##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM
10 - Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 Commission
File Number 000-51548
 STATE NATIONAL BANCSHARES, INC.
  Texas
    
    75-2641879(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 4500 Mercantile Plaza Drive  Suite 300  Fort Worth, Texas 76137
 (817) 547-1150
  þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer þ
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STATE NATIONAL BANCSHARES, INC.
  PAGEPART I  FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTSConsolidated Balance Sheets
    
    
    1Consolidated Statements of Operations
    
    
    2Consolidated
Statements of Changes in Shareholders Equity
    
    
    3Consolidated Statements of Cash Flows
    
    
    4Notes to Consolidated Financial Statements
    
    
    5ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    9ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    23ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    23PART II  OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    24ITEM 1A.
    
    RISK FACTORS
    
    
    24ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    24ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    24ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    24ITEM 5.
    
    OTHER INFORMATION
    
    
    24ITEM 6.
    
    EXHIBITS
    
    
    24Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)Certification of Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906
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PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 March 31, 2006 and December 31, 2005
 (Unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands,except share data)Assets:Cash and Cash equivalents:Cash and due from banks
    
    $
    71,236
    
    
    $
    72,922Federal funds sold
    
    
    65,700
    
    
    
    36,950Interest-bearing deposits in other banks
    
    
    35,318
    
    
    
    44,763Total Cash and cash equivalents
    
    
    172,254
    
    
    
    154,635Securities available-for-sale, at fair value (amortized cost of $212,379
and $208,797 at March 31, 2006 and December 31, 2005, respectively)
    
    
    210,399
    
    
    
    206,787Federal Reserve Bank stock and other investments, at cost
    
    
    8,092
    
    
    
    8,094Loans held-for-sale
    
    
    7,477
    
    
    
    11,584Loans held for investment:Total loans held for investment
    
    
    1,087,419
    
    
    
    1,074,611Less allowance for loan losses
    
    
    13,072
    
    
    
    12,591Net loans held for investment
    
    
    1,074,347
    
    
    
    1,062,020Premises and equipment, net
    
    
    50,643
    
    
    
    48,769Goodwill
    
    
    99,351
    
    
    
    100,486Other intangible assets, net
    
    
    17,325
    
    
    
    17,936Accrued interest receivable
    
    
    7,921
    
    
    
    8,919Other real estate and other repossessed assets
    
    
    696
    
    
    
    935Other assets
    
    
    44,173
    
    
    
    42,712Total assets
    
    $
    1,692,678
    
    
    $
    1,662,877Liabilities and shareholders equity:Deposits:Noninterest bearing deposits
    
    $
    509,329
    
    
    $
    487,369Interest-bearing demand deposits
    
    
    535,221
    
    
    
    523,857Interest-bearing time deposits
    
    
    337,989
    
    
    
    345,852Total deposits
    
    
    1,382,539
    
    
    
    1,357,078Federal funds purchased and securities sold under agreement to repurchase
    
    
    32,718
    
    
    
    28,597Accrued interest payable
    
    
    1,691
    
    
    
    1,645Other liabilities
    
    
    10,591
    
    
    
    10,459Junior subordinated debentures
    
    
    47,000
    
    
    
    47,000Notes payable
    
    
    1,201
    
    
    
    5,841Total liabilities
    
    
    1,475,740
    
    
    
    1,450,620Minority interest in consolidated subsidiaries
    
    
    866
    
    
    
    Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 par value;Authorized shares40,000,000;Issued and outstanding shares11,984,083 and 11,971,107, respectively
    
    
    11,984
    
    
    
    11,971Additional paid-in capital
    
    
    177,823
    
    
    
    177,428Retained earnings
    
    
    27,553
    
    
    
    24,164Accumulated other comprehensive loss
    
    
    (1,288
    )
    
    
    (1,306
    )Total shareholders equity
    
    
    216,072
    
    
    
    212,257Total liabilities and shareholders equity
    
    $
    1,692,678
    
    
    $
    1,662,877
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STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 Three Months Ended March 31, 2006 and 2005
 (Unaudited)
 March 31,
    
    
    March 31,2006
    
    
    2005(Dollars in thousands, exceptshare data)Interest income:Loans, including fees
    
    $
    20,785
    
    
    $
    15,802Securities
    
    
    2,320
    
    
    
    1,481Deposits in other banks
    
    
    426
    
    
    
    53Federal funds sold
    
    
    355
    
    
    
    100Total interest income
    
    
    23,886
    
    
    
    17,436Interest expense:Deposits
    
    
    4,215
    
    
    
    1,934Federal funds purchased and securities sold under agreement to repurchase
    
    
    304
    
    
    
    85Subordinated notes payable
    
    
    942
    
    
    
    702Notes payable
    
    
    51
    
    
    
    11Total interest expense
    
    
    5,512
    
    
    
    2,732Net interest income
    
    
    18,374
    
    
    
    14,704Provision for loan losses
    
    
    480
    
    
    
    300Net interest income after provision for loan losses
    
    
    17,894
    
    
    
    14,404Non-interest income:Service charges on deposit accounts
    
    
    2,695
    
    
    
    2,380Gain on sale of loans
    
    
    633
    
    
    
    573Bank owned life insurance
    
    
    327
    
    
    
    315Net realized gain on sale of investment securities
    
    
    
    
    
    
    1Other
    
    
    1,042
    
    
    
    1,095Total non-interest income
    
    
    4,697
    
    
    
    4,364Non-interest expenses:Salaries and employee benefits
    
    
    8,251
    
    
    
    7,069Net occupancy and equipment expense
    
    
    2,544
    
    
    
    2,168Amortization of intangibles
    
    
    1,022
    
    
    
    824Communication expense
    
    
    320
    
    
    
    280Data processing expense
    
    
    221
    
    
    
    220Advertising
    
    
    299
    
    
    
    221Professional fees
    
    
    504
    
    
    
    355Supplies
    
    
    185
    
    
    
    202Net costs applicable to other real estate and other repossessed assets
    
    
    69
    
    
    
    16Other
    
    
    2,369
    
    
    
    2,070Total noninterest expenses
    
    
    15,784
    
    
    
    13,425Income before income taxes and minority interest in subsidiaries
    
    
    6,807
    
    
    
    5,343Income tax expense
    
    
    2,280
    
    
    
    1,906Minority interest in consolidated subsidiarys net loss
    
    
    60
    
    
    
    Net income
    
    $
    4,587
    
    
    $
    3,437Basic income per share
    
    $
    0.38
    
    
    $
    0.34Diluted income per share
    
    
    0.38
    
    
    
    0.33Dividends per share
    
    
    0.10
    
    
    
    
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STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Change in Shareholders Equity
 (Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Total(Dollars in thousands, except number of shares)Balance,
January 1, 2005
    
    
    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
    )
    
    
    212,257Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,587
    
    
    
    
    
    
    
    4,587Change in unrealized gain on
available-for-sale
securities, net of deferred
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    18Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,605Dividends  $0.10 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,198
    )
    
    
    
    
    
    
    (1,198
    )Stock option award expense
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    127Stock issued for directors fees
    
    
    7,576
    
    
    
    8
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    190Stock options exercised
    
    
    5,400
    
    
    
    5
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    91Balance, March 31, 2006
    
    
    11,984,083
    
    
    $
    11,984
    
    
    $
    177,823
    
    
    $
    27,553
    
    
    $
    (1,288
    )
    
    $
    216,072
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STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months Ended March 31,2006
    
    
    2005(Dollars in thousands)Operating Activities:Net income
    
    $
    4,587
    
    
    $
    3,437Adjustments to reconcile net income to net cash provided by operating
activities:Provision for loan losses
    
    
    480
    
    
    
    300Depreciation and amortization
    
    
    1,909
    
    
    
    1,579Stock compensation expense
    
    
    127
    
    
    
    121Loans originated for sale
    
    
    (24,331
    )
    
    
    (23,820
    )Proceeds from sales of loans held-for-sale
    
    
    29,071
    
    
    
    25,305Gain on sale of loans
    
    
    (633
    )
    
    
    (573
    )Gain on sale of premises and equipment
    
    
    (14
    )
    
    
    Net gain on sale of investment securities
    
    
    
    
    
    
    (1
    )Net loss (gain) on sale of other real estate and repossessed assets
    
    
    23
    
    
    
    (17
    )Deferred income tax benefit
    
    
    (346
    )
    
    
    (288
    )Minority interest in consolidated subsidiarys net loss
    
    
    (60
    )
    
    
    Write-down of premises and equipment
    
    
    
    
    
    
    23Net amortization of premium on securities
    
    
    12
    
    
    
    189Net change in other assets and liabilities
    
    
    84
    
    
    
    3,567Net cash provided by operating activities
    
    
    10,909
    
    
    
    9,822Investing Activities:Purchase Price adjustment for Heritage acquisition
    
    
    724
    
    
    
    Purchases of securities available-for-sale
    
    
    (56,975
    )
    
    
    (4,998
    )Purchases of Federal Reserve Bank stock and other investments
    
    
    
    
    
    
    (13
    )Proceeds from sales, maturities and calls of securities available-for-sale
    
    
    53,383
    
    
    
    21,901Net increase in loans
    
    
    (12,869
    )
    
    
    (12,585
    )Proceeds from sale of premises and equipment
    
    
    295
    
    
    
    Proceeds from sales of other real estate and other repossessed assets
    
    
    278
    
    
    
    538Purchase of premises and equipment
    
    
    (3,077
    )
    
    
    (1,171
    )Net cash (used in) provided by investing activities
    
    
    (18,241
    )
    
    
    3,672Financing Activities:Net increase (decrease) in deposits
    
    
    25,461
    
    
    
    (1,030
    )Stock issued through exercise of stock options & warrants
    
    
    91
    
    
    
    5Stock issued for directors fees
    
    
    190
    
    
    
    Net increase in federal funds purchased and securities sold under
agreement to repurchase
    
    
    4,121
    
    
    
    42Principal payments on FHLB note
    
    
    (4,640
    )
    
    
    (29
    )Proceeds from minority interest
    
    
    926
    
    
    
    Payment of cash dividends
    
    
    (1,198
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    24,951
    
    
    
    (1,012
    )Net increase in cash and cash equivalents
    
    
    17,619
    
    
    
    12,482Cash and cash equivalents, beginning of period
    
    
    154,635
    
    
    
    89,467Cash and cash equivalents, end of period
    
    $
    172,254
    
    
    $
    101,949Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    5,466
    
    
    $
    2,675Income taxes paid, net of refunds
    
    
    136
    
    
    
    11Noncash transactions:Transfer of loans to other real estate owned, net
    
    
    77
    
    
    
    514
  4




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STATE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
 
 Notes to Interim Consolidated Financial Statements
 (Unaudited)
 1. Nature of Operations and Basis of Presentation
     2. Earnings Per Share
   Three Months EndedMarch 31,2006
    
    
    2005(In thousands,except per share data)Reported net income
    
    $
    4,587
    
    
    $
    3,437Add: Stock-based employee compensation expense included in reported net
income, net of tax
    
    
    82
    
    
    
    121Deduct: Total stock-based employee compensation expense determined under
fair value method for all awards, net of tax
    
    
    (82
    )
    
    
    (81
    )Pro forma net income
    
    $
    4,587
    
    
    $
    3,477Earnings per share:Basicas reported
    
    $
    0.38
    
    
    $
    0.34Basicpro forma
    
    
    0.38
    
    
    
    0.34Dilutedas reported
    
    
    0.38
    
    
    
    0.33Dilutedpro forma
    
    
    0.38
    
    
    
    0.33
 5




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3. Adoption of Accounting Standards
 Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20
and FASB Statement No. 3. Accounting Changes
 , 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. The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
 4. Initial Public Offering
  5. Recent Acquisitions
  6




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6. Regulatory Matters
     Minimum
    
    Well-March 31,
    
    December 31,
    
    Capital
    
    Capitalized2006
    
    2005
    
    Ratios
    
    Ratios(Dollars in thousands)Tier 1 capital
    
    $
    147,907
    
    
    $
    142,690Total capital
    
    
    160,979
    
    
    
    155,281Total risk-weighted assets
    
    
    1,196,053
    
    
    
    1,191,030Adjusted quarterly average assets
    
    
    1,649,497
    
    
    
    1,525,043Capital ratios:Leverage ratio
    
    
    9.64
    %
    
    
    9.36
    %
    
    
    4.00
    %
    
    
    5.00
    %Tier 1 capital to risk-weighted assets
    
    
    12.37
    
    
    
    11.98
    
    
    
    4.00
    
    
    
    6.00Total capital to risk-weighted assets
    
    
    13.46
    
    
    
    13.04
    
    
    
    8.00
    
    
    
    10.00
  Minimum Ratios for
    
    Actual Ratios atWell-Capitalized Banks
    
    March 31, 2006Leverage ratio
    
    
    5.00
    %
    
    
    8.41
    %Tier 1 capital to risk-weighted assets
    
    
    6.00
    
    
    
    10.81Total capital to risk-weighted assets
    
    
    10.00
    
    
    
    11.90
 7. Stock-Based Compensation
 Accounting for Stock Issued to Employees
 7




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Accounting for
Stock-Based Compensation
 Adoption of Accounting Standards
  8. Minority
Interest
  8




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   
    
    if a significant number of our customers fail to perform under their loans, our
business, profitability, and financial condition would be adversely affected;
    
    our current level of interest rate spread may decline in the future, and any
material reduction in our interest spread could have a material impact on our business and
profitability;
    
    the modification of the Federal Reserve Boards current position on the capital
treatment of our junior subordinated debt and trust preferred securities could have a
material adverse effect on our financial condition and results of operations;
    
    adverse changes in domestic or global economic conditions could have a material
adverse effect on our business, growth, and profitability;
    
    we could be liable for breaches of security in our online banking services, and
fear of security breaches could limit the growth of our online services;
    
    maintaining or increasing our market share depends on market acceptance and
regulatory approval of new products and services;
    
    significant reliance on loans secured by real estate may increase our
vulnerability to downturns in the real estate market and other variables impacting the
value of real estate;
    
    if we fail to retain our key employees, growth and profitability could be adversely affected;
    
    we may be unable to manage our future growth;
    
    increases in our allowance for loan and lease losses could materially adversely affect our earnings;
    
    our directors and executive officers beneficially own a significant portion of
our outstanding common stock; and
    
    we face substantial competition in our primary market area.
  9




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Executive Overview
 Introduction
    Critical Accounting Policies
   Loans and Allowance for Loan Losses
  Accounting for
Contingencies
 10




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Accounting by Creditors for Impairment of a Loan Accounting by
Creditors for Impairment of a Loan  Income Recognition and Disclosures
    Other Real Estate Owned and Repossessed Assets
  Results of Operations for the Three Months Ended March 31, 2006 and 2005
 Net Interest Income and Net Interest Margin
      11




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Three Months Ended March 31,2006
    
    
    2005Interest
    
    
    
    
    
    
    
    
    
    
    InterestAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate(1)
    
    
    Balance
    
    
    Expense
    
    
    Rate(1)(Dollars in thousands)ASSETS:Interest earning assets:Loans, net of unearned income
    
    $
    1,083,370
    
    
    $
    20,785
    
    
    
    7.67
    %
    
    $
    947,320
    
    
    $
    15,802
    
    
    
    6.67
    %Securities
    
    
    216,846
    
    
    
    2,474
    
    
    
    4.56
    
    
    
    150,717
    
    
    
    1,496
    
    
    
    3.97Time deposits in other banks
    
    
    32,355
    
    
    
    426
    
    
    
    5.27
    
    
    
    9,846
    
    
    
    53
    
    
    
    2.15Fed funds sold
    
    
    40,127
    
    
    
    355
    
    
    
    3.54
    
    
    
    16,494
    
    
    
    100
    
    
    
    2.43Total interest-earning assets
    
    
    1,372,698
    
    
    
    24,040
    
    
    
    7.01
    
    
    
    1,124,377
    
    
    
    17,451
    
    
    
    6.21Noninterest-earning assets:Cash and due from banks
    
    
    70,120
    
    
    
    
    
    
    
    
    
    
    
    61,097Intangible assets
    
    
    117,681
    
    
    
    
    
    
    
    
    
    
    
    85,837Premises and equipment, net
    
    
    49,451
    
    
    
    
    
    
    
    
    
    
    
    33,934Accrued interest receivable and other assets
    
    
    52,360
    
    
    
    
    
    
    
    
    
    
    
    45,515Allowance for loan losses
    
    
    (12,813
    )
    
    
    
    
    
    
    
    
    
    
    (11,468
    )Total noninterest-earning assets
    
    
    276,799
    
    
    
    
    
    
    
    
    
    
    
    214,915TOTAL ASSETS
    
    $
    1,649,497
    
    
    
    
    
    
    
    
    
    
    $
    1,339,292LIABILITIES AND SHAREHOLDERS EQUITY:Interest-bearing liabilities:Demand, savings and money market deposits
    
    $
    519,680
    
    
    $
    1,570
    
    
    
    1.21
    %
    
    $
    446,557
    
    
    $
    682
    
    
    
    0.61
    %Time deposits
    
    
    343,557
    
    
    
    2,645
    
    
    
    3.08
    
    
    
    278,618
    
    
    
    1,252
    
    
    
    1.80Fed funds purchased and securities under
agreement to repurchase
    
    
    31,649
    
    
    
    304
    
    
    
    3.84
    
    
    
    18,017
    
    
    
    85
    
    
    
    1.89Junior subordinated debentures
    
    
    47,000
    
    
    
    942
    
    
    
    8.02
    
    
    
    47,000
    
    
    
    702
    
    
    
    5.97Note payable
    
    
    4,203
    
    
    
    51
    
    
    
    4.85
    
    
    
    880
    
    
    
    11
    
    
    
    4.77Total interest-bearing liabilities
    
    
    946,089
    
    
    
    5,512
    
    
    
    2.33
    
    
    
    791,072
    
    
    
    2,732
    
    
    
    1.38Noninterest-bearing liabilities:Demand deposits
    
    
    476,067
    
    
    
    
    
    
    
    
    
    
    
    387,856Accrued interest payable and other liabilities
    
    
    12,319
    
    
    
    
    
    
    
    
    
    
    
    7,079Total noninterest-bearing liabilities, net
    
    
    488,386
    
    
    
    
    
    
    
    
    
    
    
    394,935TOTAL LIABILITIES
    
    
    1,434,475
    
    
    
    
    
    
    
    
    
    
    
    1,186,007SHAREHOLDERS EQUITY
    
    
    215,022
    
    
    
    
    
    
    
    
    
    
    
    153,285TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,649,497
    
    
    
    
    
    
    
    
    
    
    $
    1,339,292Net interest income
    
    
    
    
    
    $
    18,528
    
    
    
    
    
    
    
    
    
    
    $
    14,719Net interest spread(2)
    
    
    
    
    
    
    
    
    
    
    4.68
    %
    
    
    
    
    
    
    
    
    
    
    4.83
    %Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    5.40
    %
    
    
    
    
    
    
    
    
    
    
    5.24
    %
 
 (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. 12




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##### Table of Contents



Three Months Ended March 31,2006 vs. 2005Increase Due To Changes In:Volume
    
    
    Rate
    
    
    Total(In thousands)Interest-earning assets:Loans, net of unearned income
    
    $
    2,269
    
    
    $
    2,714
    
    
    $
    4,983Securities
    
    
    657
    
    
    
    321
    
    
    
    978Time deposits in other banks
    
    
    121
    
    
    
    252
    
    
    
    373Federal funds sold
    
    
    143
    
    
    
    112
    
    
    
    255Total interest income
    
    
    3,190
    
    
    
    3,399
    
    
    
    6,589Interest-bearing liabilities:Demand, savings and money market deposits
    
    
    112
    
    
    
    776
    
    
    
    888Time deposits
    
    
    292
    
    
    
    1,101
    
    
    
    1,393Federal funds purchased and securities
sold under agreement to repurchase
    
    
    64
    
    
    
    155
    
    
    
    219Junior subordinated debentures
    
    
    
    
    
    
    240
    
    
    
    240Notes payable
    
    
    39
    
    
    
    1
    
    
    
    40Total interest expense
    
    
    507
    
    
    
    2,273
    
    
    
    2,780Increase in net interest income
    
    $
    2,683
    
    
    $
    1,126
    
    
    $
    3,809
 Provision for Loan Losses
 Critical Accounting PoliciesLoans and
Allowance for Loan Losses.
  Noninterest Income
    13




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##### Table of Contents



Three Months Ended March 31,2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Service charges on deposit accounts
    
    $
    2,695
    
    
    
    57.4
    %
    
    $
    2,380
    
    
    
    54.6
    %Gain on sale of loans
    
    
    633
    
    
    
    13.5
    
    
    
    573
    
    
    
    13.1Bank owned life insurance
    
    
    327
    
    
    
    6.9
    
    
    
    315
    
    
    
    7.2Net realized gain on sale of securities
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Other
    
    
    1,042
    
    
    
    22.2
    
    
    
    1,095
    
    
    
    25.1Total noninterest income
    
    $
    4,697
    
    
    
    100.0
    %
    
    $
    4,364
    
    
    
    100.0
    %
 Noninterest
Expense
  Three Months Ended March 31,2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Salaries and employee benefits:Salaries
    
    $
    6,721
    
    
    
    42.6
    %
    
    $
    5,768
    
    
    
    43.0
    %Medical and other benefits
    
    
    652
    
    
    
    4.1
    
    
    
    555
    
    
    
    4.1Pension
    
    
    330
    
    
    
    2.1
    
    
    
    255
    
    
    
    1.9Payroll taxes
    
    
    548
    
    
    
    3.5
    
    
    
    491
    
    
    
    3.7Total salaries and employee benefits
    
    
    8,251
    
    
    
    52.3
    
    
    
    7,069
    
    
    
    52.7Net occupancy and equipment expense
    
    
    2,544
    
    
    
    16.1
    
    
    
    2,168
    
    
    
    16.2Amortization of intangibles
    
    
    1,022
    
    
    
    6.5
    
    
    
    824
    
    
    
    6.1Professional fees
    
    
    504
    
    
    
    3.2
    
    
    
    355
    
    
    
    2.6Communication expense
    
    
    320
    
    
    
    2.0
    
    
    
    280
    
    
    
    2.1Advertising
    
    
    299
    
    
    
    1.9
    
    
    
    221
    
    
    
    1.7Supplies
    
    
    185
    
    
    
    1.2
    
    
    
    202
    
    
    
    1.5Data processing
    
    
    221
    
    
    
    1.4
    
    
    
    220
    
    
    
    1.6Courier
    
    
    217
    
    
    
    1.4
    
    
    
    189
    
    
    
    1.4Postage
    
    
    176
    
    
    
    1.1
    
    
    
    166
    
    
    
    1.2Other real estate
    
    
    69
    
    
    
    0.4
    
    
    
    16
    
    
    
    0.1Other
    
    
    1,976
    
    
    
    12.5
    
    
    
    1,715
    
    
    
    12.8Total noninterest expense
    
    $
    15,784
    
    
    
    100.0
    %
    
    $
    13,425
    
    
    
    100.0
    %
 14




---



##### Table of Contents



Provision for Income Taxes
  Financial Condition as of March 31, 2006 and December 31, 2005
  Investment Securities
   15




---



##### Table of Contents



Available-for-Sale
    
    
    Held-to-Maturity
    
    
    TotalAmortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value(In thousands)March 31, 2006:U.S. treasury securities
    
    $
    7,019
    
    
    $
    6,940
    
    
    $
    
    
    
    $
    
    
    
    $
    7,019
    
    
    $
    6,940U.S. government agencies obligations
    
    
    118,849
    
    
    
    117,813
    
    
    
    
    
    
    
    
    
    
    
    118,849
    
    
    
    117,813Collateralized mortgage obligations
    
    
    153
    
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    154Mortgage-backed securities
    
    
    60,820
    
    
    
    59,946
    
    
    
    
    
    
    
    
    
    
    
    60,820
    
    
    
    59,946State and municipal obligations
    
    
    24,110
    
    
    
    24,168
    
    
    
    
    
    
    
    
    
    
    
    24,110
    
    
    
    24,168Federal Reserve Bank stock and
other investments
    
    
    1,428
    
    
    
    1,378
    
    
    
    8,092
    
    
    
    8,092
    
    
    
    9,520
    
    
    
    9,470Total
    
    $
    212,379
    
    
    $
    210,399
    
    
    $
    8,092
    
    
    $
    8,092
    
    
    $
    220,471
    
    
    $
    218,491December 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
    
    
    $
    214,881
  16




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##### Table of Contents



Investment Portfolio  Maturity and Yields
  As of March 31, 2006After 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
    
    $
    4,008
    
    
    
    2.31
    %
    
    $
    2,932
    
    
    
    3.77
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    6,940
    
    
    
    2.93
    %U.S. government agencies
obligations
    
    
    35,695
    
    
    
    3.63
    
    
    
    82,118
    
    
    
    4.56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117,813
    
    
    
    4.28Mortgage backed securities
and collateralized mortgage
obligations(3)
    
    
    503
    
    
    
    5.35
    
    
    
    58,715
    
    
    
    4.42
    
    
    
    878
    
    
    
    4.90
    
    
    
    4
    
    
    
    6.25
    
    
    
    60,100
    
    
    
    4.44State and municipal
obligations
    
    
    2,763
    
    
    
    3.24
    
    
    
    15,284
    
    
    
    3.44
    
    
    
    5,186
    
    
    
    3.99
    
    
    
    935
    
    
    
    5.32
    
    
    
    24,168
    
    
    
    3.61Other securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,378
    
    
    
    4.29
    
    
    
    1,378
    
    
    
    4.29Total investments
available-for-sale
    
    
    42,969
    
    
    
    3.50
    
    
    
    159,049
    
    
    
    4.39
    
    
    
    6,064
    
    
    
    4.13
    
    
    
    2,317
    
    
    
    4.71
    
    
    
    210,399
    
    
    
    4.20Other investments:FHLB stock and other
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,092
    
    
    
    5.65
    
    
    
    8,092
    
    
    
    5.65Total other investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,092
    
    
    
    5.65
    
    
    
    8,092
    
    
    
    5.65Total investments
    
    $
    42,969
    
    
    
    3.50
    %
    
    $
    159,049
    
    
    
    4.39
    %
    
    $
    6,064
    
    
    
    4.13
    %
    
    $
    10,409
    
    
    
    5.44
    %
    
    $
    218,491
    
    
    
    4.26
    %
 
 (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.  17




---



##### Table of Contents



AvailableFor-Sale SecuritiesLess than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In thousands)Treasury/Agency(1)
    
    $
    62,861
    
    
    $
    531
    
    
    $
    43,768
    
    
    $
    791
    
    
    $
    106,629
    
    
    $
    1,322Mortgage-backed
securities(2)
    
    
    12,552
    
    
    
    193
    
    
    
    33,391
    
    
    
    763
    
    
    
    45,943
    
    
    
    956Other
    
    
    6,457
    
    
    
    102
    
    
    
    502
    
    
    
    5
    
    
    
    6,959
    
    
    
    107Total temporarily impaired
securities
    
    $
    81,870
    
    
    $
    826
    
    
    $
    77,661
    
    
    $
    1,559
    
    
    $
    159,531
    
    
    $
    2,385
 
 (1)
    
    U.S. Treasury/Agency Debt Securities The unrealized losses on investments in U.S.
treasury and agency debt securities were caused by interest rate increases. The contractual
terms of these investments do not permit the issuer to settle the securities at a price less
than the amortized cost of the investment. Because we have the ability and intent to hold
these investments until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired.(2)
    
    Mortgage-Backed Securities The unrealized losses on investments in mortgage-backed
securities were caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by Federal National Mortgage Association (FNMA) and Federal Home
Loan Mortgage Corporation (FHLMC). It is expected that the securities would not be settled at
a price less than the amortized cost of the investment. Because the decline in fair value is
attributable to changes in interest rates and not credit quality, and because we have the
ability and intent to hold these investments until a market price recovery or maturity, these
investments are not considered other-than-temporarily impaired. Loans
   March 31, 2006
    
    
    December 31, 2005Loan Category
    
    
    
    
    
    
    Loan CategoryAmount
    
    
    to Total Loans
    
    
    Amount
    
    
    to Total Loans(Dollars in thousands)Real estateconstruction
    
    $
    167,951
    
    
    
    15.5
    %
    
    $
    144,721
    
    
    
    13.5
    %Real estate1-4 family
    
    
    118,993
    
    
    
    10.9
    
    
    
    125,901
    
    
    
    11.7Real estateother
    
    
    414,723
    
    
    
    38.1
    
    
    
    415,047
    
    
    
    38.6Lease financing
    
    
    2,154
    
    
    
    0.2
    
    
    
    
    
    
    
    Commercial
    
    
    274,036
    
    
    
    25.2
    
    
    
    263,975
    
    
    
    24.6Agricultural and other
    
    
    68,232
    
    
    
    6.3
    
    
    
    84,646
    
    
    
    7.9Consumer
    
    
    41,330
    
    
    
    3.8
    
    
    
    40,321
    
    
    
    3.7Total loans held for investment
    
    $
    1,087,419
    
    
    
    100.0
    %
    
    $
    1,074,611
    
    
    
    100.0
    %Allowance for loan losses
    
    
    (13,072
    )
    
    
    
    
    
    
    (12,591
    )Loans held for investment, net
    
    $
    1,074,347
    
    
    
    
    
    
    $
    1,062,020
    18




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##### Table of Contents



As of March 31, 2006One Year and
    
    
    One to
    
    
    Over
    
    
    TotalLess
    
    
    Five Years
    
    
    Five Years
    
    
    Carrying Value(In thousands)Real estateconstruction
    
    $
    127,481
    
    
    $
    25,303
    
    
    $
    15,167
    
    
    $
    167,951Real estate1-4 family
    
    
    21,402
    
    
    
    49,693
    
    
    
    47,898
    
    
    
    118,993Real estateother
    
    
    54,619
    
    
    
    230,882
    
    
    
    129,222
    
    
    
    414,723Lease financing
    
    
    
    
    
    
    
    
    
    
    2,154
    
    
    
    2,154Commercial loans
    
    
    147,380
    
    
    
    94,378
    
    
    
    32,278
    
    
    
    274,036Consumer loans
    
    
    19,971
    
    
    
    17,611
    
    
    
    3,748
    
    
    
    41,330Agriculture and other loans
    
    
    52,524
    
    
    
    12,662
    
    
    
    3,046
    
    
    
    68,232Total loans held for investment
    
    $
    423,377
    
    
    $
    430,529
    
    
    $
    233,513
    
    
    $
    1,087,419With fixed interest rates
    
    $
    93,026
    
    
    $
    224,803
    
    
    $
    68,397
    
    
    $
    386,226With variable interest rates
    
    
    330,351
    
    
    
    205,726
    
    
    
    165,116
    
    
    
    701,193Total loans held for investment
    
    $
    423,377
    
    
    $
    430,529
    
    
    $
    233,513
    
    
    $
    1,087,419
 Nonperforming Assets
   March 31,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)Nonaccrual loans
    
    $
    9,087
    
    
    $
    8,654Accruing loans past due over 90 days
    
    
    220
    
    
    
    Restructured loans
    
    
    86
    
    
    
    88Other real estate
    
    
    684
    
    
    
    927Other repossessed assets
    
    
    13
    
    
    
    8Total nonperforming assets
    
    $
    10,090
    
    
    $
    9,677Total nonperforming assets to total loans and other real estate
    
    
    0.93
    %
    
    
    0.90
    %
   19




---



##### Table of Contents



Allowance for Loan Losses
   Three months ended
    
    
    Year EndedMarch 31,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)Analysis of allowance for loan losses:Balance, beginning of period
    
    $
    12,591
    
    
    $
    11,383Provision for loan losses
    
    
    480
    
    
    
    900Loan loss reserves of acquired banks
    
    
    
    
    
    
    1,670Loans charged-off:Real estateconstruction
    
    
    
    
    
    
    72Real estate1-4 family
    
    
    48
    
    
    
    96Real estateother
    
    
    
    
    
    
    Commercial loans
    
    
    
    
    
    
    1,067Consumer loans
    
    
    126
    
    
    
    820Agriculture and other loans
    
    
    
    
    
    
    500Total charge-offs
    
    
    174
    
    
    
    2,555Recoveries of loans previously charged-off:Real estateconstruction
    
    
    
    
    
    
    45Real estate1-4 family
    
    
    1
    
    
    
    18Real estateother
    
    
    3
    
    
    
    12Commercial loans
    
    
    54
    
    
    
    535Consumer loans
    
    
    79
    
    
    
    573Agriculture and other loans
    
    
    38
    
    
    
    10Total recoveries
    
    
    175
    
    
    
    1,193Net loans (recovered) charged-off
    
    
    (1
    )
    
    
    1,362Balance, end of period
    
    $
    13,072
    
    
    $
    12,591Average loans outstanding, net of unearned
income, for the period ended
    
    $
    1,083,370
    
    
    $
    989,406Ratio of net loan charge-offs to average loans,
net of unearned income (1)
    
    
    (0.00
    )%
    
    
    0.14
    %Ratio of allowance for loan losses to total
loans, net of unearned income
    
    
    1.20
    %
    
    
    1.17
    %
 
 (1)
    
    Annualized as of March 31, 2006. Nonearning Assets
  20




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##### Table of Contents



Deposits
  Three Months Ended
    
    
    Year EndedMarch 31, 2006
    
    
    December 31, 2005Average
    
    
    Percent of
    
    
    Average
    
    
    Average
    
    
    Percent of
    
    
    AverageBalance
    
    
    Deposits
    
    
    Rate
    
    
    Balance
    
    
    Deposits
    
    
    Rate(Dollars in thousands)Noninterest-bearing demand deposits
    
    $
    476,067
    
    
    
    35.5
    %
    
    
    
    %
    
    $
    416,168
    
    
    
    35.4
    %
    
    
    
    %Interest-bearing demand, savings and
money market deposits
    
    
    519,680
    
    
    
    38.8
    
    
    
    1.21
    
    
    
    463,836
    
    
    
    39.4
    
    
    
    0.91Time deposits of less than $100,000
    
    
    192,444
    
    
    
    14.4
    
    
    
    2.88
    
    
    
    167,646
    
    
    
    14.3
    
    
    
    2.18Time deposits of $100,000 or more
    
    
    151,113
    
    
    
    11.3
    
    
    
    3.33
    
    
    
    127,973
    
    
    
    10.9
    
    
    
    2.65Total deposits
    
    $
    1,339,304
    
    
    
    100.0
    %
    
    
    1.26
    %
    
    $
    1,175,623
    
    
    
    100.0
    %
    
    
    0.96
    %
   March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Noninterest-bearing demand deposits
    
    $
    509,329
    
    
    $
    487,369Interest-bearing deposits:NOW and Money Market
    
    
    455,708
    
    
    
    448,762Savings
    
    
    79,513
    
    
    
    75,095Time deposits
    
    
    337,989
    
    
    
    345,852Total interest-bearing deposits:
    
    
    873,210
    
    
    
    869,709Total Deposits
    
    $
    1,382,539
    
    
    $
    1,357,078
  March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Three months or less
    
    $
    29,779
    
    
    $
    37,958Over three through six months
    
    
    26,810
    
    
    
    24,918Over six through 12 months
    
    
    40,737
    
    
    
    36,452Over 12 months
    
    
    53,993
    
    
    
    55,266Total time deposits of $100,000 or more
    
    $
    151,319
    
    
    $
    154,594
 Borrowings
 Other Borrowings
  21




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##### Table of Contents



Junior Subordinated Debentures
 Borrowings
 Capital Resources and Capital Adequacy Requirements
   Liquidity Management
   Aggregate Contractual Obligations
  As of March 31, 2006Over ThreeLess than
    
    
    One Year to
    
    
    Years
    
    
    Over FiveOne Year
    
    
    Three Years
    
    
    to Five Years
    
    
    Years
    
    
    Total(In thousands)FHLB advances
    
    $
    198
    
    
    $
    360
    
    
    $
    479
    
    
    $
    179
    
    
    $
    1,216Junior subordinated
debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,000
    
    
    
    47,000Operating leases
    
    
    1,426
    
    
    
    1,520
    
    
    
    2,162
    
    
    
    1,241
    
    
    
    6,349Total
    
    $
    1,624
    
    
    $
    1,880
    
    
    $
    2,641
    
    
    $
    48,420
    
    
    $
    54,565
 22




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##### Table of Contents



.
 Off-Balance Sheet Arrangements
  As of March 31, 2006Total NotionalAmounts
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    Over 5Committed
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    years(In thousands)Commitments to extend credit
    
    $
    322,108
    
    
    $
    274,597
    
    
    $
    43,413
    
    
    $
    1,212
    
    
    $
    2,886Standby letters of credit
    
    
    17,681
    
    
    
    12,884
    
    
    
    4,797
    
    
    
    
    
    
    
    Total commercial commitments
    
    $
    339,789
    
    
    $
    287,481
    
    
    $
    48,210
    
    
    $
    1,212
    
    
    $
    2,886
   
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
   
 ITEM 4. Controls and Procedures
    
 23




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##### Table of Contents



PART II  OTHER INFORMATION
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 Exhibit Number
    
    Description of Exhibit31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer.32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 24




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##### Table of Contents



STATE NATIONAL BANCSHARES, INC.Date:  May 15, 2006
    By:

/s/
Don E. CosbyDon E. CosbyExecutive Vice President, Chief Financial
Officer, Secretary and Treasurer (Principal
Financial and Accounting Officer) 25