on developing and strengthening customer
relationships. We believe that these trends going forward will
continue to contribute to our profitability.
 
    
    Emphasizing relationship-based banking. We focus on serving the
needs of small to medium-sized businesses, the owners and
employees of those businesses, as well as executives and
professionals. We believe
 3




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we are able to provide a superior level of customer service compared to the larger regional and
super-regional banks because we operate under a community banking philosophy which is customer
driven, emphasizes long-term customer relationships and provides practical financial solutions,
convenience and consistent service. Each of our banking centers is administered by one of our
local market presidents who has knowledge of the particular community and lending expertise in
the specific industries found within the community. We entrust our branch presidents with the
authority and flexibility within limited parameters to make customer-related decisions, as our
management believes that the most efficient and effective decisions are made at the point of
customer contact by the people who know the customer. With this type of branch-based
decision-making, we endeavor to provide customers with rapid decisions on lending issues.
 
    
    Optimizing our deposit mix. Beginning in December 2000, we
modified our deposit pricing to reduce our reliance on high cost
time deposits. We began to lower our rates on interest-bearing
time deposits to the lower range of market levels which has caused
a significant decrease in this balance over the last five years.
Time deposits at December 31, 2000 were $491.7 million, or 48.5%
of total deposits, and declined to $345.9 million, or 25.5% of
total deposits, at December 31, 2005. To replace this funding
source, we have emphasized the promotion of commercial transaction
accounts, such as noninterest-bearing transaction accounts. We
believe this realignment of our deposit mix is one of the key
factors that has contributed to improvement of our net interest
margin and our profitability.
 
    
    Continuing emphasis on asset quality. Our credit administration
team has developed an "asset quality cultureconsisting of
comprehensive policies and procedures for credit underwriting and
funding that we believe has enabled us to maintain sound asset
quality. For the year ended December 31, 2005, our annualized
ratio of net charge-offs to average loans was 0.14%, and averaged
0.15% over the three years ended December 31, 2005.
 Lending Activities
  Real Estate Construction Loans.
  1  4 Family Real Estate Loans.
  4




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Other Real Estate Loans.
   Commercial Loans.
  Consumer Loans.  
 Agricultural and Other Loans. 5
    Table of Contents    Underwriting Strategy
  
    
    granting loans on a sound and collectible basis;
 
    
    investing funds for the benefit of our shareholders and the protection of our depositors;
 
    
    serving the needs of the community and our general market area while seeking a balance between maximum yield and
minimum risk;
 
    
    verifying the availability of primary and secondary sources of repayment for the loan;
 
    
    developing and maintaining our targeted levels of diversification for our loan portfolio as a whole and of the loans
within each category; and
 
    
    monitoring the documentation of our loans and the satisfaction of any insurance coverage requirements.
  Deposit Products and Other Sources of Funds
  
    
    deposits;
 
    
    maturities and principal and interest payments on loans and securities; and
 
    
    other borrowings.
   6




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Deposits
      
    
    expanding long term business customer relationships, including referrals from our customers; and
 
    
    building deposit relationships through our branch relationship officers who are compensated based upon the
profitability of such relationships.
 Other Borrowings
    Trust and Wealth Management Services
  7




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Our Investment Activities
  
    
    achieve an acceptable asset/liability position (based on our separate policy related to asset/liability management that
provides guidance for how investments are to be used to manage interest rate risk);
 
    
    provide a balance of quality and diversification to our assets;
 
    
    provide liquidity necessary to meet cyclical and long term changes in the mix of assets and liabilities;
 
    
    provide a stable flow of dependable earnings;
 
    
    maintain collateral for pledging requirements;
 
    
    manage interest rate risk;
 
    
    comply with regulatory and accounting standards; and
 
    
    provide funds for local community needs.
  Accounting for Certain
Investments in Debt and Equity Securities
   Competition
  Employees
  8




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Available Information
 www.statenationalbank.com
 SUPERVISION AND REGULATION
 This following is a summary description of the relevant laws, rules and regulations governing banks
and bank holding companies.
 General
   State National Bancshares and State National Bancshares of Delaware
  Regulatory Restrictions on Dividends; Source of Strength
   9




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Activities Closely Related to Banking
 de novo
 Gramm-Leach Bliley Act; Financial Holding Companies
    
    
    financial in nature;
 
    
    incidental to such financial activity; or
 
    
    complementary to a financial activity provided it does not pose a
substantial risk to the safety and soundness of depository
institutions or the financial system generally.
  Privacy Policies
  10




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Safe and Sound Banking Practices
  Annual Reporting; Examinations
  Capital Adequacy Requirements
     Imposition of Liability for Undercapitalized Subsidiaries
  11




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Acquisitions by Bank Holding Companies
   Control Acquisitions
  Cross-guarantees
  12




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USA Patriot Act
  Sarbanes-Oxley Act of 2002
      13




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Anti-Money Laundering and Anti-Terrorism Legislation
    State National Bank
  Transactions with Affiliates
  14




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Insider Credit Transactions
  Dividends
  Capital Requirements
   The FDIC Improvement Act
 FIRREA
  15




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The FDIC Improvement Act
      16




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FDIC Deposit Insurance Assessments
   Community Reinvestment Act
  Consumer Laws and Regulations
  Clearing for the 21 st Century Act
 st
 
    
    allowing check truncation without making it mandatory;
 
    
    demanding that every financial institution communicate to accountholders in writing a description of its substitute
check processing program and their rights under the law;
 17




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
    
    legalizing substitutions for and replacements of paper checks without agreement from consumers;
 
    
    retaining in place the previously mandated electronic collection and return of checks between financial institutions
only when individual agreements are in place;
 
    
    requiring that when accountholders request verification, financial institutions produce the original check (or a copy
that accurately represents the original) and demonstrate that the account debit was accurate and valid; and
 
    
    requiring recrediting of funds to an individuals account on the next business day after a consumer proves that the
financial institution has erred.
  Interstate Branching
 de novo
 Mortgage Banking Operations
  Future Legislation and Economic Policy
  
 ITEM 1A: RISK FACTORS
 Investment in our common stock involves a high degree of risk and uncertainty. You should
carefully consider each of the risks and uncertainties described below before you decide to invest
in our common stock. You should also refer to the other information in this annual report,
including our financial statements and related notes If any of the following risks and
uncertainties actually occurs, our business, financial condition, and results of operations could
be severely harmed. This could cause the trading price of our common stock to decline, and you
could lose all or part of your investment.
 18




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Risks Relating to Our Business
 Our decisions regarding credit risk could be inaccurate and our allowance for loan losses may be
inadequate, which could materially and adversely affect our business, financial condition, results
of operations and future prospects.
  
    
    the duration of the loan;
    
    credit risks of a particular borrower;
    
    changes in economic or industry conditions; and
    
    in the case of a collateralized loan, risks resulting from uncertainties about the
future value of the collateral.
  We have a concentration of exposure to a number of individual borrowers and any significant loss on
any of these loans could materially and adversely affect our business, financial condition, results
of operations, and future prospects.
  We have a high concentration of loans secured by real estate and a downturn in the real estate
market, for any reason, could result in losses and materially and adversely affect business,
financial condition, results of operations and future prospects.
  19




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We have experienced growth through acquisitions which we may not be able to sustain, and an
unsuccessful attempt to implement our growth strategy could have a material adverse effect on our
business, financial condition, results of operations and future prospects.
  An economic downturn or a natural disaster, especially one affecting our market areas, could
adversely affect our business, financial condition, results of operations and future prospects.
  Competition from other financial intermediaries may adversely affect our profitability.
  Our profitability is vulnerable to interest rate fluctuations which could result in a decrease in
our net income.
   We rely heavily on our management team and the unexpected loss of key officers may adversely affect
our operations.
 20
    Table of Contents    Our second largest shareholder is a registered bank holding company and the activities and
regulation of such shareholder may adversely affect our permissible activities.
  If we are unable to favorably assess the effectiveness of our internal controls over financial
reporting, or if our independent auditors are unable to provide an unqualified attestation report
on our assessment, our stock price could be adversely affected.
  Risks Relating to an Investment in Our Common Stock and Our Initial Public Offering
 The sale of a substantial number of shares of common stock by our shareholders after the
expiration of lock-up agreements associated with our initial public offering may cause the market
price of our common stock to decline.
  21




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The holders of our junior subordinated debentures have rights that are senior to those of our
shareholders.
   Our management owns a significant number of shares of our common stock, allowing management further
control over our business and corporate affairs.
  Provisions of our amended and restated articles of incorporation and amended and restated bylaws,
as well as state and federal banking regulations, could delay or prevent a takeover of us by a
third party.
    22




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Our ability to pay dividends is subject to restrictions. As a result, capital appreciation, if any,
of our common stock may be your sole opportunity for gains on your investment for the foreseeable
future.
   
 ITEM 1B: Unresolved Staff Comments
  
 ITEM 2. Properties.
  Location
    
    Own/Rent
    
    Square Footage
    
    Annual RentTarrant County MarketArlington, TX
921 West Lamar
    
    Own
    
    
    7,500
    
    
    
    N/AAzle, TX
11588 FM 730 North
    
    Own
    
    
    3,900
    
    
    
    N/A150 Industrial Avenue
    
    Own
    
    
    16,800
    
    
    
    N/ABedford, TX
1600 Airport Freeway, Suite 100
    
    Rent
    
    
    8,100
    
    
    $
    155,0001600 Airport Freeway (motor bank)
    
    Rent
    
    
    500
    
    
    $
    25,000Benbrook, TX
9100 Benbrook Blvd
    
    Own
    
    
    8,600
    
    
    
    N/ACrowley, TX
586 East FM 1187
    
    Own
    
    
    8,050
    
    
    
    N/AFort Worth, TX
309 West 7th Street, Suite 100
    
    Rent
    
    
    3,800
    
    
    $
    46,0004500 Mercantile Plaza Drive, Suite 100
    
    Rent
    
    
    13,500
    
    
    $
    304,0004500 Mercantile Plaza Drive, Suite 300 (1)
    
    Rent
    
    
    3,800
    
    
    $
    68,0005950 Bryant Irving Rd (2)
    
    Own
    
    
    18,900
    
    
    
    N/AGranbury, TX
1807 Hwy 377 E
    
    Own
    
    
    12,755
    
    
    
    N/AHurst, TX
606 A Grapevine Highway
    
    Rent
    
    
    1,600
    
    
    $
    34,000West Texas MarketAbilene
6301 Buffalo Gap Road
    
    Own
    
    
    3,500
    
    
    
    N/A547 Chestnut
    
    Own
    
    
    8,600
    
    
    
    N/A1049 North 3rd Street (3)
    
    Own
    
    
    58,900
    
    
    
    N/A4702 South 14th Street
    
    Rent
    
    
    1,200
    
    
    $
    19,000Big Spring, TX
1500 South Greeg Street
    
    Own
    
    
    3,200
    
    
    
    N/A
 23




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Location
    
    Own/Rent
    
    Square Footage
    
    Annual RentLubbock, TX
1617 Broadway Avenue
    
    Own
    
    
    12,500
    
    
    
    N/A6601 Indiana
    
    Own
    
    
    1,800
    
    
    
    N/A1611 10th Street (4)
    
    Own
    
    
    16,500
    
    
    
    N/A8200 Nashville (5)
    
    Own
    
    
    23,200
    
    
    
    N/AOdessa, TX
1330 East 8th Street
    
    Own
    
    
    10,076
    
    
    
    N/A3809 East 42nd Street
    
    Rent
    
    
    2,400
    
    
    $
    51,000Plainview, TX
2804 Olton Road
    
    Own
    
    
    6,300
    
    
    
    N/ASan Angelo, TX
4112 College Hills Boulevard (6)
    
    Own
    
    
    6,800
    
    
    
    N/AStamford, TX
210 South Swanson Street
    
    Own
    
    
    14,000
    
    
    
    N/AWinters, TX
500 South Main Street (7)
    
    Own
    
    
    9,500
    
    
    
    N/ARio Grande MarketAlamogordo, NM
600 9th Street
    
    Rent
    
    
    2,900
    
    
    $
    48,000Deming, NM
411 Cody Road
    
    Rent
    
    
    1,100
    
    
    $
    18,000Elephant Butte, NM
600 Highway 195, Suite A
    
    Rent
    
    
    1,000
    
    
    $
    18,000El Paso, TX
6044 Gateway Boulevard East
    
    Rent
    
    
    8,200
    
    
    $
    153,0009820 Gateway North
    
    Rent
    
    
    2,400
    
    
    $
    48,00010456 Montwood Drive
    
    Own
    
    
    2,500
    
    
    
    N/A7744 North Loop Drive
    
    Own
    
    
    14,700
    
    
    
    N/A601 N. Mesa Steet
    
    Own
    
    
    18,900
    
    
    
    N/A690 Sunland Park Drive
    
    Own
    
    
    16,300
    
    
    
    N/A2100 Yarbrough Drive
    
    Own
    
    
    11,500
    
    
    
    N/A1610 Zaragosa Street
    
    Rent
    
    
    2,400
    
    
    $
    45,000Las Cruces, NM
225 E. Idaho
    
    Rent
    
    
    1,200
    
    
    $
    31,0003800 East Lohman (8)
    
    Own
    
    
    25,000
    
    
    
    N/ARuidoso, NM
707 Mechem Drive
    
    Own
    
    
    6,800
    
    
    
    N/A1710 Sudderth
    
    Own
    
    
    7,900
    
    
    
    N/ARuidoso Downs, NM
2151 Highway 70 West
    
    Rent
    
    
    1,000
    
    
    $
    36,000Santa Teresa, NM
1245 Country Club Road
    
    Rent
    
    
    2,500
    
    
    $
    52,000Truth Or Consequences, NM
1245 Country Club Road
    
    Own
    
    
    6,000
    
    
    
    N/ANogales, AZ
1860 North State Road (9)
    
    Rent
    
    
    800
    
    
    $
    11,000
 
 (1)
    
    Denotes State National Bancshares corporate headquarters.(2)
    
    The Cityview banking center occupies approximately 10,500 square feet and the remaining
8,400 square feet is leased or available for lease to third parties.(3)
    
    The North 3rd Street banking center occupies approximately 10,500 square feet and
the remaining 48,400 square feet is leased and or available for lease to third parties.(4)
    
    Denotes property used for our operations center facility.(5)
    
    The 82nd Street banking center occupies approximately 11,700 square feet and
the remaining 11,500 square feet is leased and or available for lease to third parties. 24




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(6)
    
    The San Angelo banking center occupies approximately 3,400 square feet and the remaining
3,400 square feet is leased and or available for lease to third parties(7)
    
    The Winters banking center occupies approximately 2,400 square feet and the remaining
7,100 square feet is leased and or available for lease to third parties.(8)
    
    The Lohman banking center occupies approximately 13,600 square feet and the remaining 11,400
square feet is leased and or available for lease to third parties(9)
    
    Denotes a loan production office. 
 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 Stockholder Matters and Issuer Purchases of
Equity Securities.
 Market Information
   2005High
    
    LowFourth Quarter (beginning September 30, 2005)
    
    $
    28.30
    
    
    $
    23.76
 Dividends
  Managements Discussion and
Analysis of Financial Condition and Results of OperationsResults of Operations as of and for the
Years Ended December 31, 2005, 2004 and 2003BorrowingsJunior Subordinated Debentures; Supervision and RegulationState National Bancshares and State National Bancshares of
DelawareRegulatory
 25




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Restrictions on Dividends; Source of Strength and Supervision and RegulationState National
BankDividends
 Securities Authorized for Issuance Under Equity Compensation Plans
  Equity Compensation Plan Information
 Number of securitiesremaining available forNumber of securities
    
    
    
    
    
    future issuance underto be issued upon
    
    Weighted-average
    
    equity compensationexercise of outstanding
    
    exercise price of
    
    plans (excludingoptions, warrants and
    
    outstanding options,
    
    securities reflected inrights
    
    warrants and rights
    
    column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    832,950
    
    
    $
    15.93
    
    
    
    364,161
 
 ITEM 6. Selected Financial Data.
  Managements Discussion and Analysis of
Financial Condition and Results of Operations
 26




---



##### Table of Contents



As of or for the years ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands, except per share data)Income Statement Data:Total interest income
    
    $
    79,070
    
    
    $
    60,989
    
    
    $
    57,165
    
    
    $
    64,165
    
    
    $
    81,720Total interest expense(1)
    
    
    15,228
    
    
    
    9,093
    
    
    
    10,755
    
    
    
    17,675
    
    
    
    36,361Net interest income(1)
    
    
    63,842
    
    
    
    51,896
    
    
    
    46,410
    
    
    
    46,490
    
    
    
    45,359Provision for loan losses(2)
    
    
    900
    
    
    
    450
    
    
    
    118
    
    
    
    1,118
    
    
    
    11,730Net interest income after provision for loan losses
    
    
    62,942
    
    
    
    51,446
    
    
    
    46,292
    
    
    
    45,372
    
    
    
    33,629Noninterest income:Service charges and other fees
    
    
    10,166
    
    
    
    9,333
    
    
    
    8,749
    
    
    
    8,098
    
    
    
    8,277Gain on sale of loans
    
    
    2,950
    
    
    
    2,261
    
    
    
    3,159
    
    
    
    2,217
    
    
    
    1,400Net realized gain on sale of securities
    
    
    1
    
    
    
    
    
    
    
    11
    
    
    
    199
    
    
    
    6Bank owned life insurance
    
    
    1,364
    
    
    
    1,259
    
    
    
    1,176
    
    
    
    1,119
    
    
    
    642Other
    
    
    4,208
    
    
    
    2,957
    
    
    
    2,703
    
    
    
    3,149
    
    
    
    2,114Total noninterest income
    
    
    18,689
    
    
    
    15,810
    
    
    
    15,798
    
    
    
    14,782
    
    
    
    12,439Noninterest expense:Salaries and employee benefits
    
    
    29,790
    
    
    
    24,507
    
    
    
    22,416
    
    
    
    21,587
    
    
    
    21,171Net occupancy and equipment expense
    
    
    9,175
    
    
    
    7,678
    
    
    
    7,529
    
    
    
    8,171
    
    
    
    8,195Amortization of intangibles
    
    
    3,518
    
    
    
    2,888
    
    
    
    2,685
    
    
    
    3,025
    
    
    
    6,459Professional fees
    
    
    1,298
    
    
    
    1,143
    
    
    
    1,023
    
    
    
    1,465
    
    
    
    1,948Other noninterest expense
    
    
    13,250
    
    
    
    11,368
    
    
    
    14,666
    
    
    
    13,470
    
    
    
    13,422Total noninterest expense(1)
    
    
    57,031
    
    
    
    47,584
    
    
    
    48,319
    
    
    
    47,718
    
    
    
    51,195Income (loss) before income taxes
    
    
    24,600
    
    
    
    19,672
    
    
    
    13,771
    
    
    
    12,436
    
    
    
    (5,127
    )Income tax expense (benefit)
    
    
    7,918
    
    
    
    6,317
    
    
    
    4,202
    
    
    
    3,432
    
    
    
    (936
    )Cumulative effect of a change in accounting
principle(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,642
    )
    
    
    Net income (loss)
    
    $
    16,682
    
    
    $
    13,355
    
    
    $
    9,569
    
    
    $
    (6,638
    )
    
    $
    (4,191
    )Per Share Data:Earnings (loss)basic
    
    $
    1.58
    
    
    $
    1.40
    
    
    $
    1.04
    
    
    $
    (0.70
    )
    
    $
    (0.44
    )Earnings (loss)diluted
    
    
    1.54
    
    
    
    1.37
    
    
    
    1.02
    
    
    
    (0.69
    )
    
    
    (0.44
    )Book value
    
    
    17.73
    
    
    
    15.05
    
    
    
    13.32
    
    
    
    12.66
    
    
    
    13.39Tangible book value
    
    
    9.23
    
    
    
    7.01
    
    
    
    8.17
    
    
    
    7.38
    
    
    
    6.41Weighted average shares outstanding basic
    
    
    10,546,331
    
    
    
    9,536,114
    
    
    
    9,217,122
    
    
    
    9,481,910
    
    
    
    9,493,603Weighted average shares outstandingdiluted
    
    
    10,812,169
    
    
    
    9,735,874
    
    
    
    9,362,588
    
    
    
    9,589,569
    
    
    
    9,576,371As of or for the years ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(In thousands, except per share data)Balance Sheet Data:Total assets
    
    $
    1,662,877
    
    
    $
    1,350,380
    
    
    $
    1,126,831
    
    
    $
    1,142,532
    
    
    $
    1,217,624Investment securities available-for-sale
    
    
    206,787
    
    
    
    151,008
    
    
    
    211,039
    
    
    
    267,601
    
    
    
    348,839Federal Reserve Bank stock and other investments
    
    
    8,094
    
    
    
    8,306
    
    
    
    7,073
    
    
    
    6,766
    
    
    
    6,605Loans, net
    
    
    1,062,020
    
    
    
    926,401
    
    
    
    726,543
    
    
    
    648,155
    
    
    
    634,037Intangibles, net
    
    
    118,422
    
    
    
    86,304
    
    
    
    51,533
    
    
    
    54,261
    
    
    
    73,115Total deposits
    
    
    1,357,078
    
    
    
    1,126,394
    
    
    
    938,734
    
    
    
    960,418
    
    
    
    1,020,209Junior subordinated debentures
    
    
    47,000
    
    
    
    47,000
    
    
    
    37,000
    
    
    
    32,934
    
    
    
    32,918Other borrowings
    
    
    5,841
    
    
    
    19,429
    
    
    
    22,694
    
    
    
    21,685
    
    
    
    26,286Stockholders equity
    
    
    212,257
    
    
    
    151,360
    
    
    
    121,248
    
    
    
    116,729
    
    
    
    127,419Performance Ratios:Return on average equity(3)
    
    
    9.73
    %
    
    
    9.84
    %
    
    
    7.94
    %
    
    
    (5.59
    )%
    
    
    (3.24
    )%Return on average assets(4)
    
    
    1.17
    
    
    
    1.08
    
    
    
    0.85
    
    
    
    (0.57
    )
    
    
    (0.33
    )Net interest margin(5)
    
    
    5.34
    
    
    
    4.87
    
    
    
    4.77
    
    
    
    4.62
    
    
    
    4.15Efficiency ratio(6)
    
    
    64.71
    
    
    
    65.96
    
    
    
    73.26
    
    
    
    72.73
    
    
    
    77.40
 27




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##### Table of Contents



As of or for the years ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(In thousands, except per share data)Asset Quality Ratios:Total nonperforming assets to total loans and
other real estate
    
    
    0.90
    %
    
    
    0.98
    %
    
    
    1.13
    %
    
    
    1.88
    %
    
    
    1.74
    %Allowance for loan losses to nonperforming loans
    
    
    144.03
    
    
    
    157.66
    
    
    
    168.08
    
    
    
    124.21
    
    
    
    106.24Allowance for loan losses to total loans
    
    
    1.17
    
    
    
    1.21
    
    
    
    1.36
    
    
    
    1.66
    
    
    
    1.67Net charge-offs to average loans
    
    
    0.14
    
    
    
    0.18
    
    
    
    0.14
    
    
    
    0.15
    
    
    
    2.17Capital Ratios:(7)Leverage ratio
    
    
    9.36
    %
    
    
    8.82
    %
    
    
    9.86
    %
    
    
    8.60
    %
    
    
    7.50
    %Tier 1 risk-based capital ratio
    
    
    11.98
    
    
    
    10.89
    
    
    
    13.37
    
    
    
    13.00
    
    
    
    12.50Total risk-based capital ratio
    
    
    13.04
    
    
    
    11.98
    
    
    
    14.62
    
    
    
    14.20
    
    
    
    14.00
 
 (1)
    
    In 2002 and 2001 we included our guaranteed preferred beneficial interest expenses of
$2,339,000 and $1,747,000, respectively, as Noninterest expense. However, commencing in
2003, we began to include this expense as an interest expense. Accordingly, for
comparability purposes, we have reclassified such amounts for 2002 and 2001.(2)
    
    The loan charge-offs and the related loan loss provision that occurred during the 2001 fiscal
year were primarily attributable to five borrowing relationships that were originated by
Independent Bankshares, Inc. which we acquired on August 11, 2000. Though due diligence was
performed, the loan problems were undetected due to fraud committed by the borrowers and a
former officer of Independent Bankshares, Inc. As a result of these charged-off loans, we also
required that other related loans be paid off thereby generating a further reduction in loans
acquired through that acquisition.The overall reduction in loans and the nonaccrual status of the loans discussed above
impacted the fair value of the acquisition of Independent Bankshares, Inc. and because of
the timing of the loan problems, an impairment to goodwill of $15,642,000 was recorded under
the guidance established by SFAS No. 142 as of January 1, 2002.(3)
    
    Return on average equity is determined by dividing net income by average stockholders
equity.(4)
    
    Return on average assets is determined by dividing net income by average assets.(5)
    
    Net interest margin is determined by dividing net interest income (fully taxable equivalent)
by average interest-earning assets.(6)
    
    The efficiency ratio is determined by dividing total noninterest expense less intangible
amortization by an amount equal to net interest income (fully taxable equivalent) plus
noninterest income.(7)
    
    See Business  Supervision and Regulation, for an explanation of these ratios. As of
December 31, 2005, all $47.0 million of our junior subordinated debentures associated with the
trust preferred securities issuance counted as Tier 1 capital under current Federal Reserve
Board guidelines. 28




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##### Table of Contents



ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operation.
 Selected Financial Data, Risk Factors,
 General
 Executive Overview
   Consolidation of Variable Interest Entities
  2005 Key Performance Indicators
  
    
    our total assets grew to $1.663 billion at the end of 2005,
representing an increase of 23.14%, from $1.350 billion at the end of
2004;
    
    our net loans grew to $1.062 billion at the end of 2005, representing
an increase of 14.64%, from $926 million at the end of 2004;
 29




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##### Table of Contents




    
    our total deposits grew to $1.357 billion at the end of 2005,
representing an increase of 20.48%, from $1.126 billion at the end of
2004;
    
    our total revenue grew to $98 million in 2005, representing an
increase of 27.29%, from $77 million in 2004;
    
    our net interest spread on a fully taxable equivalent basis increased
to 4.78% in 2005, compared to 4.57% in 2004;
    
    our total noninterest expense grew to $57.0 million in 2005,
representing an increase of 19.85%, from $47.6 million in 2004.
 Managements
Discussion and Analysis of Financial Condition and Results of Operations
 Critical Accounting Policies
   Loans and Allowance for Loan Losses
    
    
    managements evaluation of specific loans;
 
    
    the level and composition of nonperforming loans;
 
    
    the financial condition of borrowers on the problem loan list;
 
    
    the value and liquidity of collateral;
 
    
    delinquency;
 
    
    historical loss experience;
 30




---



##### Table of Contents




    
    results of examinations by regulatory agencies;
 
    
    our internal asset review process that is independent of the management of State National Bank;
 
    
    expectations of current economic conditions and their impact on particular industries and individual borrowers;
 
    
    the strength of available guarantees;
 
    
    concentrations of credit; and
 
    
    other factors that include allowances assigned to specific loans and nonspecific allowances, which are based on the
above factors.
  Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 Share-Based Payment (Revised 2004)
 Impairment of Goodwill
  31




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##### Table of Contents



Accounting for the Impairment or Disposal of Long-Lived Assets
 Company
  Results of Operations as of and for the Years Ended December 31, 2005, 2004 and 2003
   Net Interest Income and Net Interest Margin
     32




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##### Table of Contents



33




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003Interest
    
    
    
    
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    
    
    
    
    InterestAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate(1)
    
    
    Balance
    
    
    Expense
    
    
    Rate(1)
    
    
    Balance
    
    
    Expense
    
    
    Rate(1)(Dollars in thousands)ASSETS:Interest earning assets:Loans, net of unearned
income
    
    $
    989,406
    
    
    $
    70,990
    
    
    
    7.18
    %
    
    $
    825,981
    
    
    $
    52,951
    
    
    
    6.41
    %
    
    $
    694,634
    
    
    $
    46,393
    
    
    
    6.68
    %Securities
    
    
    163,419
    
    
    
    6,747
    
    
    
    4.13
    
    
    
    194,622
    
    
    
    7,508
    
    
    
    3.86
    
    
    
    241,735
    
    
    
    10,484
    
    
    
    4.34Time deposits in
other banks
    
    
    16,979
    
    
    
    398
    
    
    
    2.34
    
    
    
    13,501
    
    
    
    175
    
    
    
    1.30
    
    
    
    11,388
    
    
    
    118
    
    
    
    1.04Fed funds sold
    
    
    28,416
    
    
    
    1,102
    
    
    
    3.88
    
    
    
    31,603
    
    
    
    409
    
    
    
    1.29
    
    
    
    26,211
    
    
    
    250
    
    
    
    0.95Total interest-earning
assets
    
    
    1,198,220
    
    
    
    79,237
    
    
    
    6.61
    
    
    
    1,065,707
    
    
    
    61,043
    
    
    
    5.73
    
    
    
    973,968
    
    
    
    57,245
    
    
    
    5.88Noninterest-earning
assets:Cash and due from
banks
    
    
    63,670
    
    
    
    
    
    
    
    
    
    
    
    53,580
    
    
    
    
    
    
    
    
    
    
    
    44,962Intangible assets
    
    
    92,949
    
    
    
    
    
    
    
    
    
    
    
    63,781
    
    
    
    
    
    
    
    
    
    
    
    52,848Premises and
equipment, net
    
    
    38,067
    
    
    
    
    
    
    
    
    
    
    
    27,597
    
    
    
    
    
    
    
    
    
    
    
    26,374Accrued interest
receivable and other
assets
    
    
    48,051
    
    
    
    
    
    
    
    
    
    
    
    41,617
    
    
    
    
    
    
    
    
    
    
    
    42,589Allowance for loan
losses
    
    
    (11,915
    )
    
    
    
    
    
    
    
    
    
    
    (10,999
    )
    
    
    
    
    
    
    
    
    
    
    (10,832
    )Total
noninterest-earning
assets
    
    
    230,822
    
    
    
    
    
    
    
    
    
    
    
    175,576
    
    
    
    
    
    
    
    
    
    
    
    155,941TOTAL ASSETS
    
    $
    1,429,042
    
    
    
    
    
    
    
    
    
    
    $
    1,241,283
    
    
    
    
    
    
    
    
    
    
    $
    1,129,909LIABILITIES AND
STOCKHOLDERS EQUITY:Interest-bearing
liabilities:Demand, savings and
money market deposits
    
    $
    463,836
    
    
    $
    4,241
    
    
    
    0.91
    %
    
    $
    420,091
    
    
    $
    1,854
    
    
    
    0.44
    %
    
    $
    351,245
    
    
    $
    1,523
    
    
    
    0.43
    %Time deposits
    
    
    295,619
    
    
    
    7,057
    
    
    
    2.39
    
    
    
    293,157
    
    
    
    4,782
    
    
    
    1.63
    
    
    
    335,240
    
    
    
    6,808
    
    
    
    2.03Fed funds purchased
and securities under
agreement to
repurchase
    
    
    23,174
    
    
    
    635
    
    
    
    2.74
    
    
    
    22,181
    
    
    
    176
    
    
    
    0.79
    
    
    
    22,315
    
    
    
    125
    
    
    
    0.56Junior subordinated
debentures
    
    
    47,000
    
    
    
    3,212
    
    
    
    6.83
    
    
    
    44,423
    
    
    
    2,233
    
    
    
    5.03
    
    
    
    37,707
    
    
    
    2,252
    
    
    
    5.97Note payable
    
    
    1,688
    
    
    
    83
    
    
    
    4.92
    
    
    
    952
    
    
    
    48
    
    
    
    5.04
    
    
    
    1,139
    
    
    
    47
    
    
    
    4.13Total interest-bearing
liabilities
    
    
    831,317
    
    
    
    15,228
    
    
    
    1.83
    
    
    
    780,804
    
    
    
    9,093
    
    
    
    1.16
    
    
    
    747,646
    
    
    
    10,755
    
    
    
    1.44Noninterest-bearing
liabilities:Demand deposits
    
    
    416,168
    
    
    
    
    
    
    
    
    
    
    
    316,207
    
    
    
    
    
    
    
    
    
    
    
    249,465Accrued interest
payable and other
liabilities
    
    
    10,043
    
    
    
    
    
    
    
    
    
    
    
    8,611
    
    
    
    
    
    
    
    
    
    
    
    12,344Total
noninterest-bearing
liabilities, net
    
    
    426,211
    
    
    
    
    
    
    
    
    
    
    
    324,818
    
    
    
    
    
    
    
    
    
    
    
    261,809TOTAL LIABILITIES
    
    
    1,257,528
    
    
    
    
    
    
    
    
    
    
    
    1,105,622
    
    
    
    
    
    
    
    
    
    
    
    1,009,455STOCKHOLDERS EQUITY
    
    
    171,514
    
    
    
    
    
    
    
    
    
    
    
    135,661
    
    
    
    
    
    
    
    
    
    
    
    120,454TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
    
    $
    1,429,042
    
    
    
    
    
    
    
    
    
    
    $
    1,241,283
    
    
    
    
    
    
    
    
    
    
    $
    1,129,909Net interest income
    
    
    
    
    
    $
    64,009
    
    
    
    
    
    
    
    
    
    
    $
    51,950
    
    
    
    
    
    
    
    
    
    
    $
    46,490Net interest spread(2)
    
    
    
    
    
    
    
    
    
    
    4.78
    %
    
    
    
    
    
    
    
    
    
    
    4.57
    %
    
    
    
    
    
    
    
    
    
    
    4.44
    %Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    5.34
    %
    
    
    
    
    
    
    
    
    
    
    4.87
    %
    
    
    
    
    
    
    
    
    
    
    4.77
    %
 
 (1)
    
    Yields on tax-exempt securities are calculated on a fully taxable equivalent basis assuming
a 35% tax rate.(2)
    
    Represents the average rate earned on interest-earning assets less the average rate paid on
interest-bearing liabilities.(3)
    
    Represents net interest income on a fully taxable equivalent basis as a percentage of average
interest-earning assets.  34




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##### Table of Contents



Years Ended December 31,2005 vs. 2004
    
    
    2004 vs. 2003Increase (Decrease) Due To
    
    
    Increase (Decrease) Due ToChanges In:
    
    
    Changes In:Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(In thousands)Interest-earning assets:Loans, net of unearned income
    
    $
    10,477
    
    
    $
    7,562
    
    
    $
    18,039
    
    
    $
    8,772
    
    
    $
    (2,214
    )
    
    $
    6,558Securities
    
    
    (1,204
    )
    
    
    443
    
    
    
    (761
    )
    
    
    (2,043
    )
    
    
    (933
    )
    
    
    (2,976
    )Time deposits in other banks
    
    
    45
    
    
    
    178
    
    
    
    223
    
    
    
    22
    
    
    
    35
    
    
    
    57Fed funds sold
    
    
    (41
    )
    
    
    734
    
    
    
    693
    
    
    
    51
    
    
    
    108
    
    
    
    159Total interest income
    
    
    9,277
    
    
    
    8,917
    
    
    
    18,194
    
    
    
    6,802
    
    
    
    (3,004
    )
    
    
    3,798Interest-bearing liabilities:Demand, savings and money market
deposits
    
    
    193
    
    
    
    2,194
    
    
    
    2,387
    
    
    
    299
    
    
    
    32
    
    
    
    331Time deposits
    
    
    40
    
    
    
    2,235
    
    
    
    2,275
    
    
    
    (855
    )
    
    
    (1,171
    )
    
    
    (2,026
    )Fed funds purchased and securities sold
under agreement to repurchase
    
    
    8
    
    
    
    451
    
    
    
    459
    
    
    
    (1
    )
    
    
    52
    
    
    
    51Junior subordinated debentures
    
    
    130
    
    
    
    849
    
    
    
    979
    
    
    
    401
    
    
    
    (420
    )
    
    
    (19
    )Notes payable
    
    
    37
    
    
    
    (2
    )
    
    
    35
    
    
    
    (8
    )
    
    
    9
    
    
    
    1Total interest expense
    
    
    408
    
    
    
    5,727
    
    
    
    6,135
    
    
    
    (164
    )
    
    
    (1,498
    )
    
    
    (1,662
    )Increase (Decrease) in net interest income
    
    $
    8,869
    
    
    $
    3,190
    
    
    $
    12,059
    
    
    $
    6,965
    
    
    $
    (1,505
    )
    
    $
    5,460
 Provision for Loan Losses
 Critical Accounting PoliciesLoans and
Allowance for Loan Losses.
  Noninterest Income
    35




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Service charges on deposit accounts
    
    $
    10,166
    
    
    
    54.4
    %
    
    $
    9,333
    
    
    
    59.0
    %
    
    $
    8,749
    
    
    
    55.4
    %Gain on sale of loans
    
    
    2,950
    
    
    
    15.8
    
    
    
    2,261
    
    
    
    14.3
    
    
    
    3,159
    
    
    
    20.0Bank owned life insurance
    
    
    1,364
    
    
    
    7.3
    
    
    
    1,259
    
    
    
    8.0
    
    
    
    1,176
    
    
    
    7.4Net realized gain on sale of securities
    
    
    1
    
    
    
    0.0
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    0.1Impairment of investment securities
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    Other
    
    
    4,208
    
    
    
    22.5
    
    
    
    2,983
    
    
    
    18.9
    
    
    
    2,703
    
    
    
    17.1Total noninterest income
    
    $
    18,689
    
    
    
    100.0
    %
    
    $
    15,810
    
    
    
    100.0
    %
    
    $
    15,798
    
    
    
    100.0
    %
 Noninterest Expense
  36




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##### Table of Contents



37




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Salaries and employee benefits:Salaries
    
    $
    24,681
    
    
    
    43.3
    %
    
    $
    20,372
    
    
    
    42.8
    %
    
    $
    18,465
    
    
    
    38.2
    %Medical and other benefits
    
    
    2,340
    
    
    
    4.1
    
    
    
    1,905
    
    
    
    4.0
    
    
    
    1,831
    
    
    
    3.8Pension
    
    
    1,088
    
    
    
    1.9
    
    
    
    843
    
    
    
    1.8
    
    
    
    799
    
    
    
    1.7Payroll taxes
    
    
    1,681
    
    
    
    2.9
    
    
    
    1,387
    
    
    
    2.9
    
    
    
    1,321
    
    
    
    2.7Total salaries and employee benefits
    
    
    29,790
    
    
    
    52.2
    
    
    
    24,507
    
    
    
    51.5
    
    
    
    22,416
    
    
    
    46.4Net occupancy and equipment expense
    
    
    9,175
    
    
    
    16.1
    
    
    
    7,678
    
    
    
    16.1
    
    
    
    7,529
    
    
    
    15.6Amortization of intangibles
    
    
    3,518
    
    
    
    6.2
    
    
    
    2,888
    
    
    
    6.1
    
    
    
    2,685
    
    
    
    5.6Professional fees
    
    
    1,298
    
    
    
    2.3
    
    
    
    1,143
    
    
    
    2.4
    
    
    
    1,023
    
    
    
    2.1Communication expense
    
    
    1,227
    
    
    
    2.2
    
    
    
    1,016
    
    
    
    2.1
    
    
    
    1,129
    
    
    
    2.3Advertising
    
    
    1,332
    
    
    
    2.3
    
    
    
    882
    
    
    
    1.9
    
    
    
    1,063
    
    
    
    2.2Supplies
    
    
    807
    
    
    
    1.4
    
    
    
    823
    
    
    
    1.7
    
    
    
    803
    
    
    
    1.7Data processing
    
    
    867
    
    
    
    1.5
    
    
    
    788
    
    
    
    1.7
    
    
    
    973
    
    
    
    2.0Courier
    
    
    817
    
    
    
    1.4
    
    
    
    736
    
    
    
    1.6
    
    
    
    767
    
    
    
    1.6Postage
    
    
    745
    
    
    
    1.3
    
    
    
    671
    
    
    
    1.4
    
    
    
    694
    
    
    
    1.4Restructuring/merger expenses
    
    
    289
    
    
    
    0.5
    
    
    
    285
    
    
    
    0.6
    
    
    
    1,020
    
    
    
    2.1Other real estate
    
    
    8
    
    
    
    0.0
    
    
    
    263
    
    
    
    0.5
    
    
    
    359
    
    
    
    0.7Loss on retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,503
    
    
    
    5.2Other
    
    
    7,158
    
    
    
    12.6
    
    
    
    5,904
    
    
    
    12.4
    
    
    
    5,355
    
    
    
    11.1Total noninterest expense
    
    $
    57,031
    
    
    
    100.0
    %
    
    $
    47,584
    
    
    
    100.0
    %
    
    $
    48,319
    
    
    
    100.0
    %
 Provision for Income Taxes
  Financial Condition
    38




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##### Table of Contents



Loans
    As of December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars In thousands)Real estateconstruction
    
    $
    144,721
    
    
    $
    132,214
    
    
    $
    107,382
    
    
    $
    103,111
    
    
    $
    96,699Real estate1-4 family
    
    
    125,901
    
    
    
    94,427
    
    
    
    81,022
    
    
    
    92,402
    
    
    
    104,188Real estateother
    
    
    415,047
    
    
    
    332,870
    
    
    
    241,010
    
    
    
    192,051
    
    
    
    156,929Commercial loans
    
    
    263,975
    
    
    
    260,923
    
    
    
    200,297
    
    
    
    186,409
    
    
    
    192,580Consumer loans
    
    
    40,321
    
    
    
    39,135
    
    
    
    37,845
    
    
    
    42,399
    
    
    
    60,977Agriculture and other loans
    
    
    84,646
    
    
    
    78,215
    
    
    
    69,013
    
    
    
    42,700
    
    
    
    33,444Total loans
    
    
    1,074,611
    
    
    
    937,784
    
    
    
    736,569
    
    
    
    659,072
    
    
    
    644,817Less: Allowance for loan losses
    
    
    (12,591
    )
    
    
    (11,383
    )
    
    
    (10,026
    )
    
    
    (10,914
    )
    
    
    (10,756
    )Deferred dealer premiums and loan costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (24
    )Loans, net
    
    $
    1,062,020
    
    
    $
    926,401
    
    
    $
    726,543
    
    
    $
    648,155
    
    
    $
    634,037
     39




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##### Table of Contents



As of December 31, 2005One Year and
    
    
    One to
    
    
    Over
    
    
    TotalLess
    
    
    Five Years
    
    
    Five Years
    
    
    Carrying Value(In thousands)Real estateconstruction
    
    $
    105,815
    
    
    $
    23,905
    
    
    $
    15,001
    
    
    $
    144,721Real estate1-4 family
    
    
    20,919
    
    
    
    53,491
    
    
    
    51,491
    
    
    
    125,901Real estateother
    
    
    61,703
    
    
    
    222,518
    
    
    
    130,826
    
    
    
    415,047Commercial loans
    
    
    141,595
    
    
    
    88,052
    
    
    
    34,328
    
    
    
    263,975Consumer loans
    
    
    18,247
    
    
    
    19,477
    
    
    
    2,597
    
    
    
    40,321Agriculture and other loans
    
    
    74,089
    
    
    
    7,297
    
    
    
    3,260
    
    
    
    84,646Total loans
    
    $
    422,368
    
    
    $
    414,740
    
    
    $
    237,503
    
    
    $
    1,074,611With fixed interest rates
    
    $
    98,785
    
    
    $
    225,436
    
    
    $
    68,454
    
    
    $
    392,675With variable interest rates
    
    
    323,583
    
    
    
    189,304
    
    
    
    169,049
    
    
    
    681,936Total loans
    
    $
    422,368
    
    
    $
    414,740
    
    
    $
    237,503
    
    
    $
    1,074,611
 Underwriting Strategy
 BusinessLending ActivitiesUnderwriting Strategy
 Nonperforming Assets
   Other Real Estate and Other Repossessed Assets
 40




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##### Table of Contents



As of December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Nonaccrual loans
    
    $
    8,654
    
    
    $
    6,926
    
    
    $
    5,454
    
    
    $
    8,528
    
    
    $
    8,629Accruing loans past due over 90 days
    
    
    
    
    
    
    68
    
    
    
    245
    
    
    
    156
    
    
    
    702Restructured loans
    
    
    88
    
    
    
    226
    
    
    
    384
    
    
    
    103
    
    
    
    793Other real estate
    
    
    927
    
    
    
    1,943
    
    
    
    2,220
    
    
    
    3,640
    
    
    
    1,057Other repossessed assets
    
    
    8
    
    
    
    9
    
    
    
    12
    
    
    
    50
    
    
    
    54Total nonperforming assets
    
    $
    9,677
    
    
    $
    9,172
    
    
    $
    8,315
    
    
    $
    12,477
    
    
    $
    11,235Total nonperforming assets to total loans and other real estate
    
    
    0.90
    %
    
    
    0.98
    %
    
    
    1.13
    %
    
    
    1.88
    %
    
    
    1.74
    %
        41




---



##### Table of Contents



Other Real Estate and Other Repossessed Assets
   Allowance for Loan Losses
     42




---



##### Table of Contents



43




---



##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Analysis of allowance for loan losses:Balance, beginning of period
    
    $
    11,383
    
    
    $
    10,026
    
    
    $
    10,914
    
    
    $
    10,756
    
    
    $
    11,658Provision for loan losses
    
    
    900
    
    
    
    450
    
    
    
    118
    
    
    
    1,118
    
    
    
    11,730Loan loss reserves of acquired banks
    
    
    1,670
    
    
    
    2,410
    
    
    
    
    
    
    
    
    
    
    
    1,582Loans charged-off:Real estateconstruction
    
    
    72
    
    
    
    23
    
    
    
    8
    
    
    
    86
    
    
    
    175Real estate1-4 family
    
    
    96
    
    
    
    69
    
    
    
    176
    
    
    
    41
    
    
    
    634Real estateother
    
    
    0
    
    
    
    222
    
    
    
    131
    
    
    
    225
    
    
    
    81Commercial loans
    
    
    1,067
    
    
    
    1,410
    
    
    
    1,050
    
    
    
    1,584
    
    
    
    9,669Consumer loans
    
    
    820
    
    
    
    639
    
    
    
    553
    
    
    
    858
    
    
    
    1,892Agriculture and other loans
    
    
    500
    
    
    
    2
    
    
    
    27
    
    
    
    
    
    
    
    3,152Total charge-offs
    
    
    2,555
    
    
    
    2,365
    
    
    
    1,945
    
    
    
    2,794
    
    
    
    15,603Recoveries of loans previously charged-off:Real estateconstruction
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    Real estate1-4 family
    
    
    18
    
    
    
    28
    
    
    
    179
    
    
    
    7
    
    
    
    5Real estateother
    
    
    12
    
    
    
    12
    
    
    
    7
    
    
    
    
    
    
    
    Commercial loans
    
    
    535
    
    
    
    609
    
    
    
    349
    
    
    
    1,410
    
    
    
    1,101Consumer loans
    
    
    573
    
    
    
    208
    
    
    
    305
    
    
    
    285
    
    
    
    275Agriculture and other loans
    
    
    10
    
    
    
    5
    
    
    
    99
    
    
    
    118
    
    
    
    8Total recoveries
    
    
    1,193
    
    
    
    862
    
    
    
    939
    
    
    
    1,834
    
    
    
    1,389Net loans charged-off
    
    
    1,362
    
    
    
    1,503
    
    
    
    1,006
    
    
    
    960
    
    
    
    14,214Balance, end of period
    
    $
    12,591
    
    
    $
    11,383
    
    
    $
    10,026
    
    
    $
    10,914
    
    
    $
    10,756Average loans outstanding, net of unearned
income, for the period ended
    
    $
    989,406
    
    
    $
    825,981
    
    
    $
    694,533
    
    
    $
    651,181
    
    
    $
    654,376Ratio of net loan charge-offs to average
loans, net of unearned income, for the
period ended December 31
    
    
    0.14
    %
    
    
    0.18
    %
    
    
    0.14
    %
    
    
    0.15
    %
    
    
    2.17
    %Ratio of allowance for loan losses to
total loans, net of unearned income
    
    
    1.17
    %
    
    
    1.21
    %
    
    
    1.36
    %
    
    
    1.66
    %
    
    
    1.67
    %
 44




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##### Table of Contents



Allowance
for Loan Losses.
 As of December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    Loan
    
    
    
    
    
    
    LoanCategory
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Categoryto Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Real
estateconstruction
    
    $
    472
    
    
    
    13.5
    %
    
    $
    554
    
    
    
    14.1
    %
    
    $
    413
    
    
    
    14.6
    %
    
    $
    651
    
    
    
    15.6
    %
    
    $
    1,021
    
    
    
    15.0
    %Real estate1-4
family
    
    
    1,104
    
    
    
    11.7
    
    
    
    830
    
    
    
    10.1
    
    
    
    713
    
    
    
    11.0
    
    
    
    935
    
    
    
    14.0
    
    
    
    1,032
    
    
    
    16.1Real estateother
    
    
    2,843
    
    
    
    38.6
    
    
    
    2,002
    
    
    
    35.5
    
    
    
    1,818
    
    
    
    32.7
    
    
    
    1,707
    
    
    
    29.2
    
    
    
    1,485
    
    
    
    24.3Commercial loans
    
    
    3,006
    
    
    
    24.5
    
    
    
    2,415
    
    
    
    27.8
    
    
    
    1,981
    
    
    
    27.2
    
    
    
    2,157
    
    
    
    28.3
    
    
    
    2,708
    
    
    
    29.9Loans to individuals
    
    
    342
    
    
    
    3.8
    
    
    
    454
    
    
    
    4.2
    
    
    
    502
    
    
    
    5.1
    
    
    
    906
    
    
    
    6.4
    
    
    
    1,333
    
    
    
    9.5Agriculture and
other loans
    
    
    776
    
    
    
    7.9
    
    
    
    995
    
    
    
    8.3
    
    
    
    967
    
    
    
    9.4
    
    
    
    370
    
    
    
    6.5
    
    
    
    141
    
    
    
    5.2Total allocated
    
    
    8,543
    
    
    
    100.0
    %
    
    
    7,250
    
    
    
    100.0
    %
    
    
    6,394
    
    
    
    100.0
    %
    
    
    6,726
    
    
    
    100.0
    %
    
    
    7,720
    
    
    
    100.0
    %Unallocated
    
    
    4,048
    
    
    
    
    
    
    
    4,133
    
    
    
    
    
    
    
    3,632
    
    
    
    
    
    
    
    4,188
    
    
    
    
    
    
    
    3,036Total allowance
for loan losses
    
    $
    12,591
    
    
    
    
    
    
    $
    11,383
    
    
    
    
    
    
    $
    10,026
    
    
    
    
    
    
    $
    10,914
    
    
    
    
    
    
    $
    10,756
 Investment Securities
 Deposits
  Available-for-Sale
    
    
    Held-to-Maturity
    
    
    TotalAmortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value(In thousands)December 31, 2005:U.S. treasury securities
    
    $
    7,051
    
    
    $
    6,969
    
    
    $
    
    
    
    $
    
    
    
    $
    7,051
    
    
    $
    6,969U.S. government agencies obligations
    
    
    109,516
    
    
    
    108,622
    
    
    
    
    
    
    
    
    
    
    
    109,516
    
    
    
    108,622Collateralized mortgage obligations
    
    
    165
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    165
    
    
    
    166Mortgage-backed securities
    
    
    64,357
    
    
    
    63,292
    
    
    
    
    
    
    
    
    
    
    
    64,357
    
    
    
    63,292State and municipal obligations
    
    
    26,294
    
    
    
    26,348
    
    
    
    
    
    
    
    
    
    
    
    26,294
    
    
    
    26,348Federal Reserve Bank stock and
other investments
    
    
    1,414
    
    
    
    1,390
    
    
    
    8,094
    
    
    
    8,094
    
    
    
    9,508
    
    
    
    9,484Total
    
    $
    208,797
    
    
    $
    206,787
    
    
    $
    8,094
    
    
    $
    8,094
    
    
    $
    216,891
    
    
    $
    214,881December 31, 2004:U.S. treasury securities
    
    $
    7,270
    
    
    $
    7,228
    
    
    $
    
    
    
    $
    
    
    
    $
    7,270
    
    
    $
    7,228U.S. government agencies obligations
    
    
    76,647
    
    
    
    77,421
    
    
    
    
    
    
    
    
    
    
    
    76,647
    
    
    
    77,421Collateralized mortgage obligations
    
    
    1,398
    
    
    
    1,396
    
    
    
    
    
    
    
    
    
    
    
    1,398
    
    
    
    1,396Mortgage-backed securities
    
    
    60,837
    
    
    
    60,501
    
    
    
    
    
    
    
    
    
    
    
    60,837
    
    
    
    60,501State and municipal obligations
    
    
    3,034
    
    
    
    3,101
    
    
    
    
    
    
    
    
    
    
    
    3,034
    
    
    
    3,101Federal Reserve Bank stock and
other investments
    
    
    1,361
    
    
    
    1,361
    
    
    
    8,306
    
    
    
    8,306
    
    
    
    9,667
    
    
    
    9,667Total
    
    $
    150,547
    
    
    $
    151,008
    
    
    $
    8,306
    
    
    $
    8,306
    
    
    $
    158,853
    
    
    $
    159,314December 31, 2003:U.S. treasury securities
    
    $
    7,597
    
    
    $
    7,639
    
    
    $
    
    
    
    $
    
    
    
    $
    7,597
    
    
    $
    7,639U.S. government agencies obligations
    
    
    104,488
    
    
    
    107,784
    
    
    
    
    
    
    
    
    
    
    
    104,488
    
    
    
    107,784Collateralized mortgage obligations
    
    
    8,205
    
    
    
    8,268
    
    
    
    
    
    
    
    
    
    
    
    8,205
    
    
    
    8,268Mortgage-backed securities
    
    
    83,718
    
    
    
    83,989
    
    
    
    
    
    
    
    
    
    
    
    83,718
    
    
    
    83,989State and municipal obligations
    
    
    1,920
    
    
    
    2,048
    
    
    
    
    
    
    
    
    
    
    
    1,920
    
    
    
    2,048Federal Reserve Bank stock and
other investments
    
    
    1,341
    
    
    
    1,311
    
    
    
    7,073
    
    
    
    7,073
    
    
    
    8,414
    
    
    
    8,384Total
    
    $
    207,269
    
    
    $
    211,039
    
    
    $
    7,073
    
    
    $
    7,073
    
    
    $
    214,342
    
    
    $
    218,112
 45




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##### Table of Contents



Investment PortfolioMaturity and Yields
  As ofDecember 31, 2005After One but
    
    
    After Five butWithin
    
    
    Within Five
    
    
    Within
    
    
    AfterOne Year
    
    
    Years
    
    
    Ten Years
    
    
    Ten Years
    
    
    TotalAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield(Dollars in thousands)Investments
available-for-sale(1)(2):U.S. treasury obligations
    
    $
    4,028
    
    
    
    2.31
    %
    
    $
    2,941
    
    
    
    3.78
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    6,969
    
    
    
    2.93
    %U.S. government agencies
obligations
    
    
    32,452
    
    
    
    4.14
    
    
    
    76,170
    
    
    
    4.33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,622
    
    
    
    4.27Mortgage backed securities
and collateralized mortgage
obligations(3)
    
    
    410
    
    
    
    5.35
    
    
    
    62,134
    
    
    
    4.35
    
    
    
    911
    
    
    
    4.93
    
    
    
    3
    
    
    
    5.25
    
    
    
    63,458
    
    
    
    4.37State and municipal
obligations
    
    
    2,954
    
    
    
    3.38
    
    
    
    16,404
    
    
    
    3.38
    
    
    
    5,992
    
    
    
    3.92
    
    
    
    998
    
    
    
    5.34
    
    
    
    26,348
    
    
    
    3.58Other securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,390
    
    
    
    4.01
    
    
    
    1,390
    
    
    
    4.01Total investments
available-for-sale
    
    
    39,844
    
    
    
    3.91
    
    
    
    157,649
    
    
    
    4.23
    
    
    
    6,903
    
    
    
    4.05
    
    
    
    2,391
    
    
    
    4.57
    
    
    
    206,787
    
    
    
    4.17Other investments:FHLB stock and other
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,094
    
    
    
    5.23
    
    
    
    8,094
    
    
    
    5.23Total other investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,094
    
    
    
    5.23
    
    
    
    8,094
    
    
    
    5.23Total investments
    
    $
    39,844
    
    
    
    3.91
    
    
    $
    157,649
    
    
    
    4.23
    
    
    $
    6,903
    
    
    
    4.05
    
    
    $
    10,485
    
    
    
    5.08
    
    
    $
    214,881
    
    
    
    4.21
 
 (1)
    
    Based on estimated fair value.(2)
    
    The yields shown in the above table are not calculated on a fully taxable equivalent basis.(3)
    
    Maturities of mortgage-backed securities and collateralized mortgage obligations, or CMOs,
are based on anticipated lives of the underlying mortgages, not contractual maturities. CMO
maturities are based on cash flow (or payment) windows derived from broker market consensus. Goodwill and Other Intangibles
  2005
    
    
    2004(In thousands)Balance, January 1
    
    $
    70,818
    
    
    $
    37,934Heritage & Mercantile acquisition(1)
    
    
    29,668
    
    
    
    32,844Balance, December 31
    
    $
    100,486
    
    
    $
    70,818
 
 (1)
    
    The goodwill related to the Heritage acquisition is subject to change in 2006. 46




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##### Table of Contents



Deposits
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Percent
    
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    PercentAverage
    
    
    of
    
    
    Average
    
    
    Average
    
    
    of
    
    
    Average
    
    
    Average
    
    
    of
    
    
    AverageBalance
    
    
    Deposits
    
    
    Rate
    
    
    Balance
    
    
    Deposits
    
    
    Rate
    
    
    Balance
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Noninterest-bearing demand
deposits
    
    $
    416,168
    
    
    
    35.4
    %
    
    
    
    %
    
    $
    316,207
    
    
    
    30.7
    %
    
    
    
    %
    
    $
    249,465
    
    
    
    26.7
    %
    
    
    
    %Interest-bearing
demand, savings and
money market
deposits
    
    
    463,836
    
    
    
    39.4
    
    
    
    0.91
    
    
    
    420,091
    
    
    
    40.8
    
    
    
    0.44
    
    
    
    351,245
    
    
    
    37.5
    
    
    
    0.43Time deposits of
less than $100,000
    
    
    167,646
    
    
    
    14.3
    
    
    
    2.18
    
    
    
    174,920
    
    
    
    17.0
    
    
    
    1.55
    
    
    
    198,461
    
    
    
    21.2
    
    
    
    1.96Time deposits of
$100,000 or more
    
    
    127,973
    
    
    
    10.9
    
    
    
    2.65
    
    
    
    118,237
    
    
    
    11.5
    
    
    
    1.75
    
    
    
    136,779
    
    
    
    14.6
    
    
    
    2.14Total deposits
    
    $
    1,175,623
    
    
    
    100.0
    %
    
    
    0.96
    %
    
    $
    1,029,455
    
    
    
    100.0
    %
    
    
    0.64
    %
    
    $
    935,950
    
    
    
    100.0
    %
    
    
    0.89
    %
  December 31,2005(Inthousands)Three months or less
    
    $
    37,958Over three through six months
    
    
    24,918Over six through 12 months
    
    
    36,452Over 12 months
    
    
    55,266Total time deposits of $100,000 or more
    
    $
    154,594
 Borrowings
 Junior Subordinated Debentures
   47




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##### Table of Contents



JuniorSubordinated
    
    FinalIssuance
    
    
    
    Interest Rate at
    
    
    
    Debt Owed
    
    MaturityDescription
    
    Date
    
    Call Date
    
    December 31, 2005
    
    Floating Interest Rate
    
    to Trusts
    
    DateState National Statutory Trust I
    
    7/31/01
    
    7/31/06
    
    
    8.12
    %
    
    3.58% + 3 month LIBOR
    
    $22.7 million
    
    7/31/31State National Capital Trust I
    
    7/14/03
    
    9/30/08
    
    
    7.59
    %
    
    3.05% + 3 month LIBOR
    
    $15.5 million
    
    9/30/33State National Statutory Trust II
    
    3/17/04
    
    3/17/09
    
    
    7.33
    %
    
    2.79% + 3 month LIBOR
    
    $10.3 million
    
    3/17/34
   Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51 (Revised December 2003).
 48




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##### Table of Contents



Other Borrowings
    As of and for the YearsEndedDecember 31,2005
    
    2004
    
    2003(Dollars in thousands)Ending balance
    
    $
    5,841
    
    
    $
    899
    
    
    $
    1,013Average balance for the period
    
    
    1,688
    
    
    
    952
    
    
    
    1,139Maximum month-end balance during the period
    
    
    5,896
    
    
    
    1,125
    
    
    
    1,207Average interest rate for the period
    
    
    4.9
    %
    
    
    5.0
    %
    
    
    4.1
    %Weighted average interest rate at the end of the period
    
    
    3.1
    
    
    
    4.7
    
    
    
    4.3
 Capital Resources and Capital Adequacy Requirements
    49




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##### Table of Contents



Minimum
    
    Well-As of December 31,
    
    Capital
    
    Capitalized2005
    
    2004
    
    Ratios
    
    Ratios(Dollars in thousands)Tier 1 capital
    
    $
    142,690
    
    
    $
    113,536Total capital
    
    
    155,281
    
    
    
    124,919Total risk-weighted assets
    
    
    1,191,030
    
    
    
    1,042,935Adjusted quarterly average assets
    
    
    1,525,043
    
    
    
    1,287,094Capital ratios:Leverage ratio
    
    
    9.36
    %
    
    
    8.82
    %
    
    
    4.00
    %
    
    
    5.00
    %Tier 1 capital to risk-weighted assets
    
    
    11.98
    
    
    
    10.89
    
    
    
    4.00
    
    
    
    6.00Total capital to risk-weighted assets
    
    
    13.04
    
    
    
    11.98
    
    
    
    8.00
    
    
    
    10.00
  Minimum Ratios for
    
    Actual Ratios atWell-Capitalized Banks
    
    December 31, 2005Leverage ratio
    
    
    5.00
    %
    
    
    8.32
    %Tier 1 capital to risk-weighted assets
    
    
    6.00
    
    
    
    10.67Total capital to risk-weighted assets
    
    
    10.00
    
    
    
    11.73
   Liquidity Management
  50




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##### Table of Contents



51




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##### Table of Contents



Aggregate Contractual Obligations
  As of December 31, 2005Over ThreeLess than
    
    
    One Year to
    
    
    Years
    
    
    Over FiveOne Year
    
    
    Three Years
    
    
    to Five Years
    
    
    Years
    
    
    Total(Dollars in thousands)FHLB advances
    
    $
    4,796
    
    
    $
    371
    
    
    $
    497
    
    
    $
    201
    
    
    $
    5,865Junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,000
    
    
    
    47,000Operating leases
    
    
    1,474
    
    
    
    2,667
    
    
    
    1,774
    
    
    
    768
    
    
    
    6,683Total
    
    $
    6,270
    
    
    $
    3,038
    
    
    $
    2,271
    
    
    $
    47,969
    
    
    $
    59,548
  Off-Balance Sheet Arrangements
    As of December 31, 2005Total NotionalAmounts
    
    
    Less than
    
    
    
    
    
    
    4-5
    
    
    Over 5Committed
    
    
    1 year
    
    
    1-3 years
    
    
    years
    
    
    years(Dollars in thousands)Commitments to extend credit
    
    $
    253,902
    
    
    $
    206,489
    
    
    $
    40,281
    
    
    $
    1,009
    
    
    $
    6,123Standby letters of credit
    
    
    15,682
    
    
    
    12,573
    
    
    
    3,109
    
    
    
    
    
    
    
    Total commercial commitments
    
    $
    269,584
    
    
    $
    219,062
    
    
    $
    43,390
    
    
    $
    1,009
    
    
    $
    6,123
   52




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##### Table of Contents



Quantitative and Qualitative Disclosure about Market Risks
        53




---



##### Table of Contents



Recent Accounting Pronouncements
 Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20
and FASB Statement No. 3.
 , Share-Based Payment (Revised 2004)
  FASB
Staff Position (FSP) No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.
 54




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##### Table of Contents



Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
 
 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
  
 ITEM 8. Financial Statements and Supplementary Data.
  
 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
  
 ITEM 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control
  55




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##### Table of Contents



ITEM 9B. Other Information.
  
 PART III
 
 ITEM 10. Directors and Executive Officers of the Registrant.
    
 ITEM 11. Executive Compensation.
  
 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stock holder
Matters.
  
 ITEM 13. Certain Relationships and Related Transactions.
  
 ITEM 14. Principal Accountant Fees and Services.
  56




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##### Table of Contents



PART IV
 
 ITEM 15. Exhibits, Financial Statement Schedules
  1.
    
    Financial Statements
  2.
    
    Financial Statement Schedules
  Exhibits
 Incorporated by Reference to:Exhibit
    
    
    
    Form or
    
    
    
    
    
    Filing Date
    
    SEC FileNo.
    
    Description
    
    Schedule
    
    Exhibit No.
    
    with SEC
    
    Number1.2
    
    Indemnification Agreement by and among Keefe, Bruyette
& Woods, Inc., State National Bancshares, Inc.,
Sandler ONeill Partners, L.P. and certain
underwriters
    
    S-1/A
    
    
    1.2
    
    
    9/29/2005
    
    333-1267932.1
    
    Agreement and Plan of Merger, dated as of May 17,
2005, by and between State National Bancshares, Inc.,
New Heritage Financial Corporation, and Heritage
Financial Corporation
    
    S-1
    
    
    2.1
    
    
    7/21/2005
    
    333-1267932.2
    
    Letter Agreement, dated September 20, 2005, by and
between State National Bancshares, Inc., and Heritage
Financial Corporation
    
    S-1/A
    
    
    2.2
    
    
    9/21/2005
    
    333-1267933.1
    
    Amended and Restated Articles of Incorporation of
State National Bancshares, Inc.
    
    S-1
    
    
    3.1
    
    
    7/21/2005
    
    333-1267933.2
    
    Amended and Restated Bylaws of State National
Bancshares, Inc.
    
    S-1
    
    
    3.2
    
    
    7/21/2005
    
    333-1267934.1
    
    Specimen stock certificate representing State National
Bancshares, Inc. Common Stock
    
    S-1
    
    
    4.1
    
    
    7/21/2005
    
    333-1267934.2
    
    Indenture, dated as of July 31, 2001, between State
National Bancshares, Inc. and U.S. Bank National
Association (f/k/a State Street Bank & Trust Company
of Connecticut, National Association)
    
    S-1
    
    
    4.2
    
    
    7/21/2005
    
    333-1267934.3
    
    Amended and Restated Declaration of Trust, dated as of
July 31, 2001, by and among State National Bancshares,
Inc. and U.S. Bank National Association (f/k/a State
Street Bank & Trust Company of Connecticut, National
Association), and Tom C. Nichols, Don E. Cosby, and
Edmund W. McGee, as Administrators
    
    S-1
    
    
    4.3
    
    
    7/21/2005
    
    333-1267934.4
    
    Guarantee Agreement, dated as of July 31, 2001,
between State National Bancshares, Inc. and U.S. Bank
    
    S-1
    
    
    4.4
    
    
    7/21/2005
    
    333-126793
 57




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##### Table of Contents



Incorporated by Reference to:Exhibit
    
    
    
    Form or
    
    
    
    
    
    Filing Date
    
    SEC FileNo.
    
    Description
    
    Schedule
    
    Exhibit No.
    
    with SEC
    
    NumberNational Association (f/k/a State Street Bank & Trust
Company of Connecticut, National Association)4.5
    
    Indenture, dated as of July 14, 2003, between State
National Bancshares, Inc. and The Bank of New York
    
    S-1
    
    
    4.5
    
    
    7/21/2005
    
    333-1267934.6
    
    Amended and Restated Declaration of Trust, dated as of
July 14, 2003, by and among State National Bancshares,
Inc. and The Bank of New York, and The Bank of New
York (Delaware) and Trustees, as Administrators
    
    S-1
    
    
    4.6
    
    
    7/21/2005
    
    333-1267934.7
    
    Guarantee Agreement, dated as of July 14, 2003,
between State National Bancshares, Inc. and The Bank
of New York
    
    S-1
    
    
    4.7
    
    
    7/21/2005
    
    333-1267934.8
    
    Indenture, dated as of March 17, 2004, between State
National Bancshares, Inc. and U.S. Bank National
Association
    
    S-1
    
    
    4.8
    
    
    7/21/2005
    
    333-1267934.9
    
    Amended and Restated Declaration of Trust, dated as of
March 17, 2004, by and among State National
Bancshares, Inc. and U.S. Bank National Association,
and Tom C. Nichols, Don E. Cosby, and Edmund W. McGee,
as Administrators
    
    S-1
    
    
    4.9
    
    
    7/21/2005
    
    333-1267934.10
    
    Guarantee Agreement, dated as of March 17, 2004,
between State National Bancshares, Inc. and U.S. Bank
National Association
    
    S-1
    
    
    4.10
    
    
    7/21/2005
    
    333-126793#10.1
    
    State National Bancshares, Inc. Stock Option Plan
    
    S-1
    
    
    10.1
    
    
    7/21/2005
    
    333-126793#10.2
    
    Form of State National Bancshares, Inc. Non-Statutory
Stock Option Award Agreement
    
    S-1
    
    
    10.2
    
    
    7/21/2005
    
    333-126793#10.3
    
    Form of State National Bancshares, Inc. Director Fee
Stock Plan
    
    S-1
    
    
    10.3
    
    
    7/21/2005
    
    333-126793#10.4
    
    Form of State National Bancshares, Inc. Supplemental
Executive Retirement Plan
    
    S-1
    
    
    10.4
    
    
    7/21/2005
    
    333-12679310.5
    
    Financial Services Agreement, dated May 19,1999,
between State National Bancshares, Inc. and Castle
Creek Financial, LLC (f/k/a Belle Plaine Financial
LLC)
    
    S-1
    
    
    10.5
    
    
    7/21/2005
    
    333-126793#10.6
    
    Employment Agreement, dated June 30, 1999, between
State National Bancshares, Inc. and Tom C. Nichols
    
    S-1
    
    
    10.6
    
    
    7/21/2005
    
    333-126793#10.7
    
    Employment Agreement, dated June 30, 1999, between
State National Bancshares, Inc. and Don E. Cosby
    
    S-1
    
    
    10.7
    
    
    7/21/2005
    
    333-12679310.8
    
    Employment and Non Compete Agreement, dated April 23,
2004, between State National Bancshares, Inc. and Gary
G. Johnson
    
    S-1
    
    
    10.8
    
    
    7/21/2005
    
    333-126793#10.9
    
    Employment and Non Compete Agreement, dated April 23,
2004, between State National Bancshares, Inc. and
Morrie B. Minshew
    
    S-1
    
    
    10.9
    
    
    7/21/2005
    
    333-126793#10.10
    
    Employment and Non Solicitation Agreement, dated April
23, 2004, between State National Bancshares, Inc. and
Douglas L. Terry
    
    S-1
    
    
    10.10
    
    
    7/21/2005
    
    333-126793
 58




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##### Table of Contents



Incorporated by Reference to:Exhibit
    
    
    
    Form or
    
    
    
    
    
    Filing Date
    
    SEC FileNo.
    
    Description
    
    Schedule
    
    Exhibit No.
    
    with SEC
    
    Number#10.11
    
    Employment and Non Solicitation Agreement, dated April
23, 2004, between State National Bancshares, Inc. and
David Woodle
    
    S-1
    
    
    10.11
    
    
    7/21/2005
    
    333-12679310.12
    
    Agreement and Plan of Reorganization, dated as of
April 12, 2004, by and between State National
Bancshares, Inc. and Mercantile Bank Texas
    
    S-1
    
    
    10.12
    
    
    7/21/2005
    
    333-12679310.13
    
    First Amendment to Agreement and Plan of
Reorganization, dated as of June 16, 2004, by and
between State National Bancshares, Inc. and Mercantile
Bank Texas
    
    S-1
    
    
    10.13
    
    
    7/21/2005
    
    333-12679310.14
    
    Agreement and Plan of Share Exchange, dated as of June
16, 2004, by and between State National Bancshares,
Inc. and Mercantile Bank Texas
    
    S-1
    
    
    10.14
    
    
    7/21/2005
    
    333-126793#10.15
    
    Amendment No. 1 to State National Bancshares, Inc.
Stock Option Plan, dated December 30, 2005
    
    S-8
    
    
    4.4
    
    
    1/3/2006
    
    333-130828#10.16
    
    Amendment No. 1 to State National Bancshares, Inc.
Director Fee Plan, dated December 30, 2005
    
    S-8
    
    
    4.5
    
    
    1/3/2006
    
    333-130828*21.1
    
    List of Subsidiaries of State National Bancshares, Inc.*23.1
    
    Consent of Deloitte & Touche, LLP, independent
registered public accounting firm*31.1
    
    Certification of Chief Executive Officer pursuant to
Exchange Act Rules 13a-14 or 15d-14*31.2
    
    Certification of Chief Financial Officer pursuant to
Exchange Act Rules 13a-14 or 15d-14*32.1
    
    Certification of Chief Executive Officer pursuant to
Exchange Act Rules 13a-14(b) or 15d-14(b) and 18
U.S.C. Section 1350*32.2
    
    Certification of Chief Financial Officer pursuant to
Exchange Act Rules 13a-14(b) or 15d-14(b) and U.S.C.
Section 1350
 
 *
    
    Filed with this Annual Report on Form 10-K.#
    
    Constitutes a management contract or compensatory plan or arrangement. 59




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##### Table of Contents



SIGNATURES
  STATE NATIONAL BANCSHARES, INC.Date:  March 29, 2006
    By:
    /s/  Tom C. NicholsTom C. NicholsChairman of the Board, President and Chief
Executive Officer  Date: March 29, 2006
    
    By:
    
    /s/ Don E. CosbyDon E. CosbyDirector, Executive Vice President and ChiefFinancial OfficerDate: March 29, 2006
    
    By:
    
    /s/ Larry G. AutreyLarry G. AutreyDirectorDate: March 29, 2006
    
    By:
    
    /s/ Rick J. CalhoonRick J. CalhoonDirectorDate: March 29, 2006
    
    By:
    
    /s/ James A. CardwellJames A. CardwellDirectorDate: March 29, 2006
    
    By:
    
    /s/ Gary J. FletcherGary J. FletcherDirectorDate: March 29, 2006
    
    By:
    
    /s/ Mark G. MerloMark G. MerloDirectorDate: March 29, 2006
    
    By:
    
    /s/ H. Gil MoutrayH. Gil MoutrayDirectorDate: March 29, 2006
    
    By:
    
    /s/ Ben B. StriblingBen B. StriblingDirectorDate: March 29, 2006
    
    By:
    
    /s/ Lucinda VargasLucinda VargasDirectorDate: March 29, 2006
    
    By:
    
    /s/ F. James VolkF. James VolkDirector, Senior Vice President
 60




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
  Report of Independent Registered Public Accounting Firm.
    
    
    62Consolidated Balance Sheets as of December 31, 2005 and 2004.
    
    
    63Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003
    
    
    64Consolidated Statements of Changes in Shareholders Equity for the Years Ended December
31, 2005, 2004 and 2003.
    
    
    65Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
    
    
    66Notes to Consolidated Financial Statements.
    
    
    68
 61




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 62




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##### Table of Contents



STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 Years EndedDecember 31,2005
    
    
    2004(Dollars in thousands,except share data)Assets:Cash and due from banks
    
    $
    72,922
    
    
    $
    54,892Federal funds sold
    
    
    36,950
    
    
    
    19,100Interest-bearing deposits in other banks
    
    
    44,763
    
    
    
    15,475Cash and cash equivalents
    
    
    154,635
    
    
    
    89,467Securities available-for-sale, at fair value (amortized cost of $208,797
and $150,547 at December 31, 2005 and 2004, respectively)
    
    
    206,787
    
    
    
    151,008Federal Reserve Bank stock and other investments, at cost
    
    
    8,094
    
    
    
    8,306Loans held-for-sale
    
    
    11,584
    
    
    
    8,382Loans:Total loans
    
    
    1,074,611
    
    
    
    937,784Less allowance for loan losses
    
    
    12,591
    
    
    
    11,383Net loans
    
    
    1,062,020
    
    
    
    926,401Premises and equipment, net
    
    
    48,769
    
    
    
    33,915Goodwill
    
    
    100,486
    
    
    
    70,818Other intangible assets, net
    
    
    17,936
    
    
    
    15,486Accrued interest receivable
    
    
    8,919
    
    
    
    6,773Other real estate and other repossessed assets
    
    
    935
    
    
    
    1,952Other assets
    
    
    42,712
    
    
    
    37,872Total assets
    
    $
    1,662,877
    
    
    $
    1,350,380Liabilities and shareholders equityDeposits:Noninterest bearing deposits
    
    $
    487,369
    
    
    $
    390,159Interest-bearing demand deposits
    
    
    523,857
    
    
    
    450,351Interest-bearing time deposits
    
    
    345,852
    
    
    
    285,884Total deposits
    
    
    1,357,078
    
    
    
    1,126,394Federal funds purchased and securities sold under agreement to repurchase
    
    
    28,597
    
    
    
    18,530Accrued interest payable
    
    
    1,645
    
    
    
    835Other liabilities
    
    
    10,459
    
    
    
    5,362Junior subordinated debentures
    
    
    47,000
    
    
    
    47,000Notes payable
    
    
    5,841
    
    
    
    899Total liabilities
    
    
    1,450,620
    
    
    
    1,199,020Shareholders equity:Common stock, $1 par value;Authorized shares20,000,000;Issued shares11,971,107 in 2005 and 10,054,582 in 2004
    
    
    11,971
    
    
    
    10,055Additional paid-in capital
    
    
    177,428
    
    
    
    133,519Retained earnings
    
    
    24,164
    
    
    
    7,482Accumulated other comprehensive (loss) income
    
    
    (1,306
    )
    
    
    304Total shareholders equity
    
    
    212,257
    
    
    
    151,360Total liabilities and shareholders equity
    
    $
    1,662,877
    
    
    $
    1,350,380
  63




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##### Table of Contents



STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Years Ended December 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands, exceptper share data)Interest income:Loans, including fees
    
    $
    70,990
    
    
    $
    52,951
    
    
    $
    46,393Securities
    
    
    6,580
    
    
    
    7,454
    
    
    
    10,404Deposits in other banks
    
    
    398
    
    
    
    175
    
    
    
    118Federal funds sold
    
    
    1,102
    
    
    
    409
    
    
    
    250Total interest income
    
    
    79,070
    
    
    
    60,989
    
    
    
    57,165Interest expense:Deposits
    
    
    11,298
    
    
    
    6,636
    
    
    
    8,331Federal funds purchased and securities sold under agreement to repurchase
    
    
    635
    
    
    
    176
    
    
    
    125Subordinated notes payable
    
    
    3,212
    
    
    
    2,233
    
    
    
    2,252Notes payable
    
    
    83
    
    
    
    48
    
    
    
    47Total interest expense
    
    
    15,228
    
    
    
    9,093
    
    
    
    10,755Net interest income
    
    
    63,842
    
    
    
    51,896
    
    
    
    46,410Provision for loan losses
    
    
    900
    
    
    
    450
    
    
    
    118Net interest income after provision for loan losses
    
    
    62,942
    
    
    
    51,446
    
    
    
    46,292Non-interest income:Service charges on deposit accounts
    
    
    10,166
    
    
    
    9,333
    
    
    
    8,749Gain on sale of loans
    
    
    2,950
    
    
    
    2,261
    
    
    
    3,159Bank owned life insurance
    
    
    1,364
    
    
    
    1,259
    
    
    
    1,176Net realized gain on sale of investment securities
    
    
    1
    
    
    
    
    
    
    
    11Impairment of investment securities
    
    
    
    
    
    
    (26
    )
    
    
    Other
    
    
    4,208
    
    
    
    2,983
    
    
    
    2,703Total non-interest income
    
    
    18,689
    
    
    
    15,810
    
    
    
    15,798Non-interest expenses:Salaries and employee benefits
    
    
    29,790
    
    
    
    24,507
    
    
    
    22,416Net occupancy and equipment expense
    
    
    9,175
    
    
    
    7,678
    
    
    
    7,529Amortization of intangibles
    
    
    3,518
    
    
    
    2,888
    
    
    
    2,685Loss on retirement of debt
    
    
    
    
    
    
    
    
    
    
    2,503Communication expense
    
    
    1,227
    
    
    
    1,016
    
    
    
    1,129Data processing expense
    
    
    867
    
    
    
    788
    
    
    
    973Advertising
    
    
    1,332
    
    
    
    882
    
    
    
    1,063Professional fees
    
    
    1,298
    
    
    
    1,143
    
    
    
    1,023Supplies
    
    
    807
    
    
    
    823
    
    
    
    803Restructuring/merger expenses
    
    
    289
    
    
    
    285
    
    
    
    1,020Net costs applicable to other real estate and other repossessed assets
    
    
    8
    
    
    
    263
    
    
    
    359Other
    
    
    8,720
    
    
    
    7,311
    
    
    
    6,816Total noninterest expenses
    
    
    57,031
    
    
    
    47,584
    
    
    
    48,319Income before income taxes
    
    
    24,600
    
    
    
    19,672
    
    
    
    13,771Income tax expense
    
    
    7,918
    
    
    
    6,317
    
    
    
    4,202Net income
    
    $
    16,682
    
    
    $
    13,355
    
    
    $
    9,569Basic income per share
    
    $
    1.58
    
    
    $
    1.40
    
    
    $
    1.04Diluted income per share
    
    
    1.54
    
    
    
    1.37
    
    
    
    1.02
  64




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##### Table of Contents



STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 AccumulatedAdditional
    
    
    Retained
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Earnings
    
    
    Comprehensive
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Capital
    
    
    (Deficit)
    
    
    Income (Loss)
    
    
    Shares
    
    
    Amount
    
    
    Total(Dollars in thousands, except number of shares)Balance, January 1, 2003
    
    
    9,517,725
    
    
    
    9,518
    
    
    
    122,345
    
    
    
    (15,336
    )
    
    
    5,316
    
    
    
    (300,807
    )
    
    
    (5,114
    )
    
    
    116,729Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,569Change in unrealized gain on
available-for-sale
securities, net of deferred
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,817
    )
    
    
    
    
    
    
    
    
    
    
    (2,817
    )Reclassification adjustment
for gains included in net
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,741Treasury stock purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (183,339
    )
    
    
    (3,392
    )
    
    
    (3,392
    )Stock option award expense
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55Warrants exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    59,505
    
    
    
    1,011
    
    
    
    982Stock issued for directors fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,800
    
    
    
    133
    
    
    
    133Balance, December 31, 2003
    
    
    9,517,725
    
    
    
    9,518
    
    
    
    122,400
    
    
    
    (5,796
    )
    
    
    2,488
    
    
    
    (416,841
    )
    
    
    (7,362
    )
    
    
    121,248Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,355Change in unrealized gain on
available-for-sale
securities, net of deferred
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,184
    )
    
    
    
    
    
    
    
    
    
    
    (2,184
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,171Sale of treasury stock purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378,732
    
    
    
    6,714
    
    
    
    6,714Issuance of new stock
    
    
    521,268
    
    
    
    521
    
    
    
    10,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,149Warrants exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77
    )
    
    
    
    
    
    
    38,109
    
    
    
    648
    
    
    
    571Stock option award expense
    
    
    
    
    
    
    
    
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236Stock options exercised
    
    
    8,467
    
    
    
    9
    
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139Stock issued for directors fees
    
    
    7,122
    
    
    
    7
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Balance, December 31, 2004
    
    
    10,054,582
    
    
    
    10,055
    
    
    
    133,519
    
    
    
    7,482
    
    
    
    304
    
    
    
    
    
    
    
    
    
    
    
    151,360Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,682
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,682Change in unrealized gain on
available-for-sale
securities, net of deferred
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,609
    )
    
    
    
    
    
    
    
    
    
    
    (1,609
    )Reclassification adjustment for
gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,072Issuance of new stock
    
    
    1,907,692
    
    
    
    1,907
    
    
    
    43,279
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,186Stock option award expense
    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486Stock options exercised
    
    
    8,833
    
    
    
    9
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153Balance, December 31, 2005
    
    
    11,971,107
    
    
    $
    11,971
    
    
    $
    177,428
    
    
    $
    24,164
    
    
    $
    (1,306
    )
    
    
    0
    
    
    $
    0
    
    
    $
    212,257
  65




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##### Table of Contents



STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Operating ActivitiesNet income
    
    $
    16,682
    
    
    $
    13,355
    
    
    $
    9,569Adjustments to reconcile net income to net cash provided by operating
activities:Provision for loan losses
    
    
    900
    
    
    
    450
    
    
    
    118Depreciation and amortization
    
    
    6,693
    
    
    
    5,715
    
    
    
    5,733Gain on banking center sale
    
    
    
    
    
    
    
    
    
    
    (57
    )Stock issued to directors
    
    
    
    
    
    
    132
    
    
    
    133Stock compensation expense
    
    
    486
    
    
    
    236
    
    
    
    55Loans originated for sale
    
    
    (131,988
    )
    
    
    (102,360
    )
    
    
    (137,994
    )Proceeds from sales of loans held-for-sale
    
    
    131,736
    
    
    
    99,661
    
    
    
    153,206Gain on sale of loans
    
    
    (2,950
    )
    
    
    (2,261
    )
    
    
    (3,159
    )Loss on debt retirement
    
    
    
    
    
    
    
    
    
    
    2,503Loss on sale of premises and equipment
    
    
    
    
    
    
    10
    
    
    
    9Net gain on sale of investment securities
    
    
    (1
    )
    
    
    
    
    
    
    (11
    )Net (gain) loss on sale of other real estate and repossessed assets
    
    
    (90
    )
    
    
    21
    
    
    
    72Deferred income tax benefit
    
    
    (976
    )
    
    
    (700
    )
    
    
    (899
    )Write-down of premises and equipment
    
    
    109
    
    
    
    44
    
    
    
    251Net amortization of premium on securities
    
    
    383
    
    
    
    1,018
    
    
    
    1,612Net change in other assets and liabilities
    
    
    (323
    )
    
    
    77
    
    
    
    (1,813
    )Net cash provided by operating activities
    
    
    20,661
    
    
    
    15,398
    
    
    
    29,328Investing ActivitiesNet cash and cash equivalents paid in banking center sale
    
    
    
    
    
    
    
    
    
    
    (2,664
    )Acquisition, net of cash acquired
    
    
    (45,734
    )
    
    
    (16,425
    )
    
    
    Purchases of securities available-for-sale
    
    
    (250,803
    )
    
    
    (123,858
    )
    
    
    (152,066
    )Purchases of Federal Reserve Bank stock and other investments
    
    
    (160
    )
    
    
    (1,106
    )
    
    
    (307
    )Proceeds from sales, maturities and calls of securities
available-for-sale
    
    
    296,936
    
    
    
    205,110
    
    
    
    202,742Net increase in loans
    
    
    (35,261
    )
    
    
    (56,900
    )
    
    
    (79,160
    )Proceeds from sale of premises and equipment
    
    
    312
    
    
    
    1,468
    
    
    
    331Proceeds from sales of other real estate and other repossessed assets
    
    
    2,251
    
    
    
    1,853
    
    
    
    2,255Impairment of investment securities
    
    
    
    
    
    
    26
    
    
    
    Banking center held-for-sale
    
    
    
    
    
    
    
    
    
    
    3,751Purchase of bank-owned life insurance
    
    
    
    
    
    
    (2,800
    )
    
    
    (300
    )Purchase of premises and equipment
    
    
    (6,410
    )
    
    
    (8,793
    )
    
    
    (4,646
    )Net cash used in investing activities
    
    $
    (38,869
    )
    
    $
    (1,425
    )
    
    $
    (30,064
    )
  66




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Financing ActivitiesNet increase (decrease) in deposits
    
    $
    33,388
    
    
    $
    (10,277
    )
    
    $
    (22,835
    )Stock issued through exercise of stock options & warrants
    
    
    153
    
    
    
    138
    
    
    
    982Net (decrease) increase in federal funds purchased and
securities sold under agreement to repurchase
    
    
    4,772
    
    
    
    (4,126
    )
    
    
    798Proceeds from FHLB note
    
    
    
    
    
    
    
    
    
    
    318Principal payments on FHLB note
    
    
    (123
    )
    
    
    (114
    )
    
    
    (94
    )Proceeds for issuance of common stock
    
    
    45,186
    
    
    
    18,435
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (3,392
    )Net proceeds from issuance of guaranteed preferred
beneficial interests in the Companys subordinated
debentures
    
    
    
    
    
    
    10,000
    
    
    
    15,000Debt retirement
    
    
    
    
    
    
    (121
    )
    
    
    (13,000
    )Other
    
    
    
    
    
    
    
    
    
    
    (14
    )Net cash provided by (used in) financing activities
    
    
    83,376
    
    
    
    13,935
    
    
    
    (22,237
    )Net increase (decrease) in cash and cash equivalents
    
    
    65,168
    
    
    
    27,908
    
    
    
    (22,973
    )Cash and cash equivalents, beginning of period
    
    
    89,467
    
    
    
    61,559
    
    
    
    84,532Cash and cash equivalents, end of period
    
    $
    154,635
    
    
    $
    89,467
    
    
    $
    61,559Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    14,418
    
    
    $
    9,022
    
    
    $
    11,197Income taxes paid, net of refunds
    
    
    7,376
    
    
    
    7,250
    
    
    
    5,451Noncash transactions:Transfer of loans to other real estate owned, net
    
    
    1,158
    
    
    
    1,704
    
    
    
    906
  67




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##### Table of Contents



STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization and Nature of Business
           68




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##### Table of Contents



Principles of Consolidation
  Use of Estimates
  Statements of Cash Flows
  Adoption of Accounting Standards
 Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20
and FASB Statement No. 3.
 , Share-Based Payment (Revised 2004)
 69




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##### Table of Contents



FASB Staff Position (FSP) No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.
 Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
 Securities Available-for-Sale
     70




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##### Table of Contents



Accounting for
Derivative Instruments and Hedging Activities
 Federal Reserve Bank Stock and Other Investments
  Loans Held-for-Sale
  Loans
   Allowance for Loan Losses
  Rate Lock Commitments
  71




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##### Table of Contents



Premises and Equipment
  Other Real Estate and Other Repossessed Assets
  Interest and Fees on Loans
   Goodwill and Other Intangible Assets
   2005
    
    
    2004Other intangibles
    
    $
    38,988
    
    
    $
    33,021Less: accumulated amortization
    
    
    21,052
    
    
    
    17,535Net amortizable intangible assets
    
    $
    17,936
    
    
    $
    15,486
  2005
    
    
    2004Balance, January 1
    
    $
    15,486
    
    
    $
    13,599Heritage and Mercantile Acquisitions
    
    
    5,968
    
    
    
    4,775Amortization
    
    
    (3,518
    )
    
    
    (2,888
    )Balance, December 31
    
    $
    17,936
    
    
    $
    15,486
 72




---



##### Table of Contents



2006
    
    $
    3,9792007
    
    
    3,4842008
    
    
    3,1042009
    
    
    2,4012010 and thereafter
    
    
    4,968Total
    
    $
    17,936
   2005
    
    
    2004Balance, January 1
    
    $
    70,818
    
    
    $
    37,934Heritage and Mercantile acquisition(1)
    
    
    29,668
    
    
    
    32,884Balance, December 31
    
    $
    100,486
    
    
    $
    70,818
 
 (1)
    
    The goodwill related to the Heritage acquisition is subject to change in 2006. Federal Income Taxes
  Stock Option Plans
 Accounting for Stock Issued to Employees Accounting for Stock-Based
Compensation
 73




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003(In thousands, except per share data)Reported net income
    
    $
    16,682
    
    
    $
    13,355
    
    
    $
    9,569Add: Stock-based employee
compensation expense
included in reported net
income, net of tax
    
    
    317
    
    
    
    153
    
    
    
    37Deduct: Total stock-based
employee compensation
expense determined under
fair value method for all
awards, net of tax
    
    
    (336
    )
    
    
    (170
    )
    
    
    (54
    )Pro forma net income
    
    $
    16,663
    
    
    $
    13,338
    
    
    $
    9,552Earnings per share:Basicas reported
    
    $
    1.58
    
    
    $
    1.40
    
    
    $
    1.04Basicpro forma
    
    
    1.58
    
    
    
    1.40
    
    
    
    1.04Dilutedas reported
    
    
    1.54
    
    
    
    1.37
    
    
    
    1.02Dilutedpro forma
    
    
    1.54
    
    
    
    1.37
    
    
    
    1.02
  Per Share Calculations
  Advertising
  Restructuring expenses
   Year EndedDecember 31,2003(In thousands)Auditing and Legal
    
    $
    377Severance
    
    
    49Bonus
    
    
    40Data Processing
    
    
    112Consulting
    
    
    190Travel
    
    
    95Printing and Supplies
    
    
    74Other
    
    
    83Total Restructuring Costs
    
    $
    1,020
 74




---



##### Table of Contents



Merger Expenses
   Reclassifications
  2.
    ACQUISITION
 Mercantile Bank Texas
  Heritage Financial Corporation
  3.
    
    SECURITIES
  December 31, 2005Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government and agency securities
    
    $
    116,567
    
    
    $
    286
    
    
    $
    1,262
    
    
    $
    115,591Mortgage-backed securities and collateralized
mortgage obligations
    
    
    64,522
    
    
    
    28
    
    
    
    1,092
    
    
    
    63,458Obligations of states and political subdivisions
    
    
    26,294
    
    
    
    119
    
    
    
    65
    
    
    
    26,348Other securities
    
    
    1,414
    
    
    
    
    
    
    
    24
    
    
    
    1,390Total securities available-for-sale
    
    
    208,797
    
    
    
    433
    
    
    
    2,442
    
    
    
    206,787FRB stock and other investments
    
    
    8,094
    
    
    
    
    
    
    
    
    
    
    
    8,094Total investment portfolio
    
    $
    216,891
    
    
    $
    433
    
    
    $
    2,443
    
    
    $
    214,881
 75




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##### Table of Contents



December 31, 2004Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government and agency securities
    
    $
    83,917
    
    
    $
    1,061
    
    
    $
    329
    
    
    $
    84,649Mortgage-backed securities and collateralized
mortgage obligations
    
    
    62,235
    
    
    
    110
    
    
    
    448
    
    
    
    61,897Obligations of states and political subdivisions
    
    
    3,034
    
    
    
    68
    
    
    
    1
    
    
    
    3,101Other securities
    
    
    1,361
    
    
    
    
    
    
    
    
    
    
    
    1,361Total securities available-for-sale
    
    
    150,547
    
    
    
    1,239
    
    
    
    778
    
    
    
    151,008FRB stock and other investments
    
    
    8,306
    
    
    
    
    
    
    
    
    
    
    
    8,306Total investment portfolio
    
    $
    158,853
    
    
    $
    1,239
    
    
    $
    778
    
    
    $
    159,314
  AFS SecuritiesEstimatedAmortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    39,759
    
    
    $
    39,434Due after one year through five years
    
    
    96,159
    
    
    
    95,515Due after five years through ten years
    
    
    5,955
    
    
    
    5,992Due after ten years
    
    
    988
    
    
    
    998Equity securities
    
    
    1,414
    
    
    
    1,390Mortgage-backed securities and collateralized
mortgage obligations
    
    
    64,522
    
    
    
    63,458Total securities available-for-sale
    
    $
    208,797
    
    
    $
    206,787
     AFS SecuritiesLess than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesTreasury/Agency
    
    $
    56,451
    
    
    $
    405
    
    
    $
    42,249
    
    
    $
    857
    
    
    $
    98,700
    
    
    $
    1,262Mortgage Backed
    
    
    28,433
    
    
    
    264
    
    
    
    30,302
    
    
    
    828
    
    
    
    58,735
    
    
    
    1,092Other
    
    
    8,051
    
    
    
    88
    
    
    
    445
    
    
    
    1
    
    
    
    8,496
    
    
    
    89Total temporarily
impaired securities
    
    $
    92,935
    
    
    $
    757
    
    
    $
    72,996
    
    
    $
    1,686
    
    
    $
    165,931
    
    
    $
    2,443
 76




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##### Table of Contents



4.
    
    LOANS AND ALLOWANCE FOR LOAN LOSSES
   2005
    
    
    2004Real estateconstruction
    
    $
    144,721
    
    
    $
    132,214Real estate1-4 family
    
    
    125,901
    
    
    
    94,427Real estateother
    
    
    415,047
    
    
    
    332,871Commercial
    
    
    263,975
    
    
    
    260,923Agricultural and other
    
    
    84,646
    
    
    
    78,215Consumer
    
    
    40,321
    
    
    
    39,134Total loans
    
    
    1,074,611
    
    
    
    937,784Allowance for loan losses
    
    
    (12,591
    )
    
    
    (11,383
    )Loans, net
    
    $
    1,062,020
    
    
    $
    926,401
   77




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##### Table of Contents



2005
    
    
    2004Nonaccrual loans
    
    $
    8,654
    
    
    $
    6,926Accruing loans past due over ninety days
    
    
    
    
    
    
    68Restructured loans
    
    
    88
    
    
    
    226Other real estate and other repossessed assets
    
    
    935
    
    
    
    1,952Total nonperforming assets
    
    $
    9,677
    
    
    $
    9,172
  2005
    
    
    2004
    
    
    2003Balance, beginning of year
    
    $
    11,383
    
    
    $
    10,026
    
    
    $
    10,914Provision for loan losses
    
    
    900
    
    
    
    450
    
    
    
    118Loan loss reserves of acquired bank
    
    
    1,670
    
    
    
    2,410
    
    
    
    Loans charged off
    
    
    (2,555
    )
    
    
    (2,365
    )
    
    
    (1,945
    )Recoveries
    
    
    1,193
    
    
    
    862
    
    
    
    939Balance, end of year
    
    $
    12,591
    
    
    $
    11,383
    
    
    $
    10,026
      78




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##### Table of Contents



5.

    PREMISES AND EQUIPMENT
  EstimatedUseful Life
    
    
    2005
    
    
    2004Land
    
    
    
    
    
    $
    14,181
    
    
    $
    10,377Premises
    
    20-40 yrs
    
    
    40,625
    
    
    
    28,734Furniture and equipment
    
    3-10 yrs
    
    
    8,129
    
    
    
    6,954Gross premises and equipment
    
    
    
    
    
    
    62,935
    
    
    
    46,065Accumulated depreciation
    
    
    
    
    
    
    (14,166
    )
    
    
    (12,150
    )Net premises and equipment
    
    
    
    
    
    $
    48,769
    
    
    $
    33,915
  6.

    DEPOSITS
   2006
    
    
    235,3412007
    
    
    76,2132008
    
    
    12,2742009
    
    
    11,65520010
    
    
    10,3692011 and thereafter
    
    
    0Total
    
    $
    345,852
   7.

    BORROWING ARRANGEMENTS
    79




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##### Table of Contents



8.
    GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE COMPANYS SUBORDINATED DEBENTURES
     9.

    INCOME TAXES
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Current income tax expense
    
    $
    8,894
    
    
    $
    7,017
    
    
    $
    5,101Deferred income tax benefit
    
    
    (976
    )
    
    
    (700
    )
    
    
    (899
    )Income tax expense
    
    $
    7,918
    
    
    $
    6,317
    
    
    $
    4,202
 80




---



##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003Income before income taxes
    
    $
    24,600
    
    
    $
    19,672
    
    
    $
    13,771Statutory rate
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %Income tax expense at statutory rate
    
    
    8,610
    
    
    
    6,885
    
    
    
    4,820Tax-exempt incomeMunicipal Securities
    
    
    (104
    )
    
    
    (34
    )
    
    
    (51
    )Bank-owned life insurance
    
    
    (477
    )
    
    
    (457
    )
    
    
    (409
    )Loans
    
    
    (22
    )
    
    
    
    
    
    
    Effect of graduated rate
    
    
    
    
    
    
    
    
    
    
    (69
    )Other, net
    
    
    (89
    )
    
    
    (77
    )
    
    
    (89
    )Income tax expense as reported
    
    $
    7,918
    
    
    $
    6,317
    
    
    $
    4,202
  Years EndedDecember 31,2005
    
    
    2004Deferred tax assets:Net operating loss carryforwards
    
    $
    101
    
    
    $
    143Allowance for loan losses
    
    
    3,822
    
    
    
    3,984Premises and equipment
    
    
    237
    
    
    
    Unrealized loss on securities available-for-sale
    
    
    703
    
    
    
    Deferred compensation plans
    
    
    609
    
    
    
    478Stock Options
    
    
    272
    
    
    
    102Other
    
    
    552
    
    
    
    8266,296
    
    
    
    5,533Deferred tax liabilities:Unrealized gain on securities available-for-sale
    
    
    
    
    
    
    161Core deposit intangible
    
    
    3,750
    
    
    
    4,783Premises and equipment
    
    
    
    
    
    
    97Prepaid expenses
    
    
    351
    
    
    
    349Other
    
    
    396
    
    
    
    2804,497
    
    
    
    5,670Net deferred tax asset (liability)
    
    $
    1,799
    
    
    $
    (137
    )
   81




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##### Table of Contents



10.
    
    EMPLOYEE BENEFITS
     2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOptions outstanding, beginning of period
    
    
    818,283
    
    
    $
    15.58
    
    
    
    597,500
    
    
    $
    14.19
    
    
    
    549,200
    
    
    $
    13.86Granted
    
    
    32,500
    
    
    
    25.80
    
    
    
    229,250
    
    
    
    19.15
    
    
    
    80,800
    
    
    
    16.94Exercised
    
    
    (8,833
    )
    
    
    14.44
    
    
    
    (8,467
    )
    
    
    13.92
    
    
    
    
    
    
    
    Forfeited
    
    
    (9,000
    )
    
    
    21.00
    
    
    
    
    
    
    
    
    
    
    
    (32,500
    )
    
    
    15.38Options outstanding, end of period
    
    
    832,950
    
    
    $
    15.93
    
    
    
    818,283
    
    
    $
    15.58
    
    
    
    597,500
    
    
    $
    14.19Options exercisable, end of period
    
    
    637,682
    
    
    
    
    
    
    
    529,833
    
    
    
    
    
    
    
    502,867Weighted average fair value per share of
options granted during the year
    
    
    
    
    
    $
    6.44
    
    
    
    
    
    
    $
    5.01
    
    
    
    
    
    
    $
    2.24Weighted average remaining contractual life
in years
    
    
    
    
    
    
    2.77
    
    
    
    
    
    
    
    3.70
    
    
    
    
    
    
    
    4.36
  Weighted AverageRemainingYear of
    
    
    
    
    
    Range of
    
    Number of
    
    ContractualExpiration
    
    Year Granted
    
    Exercise Prices
    
    Outstanding Options
    
    Life in Years2006
    
    
    2001
    
    
    
    16.00
    
    
    
    10,500
    
    
    
    0.612007
    
    
    1997
    
    
    $
    10.00
    
    
    
    132,000
    
    
    
    1.442007
    
    
    2000
    
    
    
    16.00
    
    
    
    20,000
    
    
    
    1.312007
    
    
    2002
    
    
    
    16.00 - 17.00
    
    
    
    32,000
    
    
    
    1.722008
    
    
    1998
    
    
    
    10.00 - 15.00
    
    
    
    216,400
    
    
    
    2.782008
    
    
    2003
    
    
    
    16.00 - 17.50
    
    
    
    79,300
    
    
    
    2.452009
    
    
    1999
    
    
    
    15.00
    
    
    
    90,000
    
    
    
    3.252009
    
    
    2004
    
    
    
    18.50 - 21.00
    
    
    
    220,250
    
    
    
    3.582010
    
    
    2005
    
    
    
    25.80
    
    
    
    32,500
    
    
    
    4.77
 82




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##### Table of Contents



Supplemental Executive Retirement Plan
  Bank-Owned Life Insurance
   11.
    
    WARRANTS
   12.
    
    EARNINGS PER SHARE
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Numerator:Net income for basic and diluted loss per share
    
    $
    16,682
    
    
    $
    13,355
    
    
    $
    9,569Denominator:Denominator for basic income per shareweighted average shares
    
    
    10,546
    
    
    
    9,536
    
    
    
    9,217Effect of dilutive securities:Employee stock options
    
    
    266
    
    
    
    212
    
    
    
    139Warrants
    
    
    
    
    
    
    
    
    
    
    8Denominator for diluted income per shareadjusted weighted
average shares and assumed conversions
    
    
    10,812
    
    
    
    9,748
    
    
    
    9,364Basic income per share
    
    $
    1.58
    
    
    $
    1.40
    
    
    $
    1.04Diluted income per share
    
    $
    1.54
    
    
    $
    1.37
    
    
    $
    1.02
 83




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##### Table of Contents



13.
    
    FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
     Years EndedDecember 31,2005
    
    
    2004Financial instruments whose contract amounts
represent credit risk (in thousands):Commitments to extend credit
    
    $
    253,902
    
    
    $
    217,594Standby letters of credit
    
    
    15,682
    
    
    
    12,197
  14.
    
    REGULATORY RESTRICTIONS
   84
    Table of Contents     Minimum
    
    WellDecember 31,
    
    Capital
    
    Capitalized2005
    
    2004
    
    Ratios
    
    Ratios(Dollars in thousands)Tier 1 capital
    
    $
    142,690
    
    
    $
    113,536Total capital
    
    
    155,281
    
    
    
    124,919Net risk weighted assets
    
    
    1,191,030
    
    
    
    1,042,935Adjusted quarterly average assets
    
    
    1,525,043
    
    
    
    1,287,094Capital ratios:Tier 1 capital to net risk weighted assets
    
    
    11.98
    
    
    
    10.89
    %
    
    
    4.00
    %
    
    
    6.00
    %Total capital to net risk weighted assets
    
    
    13.04
    
    
    
    11.98
    
    
    
    8.00
    
    
    
    10.00Tier 1 capital to adjusted quarterly average assets
    
    
    9.36
    
    
    
    8.82
    
    
    
    4.00
    
    
    
    5.00
  Minimum Ratios for
    
    Actual Ratios atWell Capitalized Banks
    
    December 31, 2005Tier 1 capital to net risk-weighted assets
    
    
    6.00
    %
    
    
    10.67
    %Total capital to net risk-weighted assets
    
    
    10.00
    
    
    
    11.73Tier 1 capital to adjusted quarterly average
assets
    
    
    5.00
    
    
    
    8.32
   15.
    
    FAIR VALUES OF FINANCIAL INSTRUMENTS
 Disclosures About Fair Value of Financial Instruments
 85




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##### Table of Contents



2005
    
    2004Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueCash and cash equivalents
    
    $
    154,635
    
    
    $
    154,635
    
    
    $
    89,467
    
    
    $
    89,467Securities available-for-sale
    
    
    208,798
    
    
    
    206,787
    
    
    
    150,547
    
    
    
    151,008Federal Reserve Bank and other investments
    
    
    8,094
    
    
    
    8,094
    
    
    
    8,306
    
    
    
    8,306Loans held-for-sale
    
    
    11,584
    
    
    
    11,584
    
    
    
    8,382
    
    
    
    8,382Loans, net
    
    
    1,062,020
    
    
    
    1,058,158
    
    
    
    926,401
    
    
    
    925,916Deposits
    
    
    1,357,078
    
    
    
    1,354,162
    
    
    
    1,126,394
    
    
    
    1,127,159Federal funds purchased and securities
sold under agreement to repurchase
    
    
    28,597
    
    
    
    28,597
    
    
    
    18,530
    
    
    
    18,530Junior Subordinated Debentures
    
    
    47,000
    
    
    
    49,937
    
    
    
    47,000
    
    
    
    49,893Notes payable
    
    
    5,841
    
    
    
    5,824
    
    
    
    899
    
    
    
    916
  Cash and Cash Equivalents
  Securities Available-For-Sale
  Federal Reserve Bank Stock and Other Investments
  Loans and Loans Held-For-Sale
  Deposits and Federal Funds Purchased and Securities Sold Under Agreement to Repurchase
  Subordinated Notes Payable and Notes Payable
  Off-Balance Sheet Instruments
  86




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##### Table of Contents



16.
    
    COMMITMENTS AND CONTINGENCIES
    2006
    
    
    1,4742007
    
    
    1,3772008
    
    
    1,2902009
    
    
    1,1022010 and thereafter
    
    
    1,440Total
    
    $
    6,683
  17.
    
    RELATED-PARTY TRANSACTIONS
 th
 18.
    
    DEFERRED COMPENSATION PLAN
   19.
    
    PARENT COMPANY FINANCIAL INFORMATION
  87




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##### Table of Contents



STATE NATIONAL BANCSHARES, INC.
CONDENSED BALANCE SHEETS
 Year ended
    
    
    Year endedDecember 31, 2005
    
    
    December 31, 2004(Dollars in thousands)Assets:Cash
    
    $
    13,833
    
    
    $
    8,419Investment in subsidiaries
    
    
    244,561
    
    
    
    175,967Other assets
    
    
    3,208
    
    
    
    15,767Total assets
    
    $
    261,602
    
    
    $
    200,153Liabilities:Subordinated debentures
    
    $
    48,461
    
    
    $
    48,461Accrued interest payable and other liabilities
    
    
    884
    
    
    
    332Total liabilities
    
    
    49,345
    
    
    
    48,793Stockholders equity
    
    
    212,257
    
    
    
    151,360Total liabilities and stockholders equity
    
    $
    261,602
    
    
    $
    200,153
 88




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##### Table of Contents



STATE NATIONAL BANCSHARES, INC.
CONDENSED INCOME STATEMENTS
 Years ended December 312005
    
    
    2004
    
    
    2003(Dollars in thousands)Income:Dividends from subsidiaries
    
    $
    17,552
    
    
    $
    19,067
    
    
    $
    10,059Other income
    
    
    
    
    
    
    8
    
    
    
    Total income
    
    
    17,552
    
    
    
    19,075
    
    
    
    10,059Expenses:Interest on subordinated debt
    
    
    3,211
    
    
    
    2,233
    
    
    
    1,423Other expenses
    
    
    2,120
    
    
    
    1,359
    
    
    
    1,221Total expenses
    
    
    5,331
    
    
    
    3,592
    
    
    
    2,644Income before federal
income taxes and equity in
undistributed earnings of
subsidiaries
    
    
    12,221
    
    
    
    15,483
    
    
    
    7,415Federal income tax benefit
    
    
    (1,800
    )
    
    
    (1,210
    )
    
    
    (883
    )Income before equity in
undistributed earnings of
subsidiaries
    
    
    14,021
    
    
    
    16,693
    
    
    
    8,298(Distributions in excess of
earnings) equity in undistributed
earnings of subsidiaries
    
    
    2,661
    
    
    
    (3,338
    )
    
    
    1,271Net income
    
    $
    16,682
    
    
    $
    13,355
    
    
    $
    9,569
 89




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##### Table of Contents



STATE NATIONAL BANCSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
 Year ended December 31,2005
    
    
    2004
    
    
    2003(Dollars in thousandsCash flows from operating activities:Net income
    
    $
    16,682
    
    
    $
    13,355
    
    
    $
    9,569Adjustments to reconcile net income to net cash provided by operating
activities:Deferred federal income tax benefit
    
    
    (152
    )
    
    
    (43
    )
    
    
    (15
    )Equity in undistributed loss (earnings) of subsidiaries
    
    
    (2,661
    )
    
    
    3,338
    
    
    
    (1,271
    )Increase in other assets
    
    
    (1,770
    )
    
    
    (46
    )
    
    
    (211
    )Increase (Decrease) in accrued interest payable and other liabilities
    
    
    449
    
    
    
    (3
    )
    
    
    (107
    )Change in other, net
    
    
    625
    
    
    
    92
    
    
    
    (73
    )Net cash provided by operating activities
    
    
    13,173
    
    
    
    16,693
    
    
    
    7,892Cash flows from investing activity:Sales and maturities of held-to-maturity and available -for-sale securities
    
    
    
    
    
    
    25
    
    
    
    Payments for investments in and advances to subsidiaries
    
    
    (67,549
    )
    
    
    (51,551
    )
    
    
    (14,766
    )Sale or repayment of investments in and advances to subsidiaries
    
    
    14,452
    
    
    
    99
    
    
    
    112Change in other, net
    
    
    
    
    
    
    (310
    )
    
    
    Net cash used in investing activity
    
    
    (53,097
    )
    
    
    (51,737
    )
    
    
    (14,654
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    10,000
    
    
    
    15,470Repayment of long-term debt
    
    
    
    
    
    
    (121
    )
    
    
    (14
    )Proceeds from issuance of common stock
    
    
    45,313
    
    
    
    18,435
    
    
    
    1,171Payment to repurchase common stock
    
    
    
    
    
    
    
    
    
    
    (3,392
    )Change in other, net
    
    
    25
    
    
    
    430
    
    
    
    Net cash provided by financing activities
    
    
    45,338
    
    
    
    28,744
    
    
    
    13,235Net increase (decrease) in cash and cash equivalents
    
    
    5,414
    
    
    
    (6,300
    )
    
    
    6,473Cash and cash equivalents at beginning of period
    
    
    8,419
    
    
    
    14,719
    
    
    
    8,246Cash and cash equivalents at end of period
    
    $
    13,833
    
    
    $
    8,419
    
    
    $
    14,719
 20.
    
    BRANCH SALES
  90