SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31,June 30, 2006

Or

For the transition period from            to            

Commission File Number 000-12154

RENASANT CORPORATION

(Exact name of the registrant as specified in its charter)

209 Troy Street, P. O.P.O. Box 709, Tupelo, Mississippi 38802-0709

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: 662-680-1001

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

¨  Large accelerated filer    x  Accelerated filer    ¨  Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $5.00 Par Value, 10,343,06010,354,917 shares outstanding as of April 30,July 31, 2006.

RENASANT CORPORATION

INDEX

RENASANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

See Notes to Condensed Consolidated Financial Statements

RENASANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share data)

(unaudited)

See Notes to Condensed Consolidated Financial Statements

RENASANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See Notes to Condensed Consolidated Financial Statements

RENASANT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31,JUNE 30, 2006

(in thousands, except share data)

Note 1 Summary of Significant Accounting Policies

Business: Renasant Corporation (referred to herein as the “Company”), a Mississippi corporation, owns and operates Renasant Bank, a Mississippi-chartered bank with operations in Mississippi, Tennessee and Alabama, and Renasant Insurance, Inc., a wholly-owned subsidiary of Renasant Bank with operations in Mississippi. On March 31, 2005, Renasant Bank of Tennessee, a Tennessee-chartered bank and wholly-owned subsidiary of the Company, was merged into Renasant Bank, and Renasant Bank survived the merger. The Company has full service offices located throughout north Mississippi, southwest Tennessee and north Alabama.

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information regarding the Company’s accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Certain amounts in prior periods have been reclassified to conform to the current presentation, and all dollar amounts are in thousands, except share data.

New accounting pronouncements:

In January 2005, the Company adopted and applied the provisions of the American Institute of Certified Public Accountants Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” (“SOP 03-3”) on certain loans acquired in connection with the acquisition of Heritage Financial Holding Corporation (“Heritage”). There was evidence of deterioration of the credit quality of these loans since origination, and it was probable, at the acquisition date, that all contractually required payments would not be collected. The amount of such loans included in the balance sheet heading “Loans, net of unearned income” at March 31, 2006 is as follows:

The Company did not increase the allowance for loan losses through a charge to the income statement for these loans during the three months ended March 31, 2006.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision to Statement of Financial Accounting Standards No. 123, “Share-Based Payment” (“Statement 123R”). Statement 123R requires companies to recognize in their financial statements the cost resulting from all share-based payment transactions using a fair value-based measurement model. Companies are required to estimate the fair value of share-based payments to employees using a mathematical model that reflects the most accurate valuation given the information available and incorporates various factors, including exercise price of the option, expected volatility of the entity’s stock, expected term of the award, performance/service/market conditions, expected dividends, the risk-free rate, and the grant date share price. Statement 123R replaces Statement 123 and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Statement 123R became effective in annual reporting periods beginning after June 15, 2005, requiring all share-based payments granted or modified subsequent to the implementation date to be accounted for under Statement 123R. In 2002, the Company adopted the provisions of Statement 123 and began recognizing compensation expense in the income statement, based on the estimated fair value of all awards granted to employees. As such, the adoption of Statement 123R did not have a material effect on the Company’s financial condition or results of operations. The assumptions utilized in calculating the fair value of the Company’s share-based payments since the adoption of Statement 123 are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 under “Note L – Employee Benefit and Deferred Compensation Plans” in the Notes to the Consolidated Financial Statements.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact on its financial statements of FIN 48.

Note 2 Shareholders’ Equity

In September 2002, the Company’s board of directors adopted a share buy-back plan which, as amended through March 31,June 30, 2006, allows the Company to purchase up to 1,396,687 shares of our outstanding common stock, subject to a monthly purchase limit of $2,000 of our common stock. This plan will remain in effect until all authorized shares are repurchased or until otherwise instructed by the board of directors. As of March 31,June 30, 2006, 1,220,183 shares of our common stock had been purchased and 176,504 shares remained authorized under this plan. The reacquired common shares are held as treasury shares and may be reissued for various corporate purposes. During the first quarter ofsix months ending June 30, 2006, the Company reissued 29,80053,807 shares from treasury in connection with the exercise of stock options assumed in the Renasant Bancshares, Inc. (“Renasant Bancshares”) and Heritage Financial Holding Corporation (“Heritage”) acquisitions. The Company did not repurchase any shares during the first threesix months of 2006.

The Company declared a cash dividend for the firstsecond quarter of 2006 of $0.23 per share as compared to $0.21$0.23 per share for the first quarter of 2006 and $0.22 per share for the second quarter of 2005. Total cash dividends paid to shareholders by the Company were $2,379$4,766 and $2,187$4,476 for the threesix month periods ended March 31,June 30, 2006 and 2005, respectively.

In January 2006, the Company granted 98,000 stock options which become vested and exercisable in equal installments of 33 1/3% ¹/3% upon completion of one, two and three years of service measured from the grant date. In addition, the Company awarded 17,000 shares of time-based restricted stock and 14,000 shares of performance-based restricted stock in January, 2006.stock. The time-based restricted stock is earned 100% upon completion of three years of service measured from the grant date. The performance-based restricted stock is earned, in part, if the Company meets or exceeds financial performance results defined by the Boardboard of Directors.directors.

Note 3 Loans

The Company adopted and applied the provisions of the American Institute of Certified Public Accountants Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” (“SOP 03-3”) on certain loans acquired in connection with the acquisition of Heritage Financial Holding Corporation (“Heritage”). There was evidence of deterioration of the credit quality of these loans since origination, and it was probable, at the acquisition date, that all contractually required payments would not be collected. The amount of such loans included in the balance sheet heading “Loans, net of unearned income” at June 30, 2006 is as follows:

The Company did not increase the allowance for loan losses through a charge to the income statement for these loans during the six months ended June 30, 2006.

Note 4 Goodwill

During the first quartersix months of 2006, the Company adjusted goodwill to reflect the tax benefits associated with the exercise of stock options assumed in connection with Heritage and Renasant Bancshares acquisitions. As a result, the goodwill associated with the Heritage and Renasant Bancshares acquisitions was reduced $790 and $332, respectively.

Note 5 Interest Rate Swap

In May 2006, the Company entered into an interest rate swap with a notional amount of $100,000 whereby it will receive a fixed rate of interest and pay a variable rate based on the Prime rate. The effective date of the swap was May 11, 2006 and the maturity date of the swap is May 11, 2009. The interest rate swap is a designated cash flow hedge designed to convert the variable interest rate on $100,000 of loans to a fixed rate. The swap is considered to be effective and the assessment of the hedging relationship is evaluated under the hypothetical derivative method. The Company accounts for the swap in accordance with FASB Statement 133, “Accounting for Derivative Instruments and Hedging Activities.”

Note 46 Comprehensive Income

For the three month periods ended March 31, 2006 and 2005, totalThe components of comprehensive income, was $5,571 and $3,003, respectively. Total comprehensive income consistsnet of net income and the change in the unrealized gain (loss) on securities available for sale.

Note 57 Employee Benefit Plans

The following tables provide the components of net pension cost and other benefit cost recognized for the three and six month period ended March 31,June 30, 2006 and 2005:

Note 68 Net Income Per Common Share

Basic and diluted net income per common share calculations are as follows:

Basic net income per common share is calculated by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the pro forma dilution assuming outstanding stock options and warrants were exercised into common shares, calculated in accordance with the treasury stock method.

Note 79 Segment Reporting

FASB Statement No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires public companies to report certain financial and descriptive information about their reportable operating segments (as defined by management) and certain enterprise-wide financial information about products and services, geographic areas, and major customers.

The Company’s internal reporting process is organized into four segments that account for the Company’s principal activities: the delivery of financial services through its community banks in Mississippi (Mississippi Region), Tennessee (Tennessee Region) and Alabama (Alabama Region), and the delivery of insurance services through its insurance agency (Renasant Insurance). In order to give our regional management a more precise indication of the income and expenses they can control, the results of operations for the regions of the community bank and the insurance company reflect the direct revenues and expenses of each respective segment. The Company believes this management approach will enable our regional management to focus on serving customers through loan originations and deposit gathering. Indirect revenues and expenses, including but not limited to income from our investment portfolio costs associated with our data processing and back office functions, are not allocated to our segments. Rather these revenues and expenses are shown in the “Other” column, which also includes revenues and expenses associated with the operations of the holding company and eliminations which are necessary for purposes of reconciling to the consolidated amounts.

Note 10 Subsequent Event

On July 24, 2006, the Company announced a three-for-two stock split in the form of a stock dividend payable on August 28, 2006 to shareholders of record as of August 11, 2006. Since the record date follows the filing date of this report, share and per share amounts included herein have not been restated to reflect the three-for-two stock split.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands, except per share data)

This Form 10-Q may contain, or incorporate by reference, statements which may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward looking statements usually include words such as “expects,” “projects,” “anticipates,” “believes,” “intends,” “estimates,” “strategy,” “plan,” “potential,” “possible” and other similar expressions. Prospective investors are cautioned that any such forward-looking statements are not guarantees for future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include significant fluctuations in interest rates, inflation, economic recession, significant changes in the federal and state legal and regulatory environment, significant underperformance in our portfolio of outstanding loans, and competition in our markets. Management undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Overview

Renasant Corporation (formerly known as The Peoples Holding Company and referred to herein as the “Company”, “we,” “our,” or “us”), a Mississippi corporation, owns and operates Renasant Bank (formerly known as The Peoples Bank & Trust Company), a Mississippi-chartered bank with operations in Mississippi, Tennessee and Alabama, and Renasant Insurance, Inc. (formerly known as The Peoples Insurance Agency, Inc.), a Mississippi corporation with operations in Mississippi. Renasant Insurance, Inc. is a wholly owned subsidiary of Renasant Bank. The Company has full service offices located throughout north Mississippi, southwest Tennessee and north Alabama.

On July 1, 2004, we completed our acquisition of Renasant Bancshares, Inc. (“Renasant Bancshares”), the parent company of Renasant Bank of Tennessee, and expanded our footprint into Tennessee. Renasant Bank of Tennessee became one of our subsidiaries as a result of our acquisition of Renasant Bancshares. In order to simplify our operations and reduce costs, on March 31, 2005, Renasant Bank of Tennessee merged into Renasant Bank, with Renasant Bank surviving the merger. On January 1, 2005, we completed our acquisition of Heritage Financial Holding Corporation (“Heritage”), the parent company of Heritage Bank, and expanded our footprint into Alabama. On that date, Heritage merged into the Company, and Heritage Bank merged into Renasant Bank. The Company and Renasant Bank, respectively, survived the mergers. The financial condition and results of operations for both acquisitions are included in the Company’s financial statements since the date of the relevant acquisition.

Financial Condition

Total assets for the Company increased to $2,509,220$2,503,333 on March 31,June 30, 2006 from $2,397,702 on December 31, 2005, representing an increase of 4.65%4.41%.

Cash and cash equivalents increased $63,343decreased $21,208 from $95,863 at December 31, 2005 to $159,206$74,655 at March 31, 2006June 30, 2006. Cash and cash equivalents represented 6.34%2.98% of total assets at March 31,June 30, 2006 compared to 4.00% of total assets at December 31, 2005. Our investment portfolio increased to $429,169$434,567 at March 31,June 30, 2006 from $399,034 at December 31, 2005. Increases in our cash and cash equivalents and investment portfolio are due to the short-term investment of2005 as we used excess funds generated from our deposit growth during the same period.generation of deposits for investment purposes.

Mortgage loans held for sale were $34,099$36,519 at March 31,June 30, 2006 compared to $33,496 at December 31, 2005. Originations of mortgage loans to be sold totaled $94,210$209,612 for the first threesix months of 2006 as compared to $90,710$204,840 for same period in 2005. Mortgage loans to be sold are locked in at a contractual rate with third party private investors, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. Gains and losses are realized at the time consideration is received from the sale of the loans and all other criteria for sales treatment have been met. These loans are typically sold within thirty days after the loan is funded. Although some interest income is derived from mortgage loans held for sale, the main source of income is gains from the sale of mortgage loans in the secondary market.

The loan balance, net of unearned income, at March 31,June 30, 2006 was $1,664,479,$1,729,861, representing an increase of $18,256$83,638 from $1,646,223 at December 31, 2005.

The growth in loans during the first threesix months of 2006 is primarily attributable to loan production from our Tennessee and Alabama regions. Loans in the Tennessee and Alabama regions grew 8.97%$39,412 and 3.25%,$33,197, respectively, during the first threesix months of 2006 compared to the respective balances at December 31, 2005. Loans in the Mississippi region grew $11,010 during this same period. The table below sets forth loans outstanding, according to loan type, net of unearned income.

Loan concentrations are considered to exist when there are amounts loaned to a large number of borrowers engaged in similar activities who would be similarly impacted by economic or other conditions. At March 31,June 30, 2006, we had no significant concentrations of loans other than those presented in the categories in the table above.

Intangible assets decreased $1,257$1,673 to $99,575$99,159 at March 31,June 30, 2006 from $100,832 at December 31, 2005. The decrease reflects the amortization of finite-lived intangible assets recorded in connection with the Heritage and Renasant Bancshares acquisitions and an adjustment to goodwill from tax benefits associated with the exercise of stock options assumed in connection with these acquisitions. The core deposits intangible and noncompete agreements are being amortized over their estimated useful lives which range from five to ten years.

Total deposits increased $163,294$115,015 to $2,031,745$1,983,466 at March 31,June 30, 2006 from $1,868,451 on December 31, 2005. Non-interest bearing deposits grew 8.95%8.96% to $272,672$272,686 at March 31,June 30, 2006 compared to $250,270 at December 31, 2005. Interest bearing deposits increased $140,892$92,599 to $1,759,073$1,710,780 at March 31,June 30, 2006 from $1,618,181 at December 31, 2005. During the first quartersix months of 2006, we experienced a $92,236an $83,004 increase in interest bearing public-fund transactional accounts as government agencies received proceeds from tax collections. The growth in public fund transactional accounts occurred mainly in the first quarter of 2006 and allowed management to more selectively price its other deposit products. Management expects funds held in these accounts to decrease throughout the year as government agencies utilize these monies.

The growth in deposits was realized throughout each of our regions. Deposits in the Alabama and Tennessee regions grew $11,430 and $29,235, respectively, from the amounts at December 31, 2005. Deposits in the Mississippi region grew $122,629 during the first three months of 2006 from December 31, 2005.

Advances from the FHLB decreased $47,068$54,076 to $144,413$137,405 at March 31,June 30, 2006 compared to $191,481 at December 31, 2005. We utilize advances from the Federal Home Loan Bank (“FHLB”) to mitigate interest rate risk on our loan portfolio by match-funding FHLB borrowings against long term fixed rate loans. With our deposit growth during the first six months of 2006, we were able to reduce our reliance on FHLB advances which typically carry a higher interest rate as compared to deposits.

Shareholders’ equity increased 1.69%2.38% to $239,418$241,043 at March 31,June 30, 2006 compared to $235,440 at December 31, 2005. Factors contributing to the change in capitalshareholders’ equity include current year earnings offset by treasury stock purchasesdividends and dividends.changes in other comprehensive income.

Results of Operations – FirstSecond Quarter of 2006 as Compared to the FirstSecond Quarter of 2005

Summary

Net income for the three month period ended March 31,June 30, 2006 was $6,501,$7,043, an increase of $1,042,$836, or 19.09%13.47%, from net income of $5,459$6,207 for the same period in 2005. Basic earnings per share were $.63$0.68 and diluted earnings per share were $.62$0.67 for the three month period ended March 31,June 30, 2006, as compared to basic earnings per share of $0.60 and diluted earnings per share of $.52$0.59 for the comparable period a year ago.

Net Interest Income

Net interest income is the difference between interest earned on earning assets and the cost of interest-bearing liabilities, which are two of the largest components contributing to our net income. The primary concerns in managing net interest income are the mix and the repricing of rate-sensitive assets and liabilities. While the current interest rate environment has been unfavorable for net interest income, several factors have lessened the impact on the Company of the interest rate environment, including growth in variable-rate loans, risk-based loan pricing, and a shift from time deposits to less costly transaction deposits.

Net interest income grew 6.16%2.38% to $20,508$20,942 for the firstsecond quarter of 2006 compared to $19,318$20,455 for the same period in 2005 due to loan growth and excess funds held in short-term investments.growth. On a tax equivalent basis, net interest margin for the three month period ended March 31,June 30, 2006 remained at 3.99%was 3.96% compared to 4.14% for the same period in 2005. Net interest income for the firstsecond quarter of 2006 includes $262$120 in interest income related to cash flows from certain Heritage loans accounted for under American Institute of Certified Public Accountants Statement of Position 03-3 (“SOP 03-03”03-3”) as compared to $1,048 in interest income from similar loans for the second quarter of 2005. The additional interest income from these loans was due to increased cash flows that exceeded initial estimates. This additional interest income increased net interest margin by 2 and 20 basis points for thisthe second quarter by 5 basis points.of 2006 and 2005, respectively.

Interest income grew 22.26%17.86% to $35,817$37,597 for the firstsecond quarter of 2006 from $29,295$31,900 for the same period in 2005. The growth in interest income was driven by changes in volume and in rate. The average balance of interest earning assets at March 31,June 30, 2006 increased $118,081$141,553 as compared to the same period in 2005.2005 due primarily to the aforementioned loan growth. During this same period, the tax equivalent yield on earning assets increased 8964 basis points to 6.86%7.00%.

Interest expense increased $5,332$5,210 to $15,309$16,655 for the three months ended March 31,June 30, 2006 as compared to $9,977$11,445 for the same period in 2005. This increase resulted from the growth in interest bearing deposits, as well as the increase in the cost of all interest-bearing liabilities. The average balance of interest bearing deposits at March 31,June 30, 2006 increased $205,994$218,547 as compared to the same period in 2005. The cost of interest bearing deposits increased 107101 basis points to 2.96%3.16% for the firstsecond quarter of 2006 compared to 1.89%2.15% for the same period in 2005. Overall, the cost of interest-bearing liabilities increased to 3.22%3.41% for the firstsecond quarter of 2006 from 2.18%2.48% for the same period in 2005.

Noninterest Income

Noninterest income was $11,433$11,033 for the three month period ended March 31,June 30, 2006 compared to $9,903$9,951 for the same period in 2005, an increase of 15.45%10.87%.

Service charges on deposits were $4,424$4,527 for the firstsecond quarter of 2006, an increase of 14.20%8.64% over $3,874$4,167 for the same period in 2005. Service charges represent the largest component of noninterest income. Overdraft fees were $3,744$3,911 for the three month period ended March 31,June 30, 2006, an increase of $536,$402, or 16.71%11.46%, compared to the same period in 2005. This increase is primarily attributed to non-public transaction deposit growth. The amount of the fee charged for insufficient fundsoverdrafts remained the same throughout the second quarter of 2005 and the second quarter of 2006.

Fees and commissions includes fees charged for both deposit services and loan services. Fees and commissions were $3,003$3,659 and $2,505$2,965 for the three month periods ended March 31,June 30, 2006 and 2005, respectively. The Financial Services division focuses on providing specialized products and services to our customers. Specialized products include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Fixed annuities consist of a line of twelve products. We use six insurance carriers, all of which have an A. M. Best rating of an “A” or better. Mutual funds offered by the Company originate primarily from five fund families. Revenues generated from the sale of all of these products totaled $216$325 for the firstsecond quarter of 2006 compared to $249$211 for the same period in 2005. Revenues from these products are included in the Condensed Consolidated Statements of Income in the account line “Fees and commissions.”

Our emphasis on specialized products and services is designed to better serve the needs of our clients. The trust department within the Financial Services division operates on a custodial basis which includes administration of benefit plans, accounting and money management for trust accounts. The trust department manages a number of

trust accounts inclusive of personal and corporate benefit accounts, self-directed IRA’s, and custodial accounts. Fees

for managing these accounts are generated based on the contractual terms of the accounts. Trust revenue for the firstsecond quarter of 2006 was $630 as compared to $625$611 for the same period of 2005. The market value of assets under management as of March 31,June 30, 2006 was $424,810$460,383, an increase of approximately $1,782$28,477 from the prior year.

Gains from sales of mortgage loans increased to $760$674 for the three months ended March 31,June 30, 2006 compared to $693$673 for the same period in 2005. Originations of mortgage loans to be sold totaled $94,210$115,402 for the first three monthssecond quarter of 2006 as compared to $90,710$114,130 for same period in 2005.

Other noninterest income for the first quarter of 2006 includes a $558 gain recognized on the early repayment of an FHLB advance which was called in February 2006 and a $397 nontaxable death benefit from life insurance. In comparison, other noninterest income for the first quarter of 2005 includes $264 from the sale of our Pulse network to Discover.

Noninterest Expense

Noninterest expense was $21,891$22,059 for the three month period ended March 31,June 30, 2006 compared to $20,963$20,857 for the same period in 2005, an increase of $928.$1,202.

Salaries and employee benefits for the three month period ended March 31,June 30, 2006 were $12,212,$12,301, which is $753$781 greater than the same period last year. The increase in salaries and employee benefits is due to normal annual salary increases which were effective March 2006.

Data processing costs for the three month period ended March 31,June 30, 2006 were $1,080,$1,053, an increase of $36$91 compared to the same period last year. Net occupancy expense and equipment expense for the three month period ended March 31,June 30, 2006 increased $181$466 to $2,786$2,688 over the comparable period for the prior year primarily due to our de novo branch office efforts. Since the first quarter of 2005, the Company has opened three new full service branches.

Amortization of intangible assets decreased to $431$414 for the three months ended March 31,June 30, 2006 compared to $586$571 for the same period in 2005. Intangible assets are amortized over their estimated useful lives, which range between five and ten years.

Noninterest expense as a percentage of average assets was 3.61%3.56% for the three month period ended March 31,June 30, 2006 and 3.63%3.57% for the comparable period in 2005. We anticipate a continued positive impact on future noninterest expense through our investments in personnel, technology, and programs such as High Performance Checking. The net overhead ratio was 1.88%1.78% and 1.70%1.86% for the firstsecond quarter of 2006 and 2005, respectively. The net overhead ratio is defined as noninterest expense less noninterest income, expressed as a percent of average assets. Our efficiency ratio decreasedincreased to 66.83%67.22% for the three month period ended March 31,June 30, 2006 compared to 69.71%66.80% for the same period of 2005.

Income tax expense was $3,233 for the three month period ended June 30, 2006 (with an effective tax rate of 31.46%), compared to $2,495 (with an effective tax rate of 28.67%) for the same period in 2005. We continually seek investing opportunities in assets, primarily through state and local investment securities, whose earnings are given favorable tax treatment.

Results of Operations – Six Months Ended June 30, 2006 as Compared to the Six Months Ended June 30, 2005

Summary

Net income for the six month period ended June 30, 2006 was $13,544, an increase of $1,878, or 16.10%, from net income of $11,666 for the same period in 2005. Basic earnings per share were $1.31 and diluted earnings per share were $1.29 for the six month period ended June 30, 2006, as compared to basic earnings per share of $1.12 and diluted earnings per share of $1.11 for the comparable period a year ago.

Net Interest Income

Net interest income grew 4.22% to $41,450 for the six months ended June 30, 2006 compared to $39,773 for the same period in 2005 due to loan growth and excess funds held in short-term investments. On a tax equivalent basis, net interest margin for the six month period ended June 30, 2006 remained at 3.98% compared to the same period in 2005. Net interest income for the first six months of 2006 includes $382 in interest income related to certain Heritage loans accounted for under SOP 03-3 as compared to $1,048 in interest income from similar loans for the first six months of 2005. This additional interest income increased net interest margin by 4 and 10 basis points for the first six months of 2006 and 2005, respectively.

Interest income grew 19.97% to $73,414 for the six month period ended June 30, 2006 from $61,195 for the same period in 2005. The growth in interest income was driven by changes in volume and in rate. The average balance of interest earning assets at June 30, 2006 increased $131,785 as compared to the same period in 2005. During this same period, the tax equivalent yield on earning assets increased 76 basis points to 6.93%.

Interest expense increased $10,542 to $31,964 for the six months ended June 30, 2006 as compared to $21,422 for the same period in 2005. The average balance of interest bearing deposits at June 30, 2006 increased $212,305 as compared to the same period in 2005. The cost of interest bearing deposits increased 104 basis points to 3.06% for the six months ended June 30, 2006 compared to 2.02% for the same period in 2005. Overall, the cost of interest-bearing liabilities increased to 3.31% for the six months ended June 30, 2006 from 2.34% for the same period in 2005.

Noninterest Income

Noninterest income was $22,466 for the six month period ended June 30, 2006 compared to $19,854 for the same period in 2005, an increase of 13.16%.

Service charges on deposits were $8,591 for the six month period ended June 30, 2006, an increase of 11.32% over $8,041 for the same period in 2005. Overdraft fees were $7,654 for the six month period ended June 30, 2006, an increase of $937, or 13.95%, compared to the same period in 2005.

Fees and commissions for both deposit services and loan services were $6,662 and $5,470 for the six month periods ended June 30, 2006 and 2005, respectively. Revenues generated from the sale of all specialized products by the Financial Services division, as detailed above in the discussion of our results for the three months ended June 30, 2006, totaled $542 for the first six months of 2006 compared to $460 for the same period in 2005. Revenue generated by the trust department for managing accounts (described above in the discussion of our results for the three month period ended June 30, 2006) was $1,260 for the six month period ended June 30, 2006 as compared to $1,236 for the same period of 2005.

Gains from sales of mortgage loans increased to $1,434 for the six months ended June 30, 2006 compared to $1,366 for the same period in 2005. Originations of mortgage loans to be sold totaled $209,612 for the first six months of 2006 as compared to $204,840 for same period in 2005.

Other noninterest income for the six months ending June 30, 2006 includes a $558 gain recognized on the early repayment of an FHLB advance which was called in February 2006 and a $397 nontaxable death benefit from life insurance. In comparison, other noninterest income for the six months ending June 30, 2005 includes $264 from the sale of our Pulse network to Discover.

Noninterest Expense

Noninterest expense was $43,950 for the six month period ended June 30, 2006 compared to $41,820 for the same period in 2005, an increase of $2,130.

Salaries and employee benefits for the six month period ended June 30, 2006 were $24,513, which is $1,534 greater than the same period last year and is due to normal annual salary increases, as discussed above.

Data processing costs for the six month period ended June 30, 2006 were $2,035, an increase of $29 compared to the same period last year. Net occupancy expense and equipment expense for the six month period ended June 30, 2006 increased $647 to $5,474 over the comparable period for the prior year primarily due to our de novo branch office efforts, as discussed above.

Amortization of intangible assets decreased to $845 for the six months ended June 30, 2006 compared to $1,157 for the same period in 2005. Intangible assets are amortized over their estimated useful lives, which range between five and ten years.

Noninterest expense as a percentage of average assets was 3.59% for the six month period ended June 30, 2006 and 3.49% for the comparable period in 2005. The net overhead ratio was 1.76% and 1.84% for the second quarter of 2006 and 2005, respectively. Our efficiency ratio decreased to 67.03% for the six month period ended June 30, 2006 compared to 68.23% for the same period of 2005. The improvements in the net overhead and efficiency ratios were due to the additional noninterest income from the gain on early extinguishment of debt and the death benefit from life insurance described above, as well as from operating efficiencies and income opportunities provided in our new markets of Tennessee and Alabama.

Income tax expense was $2,481$5,714 for the threesix month period ended March 31,June 30, 2006 (with an effective tax rate of 27.62%29.67%), compared to $2,202$4,697 (with an effective tax rate of 28.74%28.71%) for the same period in 2005. The reduction in the effective tax rate for the three months ending March 31, 2006 as compared to the same period in 2005 is reflective of the nontaxable death benefit from life insurance received in the first quarter of 2006. We continually seek investing opportunities in assets whose earnings are given favorable tax treatment.

Allowance and Provision for Loan Losses

The provision for loan losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for loan losses at a level that is adequate to meet the inherent risks of losses on our current portfolio of loans. The appropriate level of the allowance is based on a quarterly analysis of the loan portfolio which includes consideration of such factors as the risk rating of individual credits, the size and diversity of the portfolio, economic conditions, prior loss experience, and the results of periodic credit reviews by internal loan review and regulators.

Our credit quality improved in the first quarter of 2006. Nonperforming loans (accruing loans past due 90 days or more and nonaccrual loans) as a percentage of total loans were .24%.45% and .43%.40% at March 31,June 30, 2006 and 2005, respectively. Nonaccrual loans at March 31,June 30, 2006, were $2,509, down $1,2985,978, up $1,821 as compared to the balance at March 31,June 30, 2005. During the second quarter of 2006, we placed a single relationship totaling approximately $3.8 million on nonaccrual status. At June 30, 2006, this one relationship accounted for 50.24% of total nonperforming loans. We have evaluated this loan and other loans classified as nonperforming and concluded at June 30, 2006 these loans are adequately reserved for in the allowance for loan losses.

TheWe recorded a negative provision for loan losses was $1,068 and $597of $360 during the second quarter of 2006 compared to a provision for loan losses of $847 for the three months ended March 31, 2006 and 2005, respectively.same period in 2005. For the firstsecond quarter of 2006, net charge-offsrecoveries were $958,$(877), or .23%(0.20)% annualized as a percentage of average loans. Netloans compared to net charge-offs for the same period in 2005 of $780, or 0.19% annualized. During the second quarter of 2006, we recovered $1,256 on loans previously charged-off. Of the total recoveries for the second quarter of 2006, two recoveries, associated with loans charged-off by Heritage prior to its acquisition by us, totaling $875 comprise the majority of the recoveries.

For the six months ending June 30, 2006, we recorded a provision for loan losses of $708 as compared to $1,444 for the same period in 2005. Net charge-offs were $1,186,$81, or .31% annualized..01% annualized as a percentage of average loans, for the first six months of 2006 due in large part to the aforementioned recoveries as compared to $1,967, or .25% annualized, for the same period in 2005

In determining the amount of provision to charge to operations, management considers the risk rating of individual credits, the size and diversity of the loan portfolio, current trends in net charge-offs, trends in non-performing loans, trends in past due loans and current economic conditions in the markets in which we operate.

The allowance for loan losses as a percentage of loans was 1.11%1.10% at March 31,June 30, 2006 as compared to 1.12% at December 31, 2005, and 1.14% at June 30, 2005. The reduction of the allowance for loan losses as a percentage of loans was caused by our improved credit quality andprimarily due to growth in the loan portfolio. SOP 03-3 prohibits the carryover of an allowance for loan loss for loans acquired in which the acquirer concludes that the acquirer will not collect the contractual payments. Certain loans acquired as a part of our acquisition of Heritage experienced credit deterioration since the date of origination of the credits to the date of our acquisition of Heritage. These loans, which had an outstanding balance of $18,839 at the date of acquisition, are now carried at a balance which management believes, based on the facts and circumstances surrounding each respective loan at the date of our acquisition of Heritage, represents their future cash flows. We continually monitor these loans as part of our normal credit review and monitoring procedures for changes in the estimated future cash flows. At March 31, 2006, the carrying balance of these loans was $6,439.

The table below presents information and ratios regarding loans, net charge-offs, the allowance for loan losses and nonperforming loans.