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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number 000-49928



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TEXAS UNITED BANCSHARES, INC.

(Exact
name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 75-2768656                          
|(State or other jurisdiction of Incorporation or organization) |  | (I.R.S. Employer Identification No.)

109 N. Main Street

LA GRANGE, TEXAS 78945

(Address of principal executive offices including zip
code)

(979) 968-8451

(Registrants telephone number, including area code)



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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 Exchange Act. (Check one):

Large accelerated
filer: ̈Accelerated filer:  x    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.

As of July 31, 2006, the number of outstanding shares of Common Stock, par value $1.00 per share, was 10,699,318.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                             |  |                                                                                       |  |   
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I Financial Information
|Item 1.                      |  | Condensed Consolidated Financial Statements                                           |  | 1 
|                             |  | CONDENSED CONSOLIDATED BALANCE SHEETS                                                 |  | 1 
|                             |  | CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS                                         |  | 2 
|                             |  | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                       |  | 3 
|                             |  | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY                            |  | 4 
|                             |  | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                       |  | 5 
|                             |  | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                  |  | 6 
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 35
|Item 4.                      |  | Controls and Procedures                                                               |  | 35
|                            
|PART II Other Information   
|Item 1.                      |  | Legal Proceedings                                                                     |  | 36
|Item 1A.                     |  | Risk Factors                                                                          |  | 36
|Item 2.                      |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 38
|Item 3.                      |  | Defaults Upon Senior Securities                                                       |  | 38
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                   |  | 38
|Item 5.                      |  | Other Information                                                                     |  | 38
|Item 6.                      |  | Exhibits                                                                              |  | 39
|Signatures                   |  | 40                                                                                   



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##### Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements.

TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)



|                                                                                                                                                                                                                          |  |              |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                          |  | June 30,2006 |           |   | December 31,2005 |  
|                                                                                                                                                                                                                          |  | (Unaudited)  |           |   |                  |  
|ASSETS                                                                                                                                                                                                                    |  |              |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                                                                   |  | $            | 66,548    |   |                  | $ | 61,766    |  
|Federal funds sold                                                                                                                                                                                                        |  |              | 9,660     |   |                  |   | 33,620    |  
|                                                                                                                                                                                                                          |  |              |           |   |                  |   |           |  
|Total cash and cash equivalents                                                                                                                                                                                           |  |              | 76,208    |   |                  |   | 95,386    |  
|Securities available-for-sale, at fair value                                                                                                                                                                              |  |              | 255,051   |   |                  |   | 243,011   |  
|Securities held-to-maturity, at cost                                                                                                                                                                                      |  |              | 25,582    |   |                  |   | 26,163    |  
|Loans, net                                                                                                                                                                                                                |  |              | 1,218,494 |   |                  |   | 1,004,709 |  
|Loans held for sale                                                                                                                                                                                                       |  |              | 25,728    |   |                  |   | 17,537    |  
|Premises and equipment, net                                                                                                                                                                                               |  |              | 64,124    |   |                  |   | 53,610    |  
|Accrued interest receivable                                                                                                                                                                                               |  |              | 10,100    |   |                  |   | 7,433     |  
|Goodwill                                                                                                                                                                                                                  |  |              | 86,468    |   |                  |   | 63,396    |  
|Core deposit intangibles                                                                                                                                                                                                  |  |              | 12,442    |   |                  |   | 8,847     |  
|Mortgage servicing rights                                                                                                                                                                                                 |  |              | 5,188     |   |                  |   | 4,878     |  
|Other assets                                                                                                                                                                                                              |  |              | 38,910    |   |                  |   | 27,489    |  
|                                                                                                                                                                                                                          |  |              |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                                              |  | $            | 1,818,295 |   |                  | $ | 1,552,459 |  
|                                                                                                                                                                                                                          |  |              |           |   |                  |   |           |  
|                                                                                                                                                                                                                          |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                      |  |              |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                                                                              |  |              |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                                                                                       |  | $            | 377,022   |   |                  | $ | 317,723   |  
|Interest-bearing                                                                                                                                                                                                          |  |              | 945,522   |   |                  |   | 803,699   |  
|                                                                                                                                                                                                                          |  |              |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                                                            |  |              | 1,322,544 |   |                  |   | 1,121,422 |  
|Securities sold under repurchase agreements                                                                                                                                                                               |  |              | 10,112    |   |                  |   | 7,120     |  
|Federal funds purchased                                                                                                                                                                                                   |  |              | 30,807    |   |                  |   | 21,901    |  
|Junior subordinated deferrable interest debentures                                                                                                                                                                        |  |              | 49,996    |   |                  |   | 37,624    |  
|Borrowings                                                                                                                                                                                                                |  |              | 220,278   |   |                  |   | 205,755   |  
|Other liabilities                                                                                                                                                                                                         |  |              | 15,260    |   |                  |   | 20,724    |  
|                                                                                                                                                                                                                          |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                                         |  |              | 1,648,997 |   |                  |   | 1,414,546 |  
|Commitments and contingencies                                                                                                                                                                                             |  |              |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                                                                     |  |              |           |   |                  |   |           |  
|Preferred stock, no par value, 500,000 shares authorized; none issued                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Common stock, $1.00 par value, 20,000,000 authorized; 10,647,265 shares issued and 10,641,170 shares outstanding as of June 30, 2006 and
9,210,171 shares issued and 9,204,076 shares outstanding as of December 31, 2005 |  |              | 10,647    |   |                  |   | 9,210     |  
|Additional paid-in-capital                                                                                                                                                                                                |  |              | 128,546   |   |                  |   | 102,682   |  
|Retained earnings                                                                                                                                                                                                         |  |              | 36,379    |   |                  |   | 30,045    |  
|Accumulated other comprehensive loss                                                                                                                                                                                      |  |              | (6,157    | ) |                  |   | (3,907    | )
|Less common stock held in treasury, at cost                                                                                                                                                                               |  |              | (117      | ) |                  |   | (117      | )
|                                                                                                                                                                                                                          |  |              |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                                                |  |              | 169,298   |   |                  |   | 137,913   |  
|                                                                                                                                                                                                                          |  |              |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                                |  | $            | 1,818,295 |   |                  | $ | 1,552,459 |  
|                                                                                                                                                                                                                          |  |              |           |   |                  |   |           |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)



|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | -------------------- | ------ | - | ------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                    |  | For the Three Months |        |   | For the Six Months |  
|                                                    |  | Ended June 30,       |        |   | Ended June 30,     |  
|                                                    |  | 2006                 |        |   | 2005               |   |        | 2006 |  |   | 2005   |  
|Interest income:                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Loans                                               |  | $                    | 26,613 |   |                    | $ | 14,840 |      |  | $ | 48,548 |   |  | $ | 28,499 |  
|Investment securities - taxable                     |  |                      | 2,539  |   |                    |   | 2,810  |      |  |   | 4,969  |   |  |   | 5,577  |  
|Investment securities - tax-exempt                  |  |                      | 441    |   |                    |   | 97     |      |  |   | 815    |   |  |   | 194    |  
|Federal funds sold and other temporary investments  |  |                      | 267    |   |                    |   | 31     |      |  |   | 568    |   |  |   | 39     |  
|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Total interest income                               |  |                      | 29,860 |   |                    |   | 17,778 |      |  |   | 54,900 |   |  |   | 34,309 |  
|Interest expense:                                   |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Deposits                                            |  |                      | 6,709  |   |                    |   | 3,350  |      |  |   | 12,146 |   |  |   | 6,427  |  
|Federal funds purchased                             |  |                      | 231    |   |                    |   | 331    |      |  |   | 333    |   |  |   | 507    |  
|Borrowings                                          |  |                      | 2,588  |   |                    |   | 738    |      |  |   | 4,833  |   |  |   | 1,547  |  
|Securities sold under repurchase agreements         |  |                      | 59     |   |                    |   | 26     |      |  |   | 98     |   |  |   | 46     |  
|Junior subordinated deferrable interest debentures  |  |                      | 965    |   |                    |   | 391    |      |  |   | 1,724  |   |  |   | 781    |  
|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Total interest expense                              |  |                      | 10,552 |   |                    |   | 4,836  |      |  |   | 19,134 |   |  |   | 9,308  |  
|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Net interest income                                 |  |                      | 19,308 |   |                    |   | 12,942 |      |  |   | 35,766 |   |  |   | 25,001 |  
|Provision for loan losses                           |  |                      | 635    |   |                    |   | 1,041  |      |  |   | 1,195  |   |  |   | 1,763  |  
|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Net interest income after provision for loan losses |  |                      | 18,673 |   |                    |   | 11,901 |      |  |   | 34,571 |   |  |   | 23,238 |  
|Noninterest income:                                 |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Service charges on deposit accounts                 |  |                      | 3,082  |   |                    |   | 1,978  |      |  |   | 5,618  |   |  |   | 3,812  |  
|Mortgage servicing revenue                          |  |                      | 451    |   |                    |   | 263    |      |  |   | 677    |   |  |   | 559    |  
|Net loss on sales of securities                     |  |                      | (134   | ) |                    |   | (84    | )    |  |   | (132   | ) |  |   | (122   | )
|Net gain on sales of loans                          |  |                      | 1,852  |   |                    |   | 2,385  |      |  |   | 3,584  |   |  |   | 4,975  |  
|Other noninterest income                            |  |                      | 1,474  |   |                    |   | 704    |      |  |   | 3,727  |   |  |   | 2,319  |  
|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest income                            |  |                      | 6,725  |   |                    |   | 5,246  |      |  |   | 13,474 |   |  |   | 11,543 |  
|Noninterest expense:                                |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Employee compensation and benefits                  |  |                      | 10,818 |   |                    |   | 8,180  |      |  |   | 21,035 |   |  |   | 15,241 |  
|Occupancy expense                                   |  |                      | 2,824  |   |                    |   | 1,970  |      |  |   | 5,234  |   |  |   | 3,775  |  
|Other noninterest expense                           |  |                      | 5,652  |   |                    |   | 3,047  |      |  |   | 10,110 |   |  |   | 7,620  |  
|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest expense                           |  |                      | 19,294 |   |                    |   | 13,197 |      |  |   | 36,379 |   |  |   | 26,636 |  
|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Earnings before income taxes                        |  |                      | 6,104  |   |                    |   | 3,950  |      |  |   | 11,666 |   |  |   | 8,145  |  
|Provision for income taxes                          |  |                      | 1,946  |   |                    |   | 1,338  |      |  |   | 3,708  |   |  |   | 2,731  |  
|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Net earnings                                        |  | $                    | 4,158  |   |                    | $ | 2,612  |      |  | $ | 7,958  |   |  | $ | 5,414  |  
|                                                    |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|                                                    |  |                      |        |  
|Earnings per common share:                          |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Basic                                               |  | $                    | 0.39   |   |                    | $ | 0.33   |      |  | $ | 0.79   |   |  | $ | 0.69   |  
|Diluted                                             |  | $                    | 0.39   |   |                    | $ | 0.33   |      |  | $ | 0.78   |   |  | $ | 0.68   |  
|                                                    |  |                      |        |  
|Weighted average shares outstanding:                |  |                      |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Basic                                               |  |                      | 10,576 |   |                    |   | 7,805  |      |  |   | 10,012 |   |  |   | 7,802  |  
|Diluted                                             |  |                      | 10,753 |   |                    |   | 7,964  |      |  |   | 10,146 |   |  |   | 7,966  |  
|                                                    |  |                      |        |  
|Dividends per common share                          |  | $                    | 0.08   |   |                    | $ | 0.08   |      |  | $ | 0.16   |   |  | $ | 0.16   |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)



|                                                                                     |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ---------------------------------- | ------ | - | -------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                     |  | For the Three MonthsEnded June 30, |        |   | For the Six MonthsEnded June 30, |  
|                                                                                     |  | 2006                               |        |   | 2005                             |   |       | 2006 |  |   | 2005   |  
|                                                                                     |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Net earnings                                                                         |  | $                                  | 4,158  |   |                                  | $ | 2,612 |      |  | $ | 7,958  |   |  | $ | 5,414  |  
|                                                                                     |  |                                    |        |  
|Other comprehensive income (loss), net of tax:                                       |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Unrealized holding (losses) gains on investment securities arising during the period |  |                                    | (1,598 | ) |                                  |   | 1,223 |      |  |   | (2,164 | ) |  |   | (1,666 | )
|Less: reclassification adjustment for (losses) gains included in net income          |  |                                    | 87     |   |                                  |   | (55   | )    |  |   | 86     |   |  |   | (81    | )
|                                                                                     |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Other comprehensive (loss) income                                                    |  |                                    | (1,685 | ) |                                  |   | 1,278 |      |  |   | (2,250 | ) |  |   | (1,585 | )
|                                                                                     |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Total comprehensive income                                                           |  | $                                  | 2,473  |   |                                  | $ | 3,890 |      |  | $ | 5,708  |   |  | $ | 3,829  |  
|                                                                                     |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|                                                                                     |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements.



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders Equity

Year Ended December 31, 2005 and

Six Months Ended June 30, 2006

(In thousands, except share amounts)



|                                                                      |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|--------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ------ | ---------------- | - | ------- | --------------------------------- | - | ------ | -------------------- |  | - | ------ | - |  | - | ---- | - |  | - | ------- | -
|                                                                      |  |              |  | AdditionalPaid-inCapital |        | RetainedEarnings |   |         | AccumulatedOtherComprehensiveLoss |   |        | TreasuryStock AtCost |  |   | Total  |  
|                                                                      |  | Common Stock |  |                          |        |                  |  
|                                                                      |  | Shares       |  | At Par                   |        |                  |   |         |                                  
|                                                                      |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|Balance at January 1, 2005                                            |  | 7,802,467    |  | $                        | 7,802  |                  | $ | 75,935  |                                   | $ | 21,921 |                      |  | $ | (729   | ) |  | $ | (117 | ) |  | $ | 104,812 |  
|Net earnings                                                          |  |             |  |                          |       |                  |   |        |                                   |   | 10,736 |                      |  |   |       |   |  |   |     |   |  |   | 10,736  |  
|Net change in unrealized loss on available-for-sale securities        |  |             |  |                          |       |                  |   |        |                                   |   |       |                      |  |   | (3,178 | ) |  |   |     |   |  |   | (3,178  | )
|                                                                      |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|Total comprehensive income                                            |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   | 7,558   |  
|Issuance of common stock in connection with the Gateway acquisition   |  | 1,357,379    |  |                          | 1,357  |                  |   | 24,297  |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 25,654  |  
|Stock options issued upon conversion of Gateway stock options         |  |             |  |                          |       |                  |   | 2,209   |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 2,209   |  
|Issuance of common stock upon exercise of stock options               |  | 50,325       |  |                          | 51     |                  |   | 241     |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 292     |  
|Dividends ($0.32 per share)                                           |  |             |  |                          |       |                  |   |        |                                   |   | (2,612 | )                    |  |   |       |   |  |   |     |   |  |   | (2,612  | )
|                                                                      |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|Balance at December 31, 2005                                          |  | 9,210,171    |  | $                        | 9,210  |                  | $ | 102,682 |                                   | $ | 30,045 |                      |  | $ | (3,907 | ) |  | $ | (117 | ) |  | $ | 137,913 |  
|                                                                      |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|                                                                      |  |              |  |                          |        |                 
|                                                                      |  | (Unaudited)  |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   | 
|                                                                      |  |              |  | AdditionalPaid-inCapital |        | RetainedEarnings |   |         | AccumulatedOtherComprehensiveLoss |   |        | TreasuryStock AtCost |  |   | Total  |  
|                                                                      |  | Common Stock |  |                          |        |                  |  
|                                                                      |  | Shares       |  | At Par                   |        |                  |   |         |                                  
|                                                                      |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|Balance at January 1, 2006                                            |  | 9,210,171    |  | $                        | 9,210  |                  | $ | 102,682 |                                   | $ | 30,045 |                      |  | $ | (3,907 | ) |  | $ | (117 | ) |  | $ | 137,913 |  
|Net earnings                                                          |  |             |  |                          |       |                  |   |        |                                   |   | 7,958  |                      |  |   |       |   |  |   |     |   |  |   | 7,958   |  
|Net change in unrealized loss on available-for-sale securities        |  |             |  |                          |       |                  |   |        |                                   |   |       |                      |  |   | (2,250 | ) |  |   |     |   |  |   | (2,250  | )
|                                                                      |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|Total comprehensive income                                            |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   | 5,708   |  
|Issuance of common stock in connection with the Express acquisition   |  | 248,317      |  |                          | 248    |                  |   | 4,327   |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 4,575   |  
|Issuance of common stock in connection with the Northwest acquisition |  | 984,906      |  |                          | 985    |                  |   | 19,856  |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 20,841  |  
|Issuance of common stock upon exercise of stock options               |  | 195,156      |  |                          | 195    |                  |   | 1,448   |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 1,643   |  
|Compensation expense related to stock grants                          |  | 8,715        |  |                          | 9      |                  |   | 156     |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 165     |  
|Stock option compensation expense                                     |  |             |  |                          |       |                  |   | 77      |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 77      |  
|Dividends ($0.16 per share)                                           |  |             |  |                          |       |                  |   |        |                                   |   | (1,624 | )                    |  |   |       |   |  |   |     |   |  |   | (1,624  | )
|                                                                      |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|Balance at June 30, 2006                                              |  | 10,647,265   |  | $                        | 10,647 |                  | $ | 128,546 |                                   | $ | 36,379 |                      |  | $ | (6,157 | ) |  | $ | (117 | ) |  | $ | 169,298 |  
|                                                                      |  |              |  |                          |        |                  |   |         |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                                   |  |                                  |            |   |      |   |          |  
|-------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ---- | - | -------- | -
|                                                                                                   |  | For the Six MonthsEnded June 30, |           
|                                                                                                   |  | 2006                             |            |   | 2005 |  
|Cash flows from operating activities:                                                              |  |                                  |            |   |      |   |          |  
|Net earnings                                                                                       |  | $                                | 7,958      |   |      | $ | 5,414    |  
|Adjustments to reconcile net earnings to cash provided by (used in) operating activities:          |  |                                  |            |   |      |   |          |  
|Provision for loan losses                                                                          |  |                                  | 1,195      |   |      |   | 1,763    |  
|Depreciation and amortization                                                                      |  |                                  | 2,894      |   |      |   | 2,410    |  
|Loss (gain) on sale of premises, equipment, and other real estate                                  |  |                                  | 138        |   |      |   | (544     | )
|Gain on sale of loans                                                                              |  |                                  | (3,584     | ) |      |   | (4,975   | )
|Share-based compensation                                                                           |  |                                  | 242        |   |      |   |         |  
|Realized loss on sales of available-for-sale securities, net                                       |  |                                  | 132        |   |      |   | 122      |  
|Amortization of premium, net of accretion of discounts on securities                               |  |                                  | 335        |   |      |   | 636      |  
|Origination of loans held for sale                                                                 |  |                                  | (188,597   | ) |      |   | (109,436 | )
|Sale of loans receivable held for sale                                                             |  |                                  | 183,990    |   |      |   | 127,048  |  
|Changes in assets and liabilities, net of effects resulting from acquisitions:                     |  |                                  |            |   |      |   |          |  
|Other assets                                                                                       |  |                                  | (2,073     | ) |      |   | (3,533   | )
|Other liabilities                                                                                  |  |                                  | (6,463     | ) |      |   | 177      |  
|                                                                                                   |  |                                  |            |   |      |   |          |  
|Net cash (used in) provided by operating activities                                                |  |                                  | (3,833     | ) |      |   | 19,079   |  
|Cash flows from investing activities:                                                              |  |                                  |            |   |      |   |          |  
|Purchases of available-for-sale securities, net of effects resulting from acquisitions             |  |                                  | (1,082,565 | ) |      |   | (27,934  | )
|Purchase of held-to-maturity securities                                                            |  |                                  |           |   |      |   | (12,826  | )
|Proceeds from sales, maturities, and principal paydowns of securities held-to-maturity             |  |                                  | 1,628      |   |      |   |         |  
|Proceeds from sales, maturities, and principal paydowns of securities available-for-sale           |  |                                  | 1,070,919  |   |      |   | 35,592   |  
|Net change in loans, net of effects resulting from acquisitions                                    |  |                                  | (91,494    | ) |      |   | (111,801 | )
|Proceeds from sales of premises, equipment, loans, and other real estate                           |  |                                  | 3,216      |   |      |   | 5,519    |  
|Net cash and cash equivalents received from Express acquisition                                    |  |                                  | 12,189     |   |      |   |         |  
|Net cash and cash equivalents received from Northwest acquisition                                  |  |                                  | 4,720      |   |      |   |         |  
|Purchases of premises, equipment and other real estate, net of effects resulting from acquisitions |  |                                  | (2,632     | ) |      |   | (4,015   | )
|Purchases of bank owned life insurance                                                             |  |                                  | (12,500    | ) |      |   |         |  
|                                                                                                   |  |                                  |            |   |      |   |          |  
|Net cash used in investing activities                                                              |  |                                  | (96,519    | ) |      |   | (115,465 | )
|Cash flows from financing activities:                                                              |  |                                  |            |   |      |   |          |  
|Net change in:                                                                                     |  |                                  |            |   |      |   |          |  
|Deposits                                                                                           |  |                                  | 42,363     |   |      |   | 22,281   |  
|Other borrowings                                                                                   |  |                                  | 14,523     |   |      |   | 58,589   |  
|Federal funds purchased                                                                            |  |                                  | 8,906      |   |      |   | 16,796   |  
|Securities sold under repurchase agreements                                                        |  |                                  | 2,992      |   |      |   | 76       |  
|Net proceeds from issuance of junior subordinated deferrable interest debentures                   |  |                                  | 12,372     |   |      |   |         |  
|Net proceeds from issuance of common stock upon exercise of employee stock options                 |  |                                  | 1,035      |   |      |   | 52       |  
|Excess tax deductions on the exercise of employee stock options                                    |  |                                  | 607        |   |      |   |         |  
|Dividends paid                                                                                     |  |                                  | (1,624     | ) |      |   | (1,163   | )
|                                                                                                   |  |                                  |            |   |      |   |          |  
|Net cash provided by financing activities                                                          |  |                                  | 81,174     |   |      |   | 96,631   |  
|                                                                                                   |  |                                  |            |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents                                               |  |                                  | (19,178    | ) |      |   | 245      |  
|Cash and cash equivalents at beginning of period                                                   |  |                                  | 95,386     |   |      |   | 40,767   |  
|                                                                                                   |  |                                  |            |   |      |   |          |  
|Cash and cash equivalents at end of period                                                         |  | $                                | 76,208     |   |      | $ | 41,012   |  
|                                                                                                   |  |                                  |            |   |      |   |          |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006

(UNAUDITED)

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the accounts of Texas United Bancshares, Inc. (the
Company) and its wholly-owned subsidiaries, Texas United Nevada, LLC (TUN), State Bank (State), GNB Financial, n.a. (GNB), Gateway National Bank (Gateway), and Northwest Bank
(Northwest). All material intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements of the Company.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and
with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the
Companys consolidated financial position at June 30, 2006, the Companys consolidated results of operations for the three and six months ended June 30, 2006 and 2005, respectively, consolidated cash flows for the six months
ended June 30, 2006 and 2005, and consolidated changes in shareholders equity for the six months ended June 30, 2006. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year
period. The 2005 year-end consolidated balance sheet and statement of changes in shareholders equity data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted
in the United States of America.

Certain amounts applicable to the prior periods have been reclassified to conform to the classifications
currently followed. Such reclassifications do not effect earnings.

These financial statements and the notes thereto should be read in
conjunction with the Companys audited consolidated financial statements for the year ended December 31, 2005 appearing in the Companys Annual Report on Form 10-K.

2. STOCK BASED COMPENSATION

On January 1, 2006, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 123 (Revised 2004) (SFAS 123(R)), Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion 25,
Accounting for Stock Issued to Employees. SFAS 123(R) requires the Company to recognize expense related to the fair value of its stock-based compensation awards, including employee stock options.

Prior to the adoption of SFAS 123(R), the Company accounted for stock-based compensation awards using the intrinsic value method of APB Opinion 25.
Accordingly, the Company did not recognize compensation expense in the statement of earnings for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant. As required by SFAS 123, the
Company also provided certain pro forma disclosures for stock-based awards as if the fair value-based approach of SFAS 123 had been applied.

The Company elected to use the modified prospective transition method as permitted by SFAS 123(R) and therefore did not restate its financial results for prior periods. Under this transition method, the Company will apply the provisions of
SFAS 123(R) to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, the Company will recognize compensation cost for the portion of awards for which the requisite service has not been rendered
(unvested awards) that are outstanding as of January 1, 2006, and as the remaining service is rendered. The compensation cost the Company will record for these awards will be based on the grant date fair value as calculated for the pro forma
disclosures required by SFAS 123.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

JUNE 30, 2006

(UNAUDITED)

The Companys
pre-tax compensation cost for share-based employee compensation for stock options was $40,000 ($26,000 after tax effects) for the three months ended June 30, 2006, and $77,000 ($50,000 after tax effects) for the six months ended June 30,
2006. As a result of the adoption of SFAS 123(R), the Companys financial results were lower than under its previous accounting method for share-based compensation by the following amounts:



|                                  |  |                                        |    |                                      |   |   
|--------------------------------- |  | -------------------------------------- | -- | ------------------------------------ | - | --
|                                  |  | For the Three MonthsEnded June 30,2006 |    | For the Six MonthsEnded June 30,2006
|                                  |  | (In thousands, except per share data) 
|                                  |  |                                        |    |                                      |   |   
|Earnings before income taxes      |  | $                                      | 40 |                                      | $ | 77
|Net earnings                      |  |                                        | 26 |                                      |   | 50
|Basic earnings per common share   |  | $                                      |   |                                      | $ |  
|Diluted earnings per common share |  |                                        |   |                                      |   |  

Prior to the adoption of SFAS 123(R), to the extent that they would have existed, the Company
would have presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Condensed Consolidated Statements of Cash Flows. SFAS 123(R) requires that cash flows from the exercise of stock options resulting from
tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) be classified as financing cash flows. For the three and six months ended June 30, 2006, there was a tax benefit of approximately $43,000 and $607,000,
respectively, as a result of the exercise of stock options.

The following table illustrates the effect on net earnings after tax and net
earnings per common share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation for the three and six months ended June 30, 2005:



|                                                                                                                                                                  |  |                                       |       |                                     |   |      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | ----------------------------------- | - | -----
|                                                                                                                                                                  |  | For the ThreeMonths EndedJune 30,2005 |       | For the SixMonths EndedJune 30,2005
|                                                                                                                                                                  |  | (In thousands, except per share data)
|                                                                                                                                                                  |  |                                       |       |                                     |   |      
|Net earnings as reported                                                                                                                                          |  | $                                     | 2,612 |                                     | $ | 5,414
|Plus:  Share-based  employee compensation expense included in reported net income, net of related   tax
effects                                                   |  |                                       |      |                                     |   |     
|Less:  Share-based  employee compensation expense determined under fair value-based method for   awards granted,
modified, or settled, net of related tax effects |  |                                       | 25    |                                     |   | 38   
|                                                                                                                                                                  |  |                                       |       |                                     |   |      
|Pro forma net earnings                                                                                                                                            |  | $                                     | 2,587 |                                     | $ | 5,376
|                                                                                                                                                                  |  |                                       |       |                                     |   |      
|                                                                                                                                                                  |  |                                      
|Earnings per share:                                                                                                                                               |  |                                       |       |                                     |   |      
|Basic - as reported                                                                                                                                               |  | $                                     | 0.33  |                                     | $ | 0.69 
|Basic - pro forma                                                                                                                                                 |  | $                                     | 0.33  |                                     | $ | 0.69 
|                                                                                                                                                                  |  |                                      
|Diluted - as reported                                                                                                                                             |  | $                                     | 0.33  |                                     | $ | 0.68 
|Diluted - pro forma                                                                                                                                               |  | $                                     | 0.32  |                                     | $ | 0.67 



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

JUNE 30, 2006

(UNAUDITED)

The fair value of
options granted is estimated on the date of grant using the Black-Scholes-Merton option pricing model based on the assumptions in the table below:



|                        |  |                                    |  |  |  |         
|----------------------- |  | ---------------------------------- |  |  |  | --------
|                        |  | For the Three MonthsEnded June 30,
|                        |  | 2006                               |  |  |  | 2005    
|                        |  |                                    |  |  |  |         
|Expected term           |  | 5 years                            |  |  |  | 10 years
|Risk-free interest rate |  | 4.95%                              |  |  |  | 3.86%   
|Volatility              |  | 26.00%                             |  |  |  | 40.00%  
|Dividend yield          |  | 1.60%                              |  |  |  | 1.79%   

The expected term of the options is based on evaluations of historical and expected future
employee exercise behavior. The risk-free interest rate was based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of the
Companys common stock since the Company became publicly traded. The historical period over which volatility was calculated does not correspond to the expected term of the options as the Company feels that the volatility since becoming public
is more representative of the expected future volatility. The dividend yield is based on the projected dividends to be paid in future periods and the expected stock price in those periods using the volatility factor noted above.

Share-Based Payment Plans and Agreements

The
Company has nonqualified common stock option agreements (executive agreements) with two executive officers (one of whom is also a director). The options were granted under the executive agreements in 1996 and 1997 and each grant has a
ten year term and both vest and become exercisable at 20% each year for five years. The exercise price of the options granted under the executive agreements will be the market value at the date of grant. During the three and six months ended
June 30, 2006, under these two agreements, no stock options were granted, 33,750 stock options were exercised, and no stock options were forfeited or expired. At June 30, 2006, there were 16,875 stock options outstanding under these executive
agreements.

On July 28, 1998, the Board of Directors adopted the Texas United Bancshares, Inc. 1998 Incentive Stock Option Plan (the
1998 Plan) which was approved by the Companys shareholders on April 22, 1999. Under the 1998 Plan, 337,500 shares of common stock were reserved for issuance upon the exercise of qualified incentive stock options. As of
June 30, 2006, options to acquire 337,469 shares have been previously granted and 31 shares are available for future grants. Options granted under the 1998 Plan have a maximum term of ten years and become exercisable under the terms of the
respective option agreements. The exercise price of the options granted under the 1998 Plan may not be less than the fair market value of the shares on the date the option is granted, unless a person owns 10% or more of the common stock of the
Company, in which case it may not be less than 110% of the fair market value of the shares on the date of grant. The 1998 Plan terminates 15 years from shareholder approval on April 22, 2014, after which no further shares will be granted under
the plan.

On July 14, 2004, the Companys Board of Directors adopted the Texas United Bancshares, Inc. 2004 Stock Incentive Plan
(the 2004 Plan) which was approved by the Companys shareholders on September 14, 2004. Under the 2004 Plan, 250,000 shares of common stock were reserved for issuance upon the exercise of incentive stock options and
nonqualified stock options granted under the 2004 Plan or upon the grant of restricted stock awards under the 2004 Plan. As of June 30, 2006, there were 93,300 stock options and 57,105 shares of restricted stock granted under the 2004 Plan. As
of June 30, 2006, there were 99,595 shares available for future grants under the 2004 Plan. Options granted under the 2004 Plan have a maximum term of ten years. The exercise price of any incentive stock options granted under the 2004 Plan may
not be less than fair market value of the shares of common stock on the date the option is granted, unless a person owns 10% or more of the common stock of the Company, in which case it may not be less than 110% of the fair market value of the
shares on the date of grant. The 2004 Plan terminates 10 years from adoption by the Board of Directors on July 14, 2014, after which no further shares will be granted under the plan.

The Company has granted nonvested shares (restricted stock) to certain directors and employees under the 2004 Plan. The person is not
entitled to the shares until they vest, which is over a 3 to 5 year period. The shares granted do not have a cost to the person and the only requirement of vesting is continued service to the Company. Compensation cost related to restricted stock is
calculated based on the fair value of the shares at the date of grant. If the person leaves the Company before the shares vest, the unvested shares are forfeited. The person is entitled to receive dividends on and vote



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

JUNE 30, 2006

(UNAUDITED)

the shares prior to vesting. As of
June 30, 2006, there were 57,105 shares of restricted stock outstanding, all of which were granted during the first quarter of 2006, with a weighted average grant date fair value of $18.95.

On December 1, 2005, the Company acquired Gateway Holding Company. The options to purchase shares of Gateway Holding Company common stock
outstanding at the effective time of the transaction were converted into fully vested stock options to purchase a total of 160,867 shares of the Companys common stock at exercise prices ranging from $4.64 to $6.73 per share. The converted
options are governed by the original Gateway Plan under which they were issued. For the three months ended June 30, 2006, 20,978 stock options were exercised under the Gateway Plan. For the six months ended June 30, 2006, 107,591 stock
options were exercised under the Gateway Plan. As of June 30, 2006, 53,276 stock options were outstanding under the Gateway Plan.

The
following summarizes the Companys stock option plans with shares available for grant at June 30, 2006:



|                                                                             |  |                |  |              
|---------------------------------------------------------------------------- |  | -------------- |  | -------------
|                                                                             |  | 1998 Plan      |  | 2004 Plan    
|                                                                             |  |                |  |              
|Minimum exercise price as a percentage of fair market value at date of grant |  | 100%           |  | 100%         
|Plan termination date                                                        |  | April 22, 2014 |  | July 14, 2014
|Shares available for grant at June 30, 2006                                  |  | 31             |  | 99,595       
|                                                                             |  |                |  |              

Option grants under the executive agreements, the 1998 Plan and the 2004 Plan have contractual
lives of ten years. Option grants under these plans vest based on the schedule specified in each grant agreement which range from 20% to 33% per year. Vesting occurs on each anniversary of the grant date commencing with the first anniversary.
The Company recognizes compensation costs for these awards on a straight-line basis over the service period.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

JUNE 30, 2006

(UNAUDITED)

The following is a
summary of the changes in outstanding options for the three and six months ended June 30, 2006:



|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|------------------------------ |  | ---------------------------------------- | - |  | ------------------------------------- | ----- | -------------------------------------------------- | ---- | -------------------------------------- | - | ------ | -
|                               |  | For the Three Months Ended June 30, 2006 |  
|                               |  | Number ofShares                          |   |  | WeightedAverageExercisePricePer Share |       | WeightedAverageRemainingContractualLife (In years) |      | AggregateIntrinsic Value(In thousands) |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|Outstanding at April 1, 2006   |  | 346,279                                  |   |  | $                                     | 10.02 |                                                    | 3.92 |                                        | $ | 6,278  |  
|Granted                        |  | 5,000                                    |   |  |                                       | 20.16 |                                                    | 9.83 |                                        |   | 40     |  
|Exercised                      |  | (70,919                                  | ) |  |                                       | 6.29  |                                                    | 3.00 |                                        |   | (1,550 | )
|Forfeited                      |  |                                         |   |  |                                       |      |                                                    |     |                                        |   |       |  
|Expired                        |  |                                         |   |  |                                       |      |                                                    |     |                                        |   |       |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|Outstanding at June 30, 2006   |  | 280,360                                  |   |  | $                                     | 11.16 |                                                    | 4.49 |                                        | $ | 4,763  |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|                               |  |                                          |   | 
|Exercisable at June 30, 2006   |  | 182,636                                  |   |  | $                                     | 7.30  |                                                    | 4.43 |                                        | $ | 3,808  |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|                               | 
|                               |  | For the Six Months Ended June 30, 2006   |  
|                               |  | Number ofShares                          |   |  | WeightedAverageExercisePricePer Share |       | WeightedAverageRemainingContractualLife (In years) |      | AggregateIntrinsic Value(In thousands) |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|Outstanding at January 1, 2006 |  | 453,540                                  |   |  | $                                     | 8.23  |                                                    | 4.62 |                                        | $ | 9,035  |  
|Granted                        |  | 25,500                                   |   |  |                                       | 18.95 |                                                    | 9.63 |                                        |   | 235    |  
|Exercised                      |  | (195,157                                 | ) |  |                                       | 5.31  |                                                    | 3.22 |                                        |   | (4,457 | )
|Forfeited                      |  | (3,523                                   | ) |  |                                       | 16.07 |                                                    | 6.61 |                                        |   | (43    | )
|Expired                        |  |                                         |   |  |                                       |      |                                                    |     |                                        |   |       |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|Outstanding at June 30, 2006   |  | 280,360                                  |   |  | $                                     | 11.16 |                                                    | 4.49 |                                        | $ | 4,763  |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|                               |  |                                          |   | 
|Exercisable at June 30, 2006   |  | 182,636                                  |   |  | $                                     | 7.30  |                                                    | 4.43 |                                        | $ | 3,808  |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  
|                               |  |                                          |   |  |                                       |       |                                                    |      |                                        |   |        |  

The weighted average grant date fair value of share options granted during the three and six
months ended June 30, 2006 was $5.52 and $4.81, respectively. The total intrinsic value of share options exercised for the three and six months ended June 30, 2006 was $1.6 million and $4.5 million, respectively.

Other Information

As of June 30, 2006,
the Company had $918,000 of total unrecognized compensation cost related to nonvested awards granted under the Companys share-based plan described above, which is expected to be recognized over a weighted average period of 3.0 years.

The Company received cash from stock options exercised for the three and six months ended June 30, 2006 of $446,000 and $1.035
million, respectively. The impact of these cash receipts is included in financing activities in the accompanying condensed consolidated statements of cash flows. The tax benefit realized upon the exercise of employee stock options was $43,000 for
the three months ended June 30, 2006 and $607,000 for the six months ended June 30, 2006.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

JUNE 30, 2006

(UNAUDITED)

Stock Appreciation Rights
Agreements

The terms of stock appreciation rights agreements (Agreements) grant certain key employees, directors, and
advisors of the Company rights to the appreciation in the fair value (as defined in the Agreements) of a stated number of shares of common stock of the Company. The rights become fully vested and are exercisable under the terms of the respective
Agreements. Although the appreciation of the rights is payable in whole shares of the Companys Common Stock valued at fair market value on the date of the exercise or in cash at the sole discretion of the Company, it is the intention of the
Companys Board of Directors that all stock appreciation rights will be paid in cash. The Agreements terminate on the earliest of: a) ten years from the date of grant, b) the date the employee terminates employment with the Company, if the
Company requests the employees resignation, c) ninety days after the employee terminates employment with the Company, when termination is the employees decision, or d) the date one year after the employees death or disability. The
number of stock appreciation rights issued under the Agreements as of June 30, 2006 were 139,062. Operations are charged or credited for the aggregate appreciation or depreciation of the rights. For the three and six months ended June 30,
2006, the Company expensed $365,600 and $554,900, respectively, related to the agreements. The weighted average fair value of stock appreciation rights granted during the three and six months ended June 30, 2006 was $20.37 per share and $19.24
per share, respectively.

3. EARNINGS PER COMMON SHARE

Basic earnings per share (EPS) is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed
by dividing net earnings available to common shareholders by the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares are computed using the treasury stock
method. Potentially dilutive shares include outstanding stock options granted.



|                                                                                          |  |                                       |        |                                  |   |       |  |      |        |  |   |      
|----------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | -------------------------------- | - | ----- |  | ---- | ------ |  | - | -----
|                                                                                          |  | For the Three MonthsEnded June 30,    |        | For the Six MonthsEnded June 30,
|                                                                                          |  | 2006                                  |        | 2005                             |   | 2006  |  | 2005
|                                                                                          |  | (In thousands, except per share data)
|                                                                                          |  |                                       |        |                                  |   |       |  |      |        |  |   |      
|                                                                                          |  |                                       |        |                                 
|Net earnings available to common shareholders used in basic and diluted EPS               |  | $                                     | 4,158  |                                  | $ | 2,612 |  | $    | 7,958  |  | $ | 5,414
|                                                                                          |  |                                       |        |                                  |   |       |  |      |        |  |   |      
|                                                                                          |  |                                       |        |                                 
|Weighted average common shares used in basic EPS                                          |  |                                       | 10,576 |                                  |   | 7,805 |  |      | 10,012 |  |   | 7,802
|Effect of dilutive securities:                                                            |  |                                       |        |                                  |   |       |  |      |        |  |   |      
|Stock options                                                                             |  |                                       | 177    |                                  |   | 159   |  |      | 134    |  |   | 164  
|                                                                                          |  |                                       |        |                                  |   |       |  |      |        |  |   |      
|Weighted average common shares and potentially dilutive common shares used in diluted EPS |  |                                       | 10,753 |                                  |   | 7,964 |  |      | 10,146 |  |   | 7,966
|                                                                                          |  |                                       |        |                                  |   |       |  |      |        |  |   |      
|                                                                                          |  |                                       |        |                                 
|Basic EPS                                                                                 |  | $                                     | 0.39   |                                  | $ | 0.33  |  | $    | 0.79   |  | $ | 0.69 
|Diluted EPS                                                                               |  | $                                     | 0.39   |                                  | $ | 0.33  |  | $    | 0.78   |  | $ | 0.68 



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

JUNE 30, 2006

(UNAUDITED)

4. INTANGIBLE ASSETS

The gross carrying amount of intangible assets and accumulated amortization at June 30, 2006 is presented in the following table:



|                             |  |                                     |        |                                       |   |        |  
|---------------------------- |  | ----------------------------------- | ------ | ------------------------------------- | - | ------ | -
|                             |  | Gross    Carrying            Amount |        | AccumulatedAmortizationand Impairment |  
|                             |  | (In thousands)                      |       
|Amortized intangible assets: |  |                                     |        |                                       |   |        |  
|Mortgage servicing rights    |  | $                                   | 8,967  |                                       | $ | (3,779 | )
|Core deposit intangibles     |  | $                                   | 14,383 |                                       | $ | (1,941 | )
|                             |  |                                     |        |                                       |   |        |  

The projections of amortization expense shown below for mortgage servicing rights are based on
existing asset balances and the existing interest rate environment as of June 30, 2006. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market
conditions.

The following table shows the current period and estimated future amortization for intangible assets (in thousands):



|                                              |  |                         |     |                        |   |       |  |   |      
|--------------------------------------------- |  | ----------------------- | --- | ---------------------- | - | ----- |  | - | -----
|                                              |  | MortgageServicingRights |     | CoreDepositIntangibles |   | Total
|                                              |  |                         |     |                        |   |       |  |   |      
|Six months ended June 30, 2006 (actual)       |  | $                       | 367 |                        | $ | 699   |  | $ | 1,066
|Six months ended December 31, 2006 (estimate) |  |                         | 422 |                        |   | 932   |  |   | 1,354
|                                              |  |                         |    
|Estimate for the years ended December 31,     |  |                         |     |                        |   |       |  |   |      
|2007                                          |  | $                       | 773 |                        | $ | 1,235 |  | $ | 2,008
|2008                                          |  |                         | 534 |                        |   | 1,173 |  |   | 1,707
|2009                                          |  |                         | 481 |                        |   | 1,147 |  |   | 1,628
|2010                                          |  |                         | 431 |                        |   | 1,147 |  |   | 1,578
|2011                                          |  |                         | 386 |                        |   | 1,147 |  |   | 1,533



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

JUNE 30, 2006

(UNAUDITED)

5. NEW ACCOUNTING STANDARDS

SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS 155 amends SFAS 133,
Accounting for Derivative Instruments and Hedging Activities and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 (i) permits fair
value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirements of
SFAS 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring
bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (v) amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for the Company on January 1, 2007 and is not expected to have a significant impact on the
Companys financial statements.

In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 156 requires all
separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits for subsequent measurement using either fair value measurement with changes in fair value reflected in earnings or the
amortization and impairment requirements of Statement No. 140. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in
servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. SFAS 156 is effective for an entitys
first fiscal year beginning after September 15, 2006. The Company did not adopt SFAS 156 effective January 1, 2006 and did not elect to apply the fair value method for its separately recognized mortgage servicing rights with changes in
fair value reflected in earnings for subsequent measurement.

6. OFF BALANCE SHEET CREDIT COMMITMENTS

In the normal course of business, the Company enters into various financial instruments, which, in accordance with accounting principles generally
accepted in the United States of America, are not included in its consolidated balance sheet. These transactions are referred to as off balance sheet commitments. The Company enters into these financial instruments to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheet.
The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

The
Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for
working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Companys commitments to extend credit are contingent upon customers maintaining



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

JUNE 30, 2006

(UNAUDITED)

specific credit standards at the time of
loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Commitments to extend credit totaled $255.0 million at June 30, 2006 and $222.6
million at December 31, 2005.

Standby letters of credit are written conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. The Companys policies generally require that standby letters of credit arrangements contain collateral and debt covenants similar to those contained in loan agreements. In the event the customer does
not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the
contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. Standby letters of credit totaled $6.3 million at June 30, 2006 and $4.6 million at December 31, 2005. As
of June 30, 2006 and December 31, 2005, no liability for the fair value of the Companys potential obligations under these guarantees was recorded since the amount was deemed immaterial.

7. SEGMENT INFORMATION

The Company has two
reportable operating segments: commercial banking and mortgage banking. The Company reports the financial position and the results of operations on a consolidated basis. The commercial banking and the mortgage banking segments are managed separately
because each business requires different marketing strategies and each offers different products and services.

Summarized below is the
financial information by operating segment for the three and six month periods ended June 30, 2006 and 2005:



|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|---------------------------- |  | --------------------------------------- | --------- | --------------- | - | --------------------------------------- |  | - | --------- | ----------------- |  | --------------- | - | ------------ |  | - | ------- |  | - | ---------
|                             |  | For the Three Months EndedJune 30, 2006 |           |                 |   | For the Three Months EndedJune 30, 2005
|                             |  | CommercialBanking                       |           | MortgageBanking |   | Consolidated                            |  |   |           | CommercialBanking |  | MortgageBanking |   | Consolidated
|                             |  | (In thousands)                         
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Net interest income          |  | $                                       | 15,802    |                 | $ | 3,506                                   |  | $ | 19,308    |                   |  |                 | $ | 10,509       |  | $ | 2,433   |  | $ | 12,942   
|Noninterest income           |  |                                         | 5,880     |                 |   | 845                                     |  |   | 6,725     |                   |  |                 |   | 1,813        |  |   | 3,433   |  |   | 5,246    
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Total income                 |  |                                         | 21,682    |                 |   | 4,351                                   |  |   | 26,033    |                   |  |                 |   | 12,322       |  |   | 5,866   |  |   | 18,188   
|Provision for loan losses    |  |                                         | 635       |                 |   |                                        |  |   | 635       |                   |  |                 |   | 1,041        |  |   |        |  |   | 1,041    
|Noninterest expense          |  |                                         | 17,796    |                 |   | 1,498                                   |  |   | 19,294    |                   |  |                 |   | 9,235        |  |   | 3,962   |  |   | 13,197   
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Earnings before income taxes |  |                                         | 3,251     |                 |   | 2,853                                   |  |   | 6,104     |                   |  |                 |   | 2,046        |  |   | 1,904   |  |   | 3,950    
|Provision for income taxes   |  |                                         | 1,077     |                 |   | 869                                     |  |   | 1,946     |                   |  |                 |   | 691          |  |   | 647     |  |   | 1,338    
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Net earnings                 |  | $                                       | 2,174     |                 | $ | 1,984                                   |  | $ | 4,158     |                   |  |                 | $ | 1,355        |  | $ | 1,257   |  | $ | 2,612    
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Total assets                 |  | $                                       | 1,646,550 |                 | $ | 171,745                                 |  | $ | 1,818,295 |                   |  |                 | $ | 1,114,398    |  | $ | 127,605 |  | $ | 1,242,003
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|                             |  |                                         |          
|                             |  | For the Six Months EndedJune 30, 2006   |           |                 |   | For the Six Months EndedJune 30, 2005  
|                             |  | CommercialBanking                       |           | MortgageBanking |   | Consolidated                            |  |   |           | CommercialBanking |  | MortgageBanking |   | Consolidated
|                             |  | (In thousands)                         
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Net interest income          |  | $                                       | 28,913    |                 | $ | 6,853                                   |  | $ | 35,766    |                   |  |                 | $ | 20,570       |  | $ | 4,431   |  | $ | 25,001   
|Noninterest income           |  |                                         | 9,930     |                 |   | 3,544                                   |  |   | 13,474    |                   |  |                 |   | 5,837        |  |   | 5,706   |  |   | 11,543   
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Total income                 |  |                                         | 38,843    |                 |   | 10,397                                  |  |   | 49,240    |                   |  |                 |   | 26,407       |  |   | 10,137  |  |   | 36,544   
|Provision for loan losses    |  |                                         | 1,195     |                 |   |                                        |  |   | 1,195     |                   |  |                 |   | 1,763        |  |   |        |  |   | 1,763    
|Noninterest expense          |  |                                         | 31,098    |                 |   | 5,281                                   |  |   | 36,379    |                   |  |                 |   | 19,654       |  |   | 6,982   |  |   | 26,636   
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Earnings before income taxes |  |                                         | 6,550     |                 |   | 5,116                                   |  |   | 11,666    |                   |  |                 |   | 4,990        |  |   | 3,155   |  |   | 8,145    
|Provision for income taxes   |  |                                         | 2,047     |                 |   | 1,661                                   |  |   | 3,708     |                   |  |                 |   | 1,658        |  |   | 1,073   |  |   | 2,731    
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Net earnings                 |  | $                                       | 4,503     |                 | $ | 3,455                                   |  | $ | 7,958     |                   |  |                 | $ | 3,332        |  | $ | 2,082   |  | $ | 5,414    
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Total assets                 |  | $                                       | 1,646,550 |                 | $ | 171,745                                 |  | $ | 1,818,295 |                   |  |                 | $ | 1,114,398    |  | $ | 127,605 |  | $ | 1,242,003
|                             |  |                                         |           |                 |   |                                         |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

JUNE 30, 2006

(UNAUDITED)



8. SUBSEQUENT EVENTS

On July 18, 2006, the Company and Prosperity Bancshares, Inc., a Texas
corporation (Prosperity), entered into an Agreement and Plan of Reorganization (the Agreement) pursuant to which the Company will merge with and into Prosperity (the Merger). Under the terms of the Agreement,
shareholders of the Company will receive one share of Prosperity common stock in exchange for each of their shares of the Companys common stock. Prosperity will issue approximately 10,875,000 shares for all outstanding shares of the
Companys common stock and all options to acquire shares of the Companys common stock. The transaction values the Company at approximately $357.1 million or $32.84 per share (based on a Prosperity stock price of $32.84, the average
closing price of Prosperity for the last 20 trading days ended July 18, 2006). The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the shareholders of the Company and
Prosperity. The merger is currently expected to be completed in the first quarter of 2007, although delays could occur.

9. RECENT DEVELOPMENTS

On April 1, 2006, the Company completed the acquisition of Northwest Bancshares, Inc. and its wholly-owned bank subsidiary, Northwest
Bank (Northwest), Roanoke, Texas. In connection with the acquisition, the Company issued approximately 984,906 shares of its common stock and paid approximately $12.4 million in cash to shareholders of Northwest in exchange for all of
the outstanding shares of Northwest common stock. As of March 31, 2006, Northwest had five branch locations and had, on a consolidated basis, total assets of $132.5 million, total loans of $107.1 million, total cash of $6.7 million, property and
equipment of $3.7 million, total deposits of $121.1 million, other liabilities of $15 million, and shareholders equity of $11.3 million. The Company is operating Northwest as a separate banking subsidiary. As of June 30, 2006, Northwest had
total assets of $165.5 million, total loans of $119.2 million, and total deposits of $128.3 million. Goodwill of $18.4 million was recognized with this transaction. The Northwest acquisition is consistent with the Companys expansion
strategies.

The following unaudited pro forma information for the six months ended June 30, 2006 assumes the acquisition of Northwest
occurred on January 1, 2006 (dollars in thousands):



|                             |  |   |       
|---------------------------- |  | - | ------
|Interest Income              |  | $ | 57,029
|Net earnings                 |  |   | 6,917 
|Earnings per share (basic)   |  |   | 0.69  
|Earnings per share (diluted) |  |   | 0.68  

These pro forma results are not necessarily indicative of what actually would have occurred if the
acquisition had been completed as of the beginning of the indicated period and are not indicative of future financial results.

During the
second quarter of 2006, the Company closed seven underperforming mortgage offices. These offices were originally acquired as part of the Community Home Loan acquisition. Management has determined these discontinued operations to be immaterial to its
condensed consolidated financial statements.



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##### Table of Contents

Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

Special Cautionary Notice Regarding Forward-looking Statements

Statements and financial discussion and analysis
contained in the Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include information about
possible or assumed future results of the Companys operations or performance. When we use any of the words believe, expect, anticipate, estimate, continue, intend,
may, will, should, or similar expressions, we are making forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those
financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:



| |  |  | deposit attrition, operating costs, customer loss and business disruption are greater than the Company expects;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | competitive factors including product and pricing pressures among financial services organizations may increase;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | changes in the interest rate environment reduce the net interest margins;
| | - |  | -------------------------------------------------------------------------



| |  |  | changes in market rates and prices may adversely impact securities, loans, deposits, mortgage servicing rights, and other financial instruments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general business and economic conditions in the markets the Company serves change or are less favorable than it expected;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | legislative or regulatory changes adversely affect the Companys business;
| | - |  | --------------------------------------------------------------------------



| |  |  | personal or commercial bankruptcies increase;
| | - |  | ---------------------------------------------



| |  |  | the Companys ability to expand and grow its business and operations, including the establishment of additional branches and acquisition of additional banks or branches of
banks may be more difficult or costly than it expected;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any future acquisitions may be more difficult to integrate than expected and the Company may be unable to realize any cost savings and revenue enhancements it may have projected in
connection with such acquisitions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in accounting principles, policies or guidelines;
| | - |  | ---------------------------------------------------------



| |  |  | changes occur in the securities markets; and
| | - |  | --------------------------------------------



| |  |  | technology-related changes are harder to make or more expensive than the Company anticipated.
| | - |  | ---------------------------------------------------------------------------------------------

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has
chosen the assumptions or bases in good faith and they are reasonable. However, the Company cautions you that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be
material. The Company will not update these statements unless the securities laws require it to do so.



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##### Table of Contents

Subsequent Events. On July 18, 2006, the Company and Prosperity Bancshares, Inc., a Texas
corporation (Prosperity), entered into an Agreement and Plan of Reorganization (the Agreement) pursuant to which the Company will merge with and into Prosperity (the Merger). Under the terms of the Agreement,
shareholders of the Company will receive one share of Prosperity common stock in exchange for each of their shares of the Companys common stock. Prosperity will issue approximately 10,875,000 shares for all outstanding shares of the
Companys common stock and all options to acquire the Companys common stock. The transaction values the Company at approximately $357.1 million or $32.84 per share (based on a Prosperity stock price of $32.84, the average closing price of
Prosperity for the last 20 trading days ended July 18, 2006). The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the shareholders of the Company and Prosperity. The merger
is currently expected to be completed in the first quarter of 2007, although delays could occur.

Recent Developments.On
April 1, 2006, the Company completed the acquisition of Northwest Bancshares, Inc. and its wholly-owned bank subsidiary, Northwest Bank (Northwest), Roanoke, Texas. In connection with the acquisition, the Company issued
approximately 984,906 shares of its common stock and paid approximately $12.4 million in cash to shareholders of Northwest in exchange for all of the outstanding shares of Northwest common stock. As of March 31, 2006, Northwest had five branch
locations and had, on a consolidated basis, total assets of $132.5 million, total loans of $107.1 million, total deposits of $121.1 million and shareholders equity of $11.3 million. The Company is operating Northwest Bank as a separate banking
subsidiary. As of June 30, 2006, Northwest had total assets of $165.5 million, total loans of $119.2 million, and total deposits of $128.3 million.

During the second quarter of 2006, the Company closed seven underperforming mortgage offices. These offices were originally acquired as part of the Community Home Loan acquisition. Management has determined these
discontinued operations to be immaterial to the condensed consolidated financial statements.

General. The Company is the bank
holding company for State Bank, a commercial bank headquartered in La Grange, Texas, GNB Financial, n.a., a commercial bank headquartered in Gainesville, Texas, Gateway National Bank, a commercial bank headquartered in Dallas, Texas, and Northwest
Bank, a commercial bank headquartered in Roanoke, Texas (acquired on April 1, 2006). State Bank has twenty-five (25) full service banking locations serving twelve counties within central and south central Texas, GNB Financial has seven
(7) full service banking centers located in Cooke, Denton and Ellis counties surrounding the Dallas-Ft. Worth metroplex, Gateway National Bank has six (6) full service banking centers located in the Dallas metropolitan area, and Northwest
Bank has five (5) full service banking centers located in and around the Dallas-Fort Worth metroplex. In addition, State Bank operates seven (7) mortgage loan production offices (LPOs) and three (3) limited services
branches (LSBs) located in Dallas, San Antonio and Austin, Texas. These LSBs have the capability to make lending decisions, in addition to obtaining loan applications. The Company provides a wide array of financial services
to small and medium-sized businesses, including commercial loans and commercial mortgage loans, and loans to individuals, including 1-4 family residential mortgage loans and consumer loans.

Net earnings for the three months ended June 30, 2006 were $4.2 million, an increase of $1.5 million or 59.2% compared with $2.6 million for the
same three months of 2005. Basic and diluted EPS for the three months ended June 30, 2006 were both $0.39, an increase of $0.06 per share or 18.2%, compared with both basic and diluted EPS of $0.33 for the same three months of 2005. The higher
net earnings and diluted EPS for the three months ended June 30, 2006, compared with the same three months of 2005, were primarily due to growth associated with the acquisitions of Gateway National Bank (Gateway) on December 1,
2005, The Express Bank of Texas (Express) on February 14, 2006, and Northwest Bank (Northwest) on April 1, 2006, and organic growth. Weighted average basic shares outstanding for the three months ended



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##### Table of Contents

June 30, 2006 were approximately 10,576,000 compared with 7,805,000 for the same three months of 2005. Weighted average diluted shares outstanding for
the three months ended June 30, 2006 were approximately 10,753,000 compared with 7,964,000 for the same three months of 2005.

Net
earnings for the six months ended June 30, 2006 were $8.0 million, an increase of $2.5 million or 47.0% compared with $5.4 million for the same six months of 2005. Basic and diluted EPS for the six months ended June 30, 2006 were $0.79 and
$0.78, respectively, both increases of $0.10 per share or 14.5% and 14.7%, respectively, compared with basic and diluted EPS of $0.69 and $0.68, respectively, for the same six months of 2005. The higher net earnings and diluted EPS for the six
months ended June 30, 2006, compared with the same six months of 2005, were primarily due to growth associated with the acquisitions of Gateway, Express, and Northwest and organic growth as mentioned above. Additionally, there have been four
increases in the prime lending rate (totaling 100 basis points) since December 31, 2005, which has positively impacted earnings on variable rate earning assets for the six months ended June 30, 2006. Weighted average basic shares
outstanding for the six months ended June 30, 2006 were approximately 10,012,000 compared with 7,802,000 for the same six months of 2005. Weighted average diluted shares outstanding for the six months ended June 30, 2006 were approximately
10,146,000 compared with 7,966,000 for the same six months of 2005.

Total assets at June 30, 2006 were $1.818 billion, an increase of
$265.8 million or 17.1% compared with $1.552 billion at December 31, 2005. The return on average assets for the three months ended June 30, 2006 was 0.93%, an increase of 7 basis points compared with 0.86% for the same three months of
2005. The return on average assets for the six months ended June 30, 2006 was 0.95%, an increase of 3 basis points compared with 0.92% for the same six months of 2005. Total investments (investment securities and Federal Funds sold and other
temporary investments) at June 30, 2006 were $290.3 million, a decrease of $12.5 million or 4.1% compared with total investments of $302.8 million at December 31, 2005. Total loans (including loans held for sale) at June 30, 2006 were
$1.255 billion, an increase of $223.4 million or 21.6% compared with total loans (including loans held for sale) of $1.032 billion at December 31, 2005. Total deposits at June 30, 2006 were $1.323 billion, an increase of $201.1 million or
17.9% compared with total deposits of $1.121 billion at December 31, 2005. Borrowings at June 30, 2006 were $220.3 million, an increase of $14.5 million or 7.1% compared with borrowings of $205.8 million at December 31, 2005.

Shareholders equity at June 30, 2006 was $169.3 million, an increase of $31.4 million or 22.8% compared with shareholders
equity of $137.9 million at December 31, 2005. The increase was primarily the result of the acquisitions of Express and Northwest, net earnings for the first six months of 2006 and the issuance of common stock upon exercise of employee stock
options. The return on average equity for the three months ended June 30, 2006 was 9.89%, an increase of 1 basis point compared with 9.88% for the same three months of 2005. The return on average tangible equity for the three months ended
June 30, 2006 was 26.32%, an increase of 779 basis points compared with 18.53% for the same three months of 2005. The return on average equity for the six months ended June 30, 2006 was 10.28%, a decrease of 6 basis points compared with
10.34% for the same six months of 2005. The return on average tangible equity for the six months ended June 30, 2006 was 24.77%, an increase of 535 basis points compared with 19.42% for the same six months of 2005.



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##### Table of Contents

Critical Accounting Policies. The Companys accounting policies are integral to understanding
the results reported. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable losses incurred on loans. Loans are charged to the allowance when the loss actually occurs or when a determination is made
that a probable loss has occurred on a specific loan. Recoveries are credited to the allowance at the time of recovery. Throughout the year, management estimates the probable level of losses to determine whether the allowance for credit losses is
adequate to absorb losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate
to absorb losses. Managements judgment as to the level of probable losses on existing loans involves the consideration of current economic conditions and their estimated effects on specific borrowers; an evaluation of the existing
relationships among loans, potential loan losses and the present level of the allowance; results of examinations of the loan portfolio by regulatory agencies; and managements internal review of the loan portfolio. In determining the
collectability of certain loans, management also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond the
Companys control. Please refer to the subsequent discussion of Allowance for Loan Losses included in Managements Discussion and Analysis of Financial Condition and Results of Operations for additional insight into
managements approach and methodology in estimating the allowance for loan losses.

Mortgage Servicing Rights: Mortgage servicing
rights assets are established and accounted for based on discounted cash flow modeling techniques which require management to make estimates regarding the amount and timing of expected future cash flows, including assumptions about loan repayment
rates, loan loss experience, and costs to service, as well as discount rates that consider the risk involved. The Company historically has attempted to offset some of the mortgage servicing rights interest rate risk exposure by designating certain
interest rate derivatives as fair value hedges. Effective March 31, 2006, management ceased all hedging activities related to mortgage servicing rights assets. Because the values of mortgage servicing rights are sensitive to changes in
assumptions, the valuation of these assets are considered a critical accounting estimate. Please refer to Note 4 to the condensed consolidated financial statements above and discussion of Noninterest Income included in
Managements Discussion and Analysis of Financial Condition and Results of Operations for additional insight into managements approach in estimating transfers and servicing of financial assets.

Share-Based Compensation: On January 1, 2006, the Company changed its method of accounting for stock options in connection with the adoption of the
provisions of SFAS No. 123 (R), Share-based Payment (Revised 2004), which eliminates the ability to account for stock-based compensation using the intrinsic value method of APB 25 and requires such transactions to be
recognized in the statement of earnings based on their fair values at the date of grant. The Company elected to use the modified prospective transition method as permitted by SFAS 123(R) and therefore did not restate its financial results for prior
periods. SFAS No. 123(R) applies to new awards and to awards modified, repurchased, or cancelled after January 1, 2006 and requires that management make assumptions including stock price volatility and employee turnover that are utilized
to measure compensation expense. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes-Merton option-pricing model which requires the input of highly subjective assumptions. Please refer to Note 2 to the
condensed consolidated financial statements for further information.

Net Interest Income. Net interest income, before the provision
for loan losses, for the three months ended June 30, 2006 was $19.3 million, an increase of $6.4 million or 49.2% compared with $12.9 million for the same three months of 2005. The net interest margin for the three months ended June 30,
2006 was 5.03%, an improvement of 15 basis points compared with 4.88% for the same three months of 2005. Net interest income, before the provision for loan losses, for the six months ended June 30, 2006 was $35.8 million, an increase of $10.8
million or 43.1% compared with $25.0 million for the same six months of 2005. The net interest margin for the six months ended June 30, 2006 was 4.98%, an improvement of 10 basis points compared with 4.88% for the same six months of 2005.

The increases in net interest income and the improvements in the net interest margins for the three and six months ended June 30,
2006, compared with the same three and six months ended June 30, 2005, were primarily due to larger earning asset volumes as a result of the acquisitions of Gateway, Express and Northwest and continued internal growth. In addition, increased
market interest rates contributed to higher yields on existing and newly established earning assets. This was partially offset by increased pricing pressures on interest-bearing liabilities, higher market interest rates and increased
interest-bearing liability volumes. As long as market interest rates remain at current levels or increase, the Companys net interest margin is anticipated to remain consistent but may experience pressure should market interest rates decline.

Interest Income. Interest income from average earning assets for the three months ended June 30, 2006 was $29.9 million, an
increase of $12.1 million or 68.0% compared with $17.8 million for the same three months of 2005. Interest income from average earning assets for the six months ended June 30, 2006 was $54.9 million, an increase of $20.6 million or 60.0% compared
with $34.3 million for the same six months of 2005. The increases in both periods compared with the same periods in 2005 were primarily due to larger earning asset volumes as a result of acquisitions and internal growth, in addition to increased
yields on earning assets as a result of higher market interest rates.

Average earning assets for the three months ended June 30, 2006 were
$1.539 billion, an increase of $476.1 million or 44.8% compared with average earning assets of $1.063 billion for the same three months of 2005. Average earning assets for the six months ended June 30, 2006 were $1.449 billion, an increase of $415.1
million or 40.1% compared with average earning assets of $1.034 billion for the same six months of 2005.

The yield on average earning
assets for the three months ended June 30, 2006 was 7.78%, an increase of 107 basis points compared with the yield on average earning assets of 6.71% for the same three months of 2005. The yield on average earning assets for the six months ended
June 30, 2006 was 7.64%, an increase of 95 basis points compared with the yield on average earning assets of 6.69% for the same six months of 2005.

Interest income from average total loans for the three months ended June 30, 2006 was $26.6 million, an increase of $11.8 million or 79.3% compared with $14.8 million for the same three months of 2005. Interest income from average total
loans for the six months ended June 30, 2006 was $48.5 million, an increase of $20.0 million or 70.3% compared with $28.5 million for the same six months of 2005. The increases in both periods were primarily due to higher loan volumes as a result of
acquisitions and internal growth. In addition to increased loan volumes, higher market interest rates were also a contributing factor towards higher loan yields.

Average total loans for the three months ended June 30, 2006 were $1.228 billion, an increase of $472.8 million or 62.6% compared with average total loans of $754.9 million for the same three months of 2005. Average
total loans for the six months ended June 30, 2006 were $1.141 billion, an increase of $414.0 million or 56.9% compared with average total loans of $727.5 million for the same six months of 2005.

The yield on average total loans for the three months ended June 30, 2006 was 8.69%, an increase of 80 basis points compared with the yield on average
total loans of 7.89% for the same three months of 2005. The yield on average total loans for the six months ended June 30, 2006 was 8.58%, an increase of 68 basis points compared with the yield on average total loans of 7.90% for the same six months
of 2005.

Interest income from average total investments (total investment securities and Federal Funds sold) for the three months ended
June 30, 2006 was $3.2 million, an increase of $309,000 or 10.5% compared with $2.9 million for the same three months of 2005. Interest income from average total investments for the six months ended June 30, 2006 was $6.4 million, an increase of
$542,000 or 9.3% compared with $5.8 million for the same six months of 2005. The increases in both periods were primarily due to increased market interest rates on the overall investment portfolio. In addition, the increase in interest income from
investments was also the result of portfolio repositioning in order to maximize yield, as individual investments matured, were sold, and/or became due for repricing.

Average total investments for the three months ended June 30, 2006 were $311.6 million, an increase of $3.3 million or 1.1% compared with average total investments of $308.3 million for the same three months of 2005.
Average total investments for the six months ended June 30, 2006 were $307.7 million, an increase of $1.1 million or 0.4% compared with average total investments of $306.6 million for the same six months of 2005.

The yield on average total investments for the three months ended June 30, 2006 was 4.18%, an increase of 36 basis points compared with the yield on
average total investments of 3.82% for the same three months of 2005. The yield on average total investments for the six months ended June 30, 2006 was 4.16%, an increase of 34 basis points compared with the yield on average total investments of
3.82% for the same six months of 2005.



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##### Table of Contents

Interest Expense. Interest expense from average interest-bearing liabilities for the three months
ended June 30, 2006 was $10.6 million, an increase of $5.7 million or 118.2% compared with $4.8 million for the same three months of 2005. Interest expense from average interest-bearing liabilities for the six months ended June 30, 2006 was $19.1
million, an increase of $9.8 million or 105.6% compared with $9.3 million for the same six months of 2005. The increases in both periods compared with the same periods in 2005 were primarily due to increased pricing pressures on interest-bearing
liabilities as a result of higher market interest rates in addition to increased interest-bearing liability volumes as a result of acquisitions, internal growth, and additional funding requirements to support earning asset growth.

Average interest-bearing liabilities for the three months ended June 30, 2006 were $1.233 billion, an increase of $344.8 million or 38.8% compared with
average interest-bearing liabilities of $888.4 million for the same three months of 2005. Average interest-bearing liabilities for the six months ended June 30, 2006 were $1.173 billion, an increase of $307.8 million or 35.6% compared with average
interest-bearing liabilities of $865.3 million for the same six months of 2005.

The cost of average interest-bearing liabilities for the
three months ended June 30, 2006 was 3.43%, an increase of 125 basis points compared with the cost of average interest-bearing liabilities of 2.18% for the same three months of 2005. The cost of average interest-bearing liabilities for the six
months ended June 30, 2006 was 3.29%, an increase of 112 basis points compared with the cost of average interest-bearing liabilities of 2.17% for the same six months of 2005.

Interest expense from average interest-bearing deposits for the three months ended June 30, 2006 was $6.7 million, an increase of $3.4 million or 100.3%
compared with $3.3 million for the same three months of 2005. Interest expense from average interest-bearing deposits for the six months ended June 30, 2006 was $12.1 million, an increase of $5.7 million or 89.0% compared with $6.4 million for the
same six months of 2005. The increases in both periods were primarily due to increased pricing pressures on the interest rates paid for interest-bearing deposits as a result of higher market interest rates. Additionally, increased interest-bearing
deposit volumes, as a result of acquisitions and internal growth, contributed to the higher interest expense paid for interest-bearing deposits.

Average interest-bearing deposits for the three months ended June 30, 2006 were $946.2 million, an increase of $252.7 million or 36.4% compared with average interest-bearing deposits of $693.4 million for the same three months of 2005.
Average interest-bearing deposits for the six months ended June 30, 2006 were $900.7 million, an increase of $206.0 million or 29.7% compared with average interest-bearing deposits of $694.7 million for the same six months of 2005.

The interest rate paid for average interest-bearing deposits for the three months ended June 30, 2006 was 2.84%, an increase of 90 basis points compared
with the interest rate paid for average interest-bearing deposits of 1.94% for the same three months of 2005. The interest rate paid for average interest-bearing deposits for the six months ended June 30, 2006 was 2.72%, an increase of 85 basis
points compared with the interest rate paid for average interest-bearing deposits of 1.87% for the same six months of 2005.

Interest
expense from average total borrowings (Federal Funds purchased, junior subordinated deferrable interest debentures, securities sold under repurchase agreements and other borrowings) for the three months ended June 30, 2006 was $3.8 million, an
increase of $2.3 million or 158.6% compared with $1.5 million for the same three months of 2005. Interest expense from average total borrowings for the six months ended June 30, 2006 was $7.0 million, an increase of $4.1 million or 142.6% compared
with $2.9 million for the same six months of 2005. The increases in both periods were primarily due to higher market interest rates paid for borrowings and higher borrowing volumes, as a result of increased funding requirements to support earning
asset growth.

Average total borrowings for the three months ended June 30, 2006 were $287.1 million, an increase of $92.1 million or 47.2%
compared with average total borrowings of $195.0 million for the same three months of 2005. Average total borrowings for the six months ended June 30, 2006 were $272.4 million, an increase of $101.7 million or 59.6% compared with average total
borrowings of $170.6 million for the same six months of 2005.

The interest rate paid for average total borrowings for the three months
ended June 30, 2006 was 5.37%, an increase of 231 basis points compared with the interest rate paid for average total borrowings of 3.06% for the same three months of 2005. The interest rate paid for average total borrowings for the six months ended
June 30, 2006 was 5.17%, an increase of 177 basis points compared with the interest rate paid for average total borrowings of 3.40% for the same six months of 2005.



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##### Table of Contents

The following tables set forth, for the periods indicated, an analysis of net interest income by each
major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The tables also set forth the average interest rate earned on total interest-earning assets,
the average interest rate paid on total interest-bearing liabilities and the net interest margins and spreads on average total interest-earning assets for the same periods. All average balances are daily average balances and nonaccruing loans have
been included in the tables as loans carrying a zero yield.



|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|-------------------------------------------------- |  | ----------------------------------- | --------- | - | -------------------- | - | ---------------------- |  | ---- | ------------------------- |  | - | -------------------- | - | ---------------------- | - | ------ |  | ---- | -
|                                                   |  | For the Three Months Ended June 30, |          
|                                                   |  | 2006                                |           |   | 2005                 |  
|                                                   |  | AverageOutstandingBalance           |           |   | InterestEarned /Paid |   | AverageYield /Rate (1) |  |      | AverageOutstandingBalance |  |   | InterestEarned /Paid |   | AverageYield /Rate (1) |  
|                                                   |  | (Dollars in thousands)              |          
|ASSETS                                             |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-earning assets:                           |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total loans                                        |  | $                                   | 1,227,693 |   |                      | $ | 26,613                 |  | 8.69 | %                         |  | $ | 754,879              |   |                        | $ | 14,840 |  | 7.89 | %
|Taxable securities                                 |  |                                     | 246,240   |   |                      |   | 2,539                  |  | 4.14 |                           |  |   | 291,541              |   |                        |   | 2,810  |  | 3.87 |  
|Tax-exempt securities                              |  |                                     | 43,779    |   |                      |   | 441                    |  | 4.04 |                           |  |   | 12,488               |   |                        |   | 97     |  | 3.12 |  
|Federal funds sold                                 |  |                                     | 21,580    |   |                      |   | 267                    |  | 4.96 |                           |  |   | 4,313                |   |                        |   | 31     |  | 2.88 |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-earning assets                      |  |                                     | 1,539,292 |   |                      |   | 29,860                 |  | 7.78 |                           |  |   | 1,063,221            |   |                        |   | 17,778 |  | 6.71 |  
|Less: allowance for loan losses                    |  |                                     | (11,123   | ) |                      |   |                        |  |      |                           |  |   | (7,014               | ) |                        |   |        |  |      |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-earning assets, net of allowance    |  |                                     | 1,528,169 |   |                      |   |                        |  |      |                           |  |   | 1,056,207            |   |                        |   |        |  |      |  
|Noninterest-earning assets                         |  |                                     | 269,568   |   |                      |   |                        |  |      |                           |  |   | 155,838              |   |                        |   |        |  |      |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total assets                                       |  | $                                   | 1,797,737 |   |                      |   |                        |  |      |                           |  | $ | 1,212,045            |   |                        |   |        |  |      |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY               |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-bearing liabilities:                      |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-bearing demand deposits                   |  | $                                   | 235,404   |   |                      | $ | 984                    |  | 1.68 | %                         |  | $ | 218,768              |   |                        | $ | 715    |  | 1.31 | %
|Saving and money market accounts                   |  |                                     | 289,484   |   |                      |   | 1,565                  |  | 2.17 |                           |  |   | 157,162              |   |                        |   | 504    |  | 1.29 |  
|Time deposits                                      |  |                                     | 421,295   |   |                      |   | 4,160                  |  | 3.96 |                           |  |   | 317,519              |   |                        |   | 2,131  |  | 2.69 |  
|Federal funds purchased                            |  |                                     | 18,291    |   |                      |   | 231                    |  | 5.07 |                           |  |   | 37,038               |   |                        |   | 331    |  | 3.58 |  
|Junior subordinated deferrable interest debentures |  |                                     | 49,996    |   |                      |   | 965                    |  | 7.74 |                           |  |   | 17,520               |   |                        |   | 391    |  | 8.95 |  
|Repurchase agreements                              |  |                                     | 13,252    |   |                      |   | 59                     |  | 1.79 |                           |  |   | 6,256                |   |                        |   | 26     |  | 1.67 |  
|Other borrowings                                   |  |                                     | 205,520   |   |                      |   | 2,588                  |  | 5.05 |                           |  |   | 134,168              |   |                        |   | 738    |  | 2.21 |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-bearing liabilities                 |  |                                     | 1,233,242 |   |                      |   | 10,552                 |  | 3.43 |                           |  |   | 888,431              |   |                        |   | 4,836  |  | 2.18 |  
|Noninterest-bearing liabilities:                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Noninterest-bearing demand deposits                |  |                                     | 374,252   |   |                      |   |                        |  |      |                           |  |   | 202,440              |   |                        |   |        |  |      |  
|Other liabilities                                  |  |                                     | 21,553    |   |                      |   |                        |  |      |                           |  |   | 15,109               |   |                        |   |        |  |      |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total liabilities                                  |  |                                     | 1,629,047 |   |                      |   |                        |  |      |                           |  |   | 1,105,980            |   |                        |   |        |  |      |  
|Shareholders equity                               |  |                                     | 168,690   |   |                      |   |                        |  |      |                           |  |   | 106,065              |   |                        |   |        |  |      |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total liabilities and shareholders equity         |  | $                                   | 1,797,737 |   |                      |   |                        |  |      |                           |  | $ | 1,212,045            |   |                        |   |        |  |      |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Net interest income                                |  |                                     |           |   |                      | $ | 19,308                 |  |      |                           |  |   |                      |   |                        | $ | 12,942 |  |      |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|                                                   |  |                                     |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Net interest spread                                |  |                                     |           |   |                      |   |                        |  | 4.35 | %                         |  |   |                      |   |                        |   |        |  | 4.53 | %
|Net interest margin                                |  |                                     |           |   |                      |   |                        |  | 5.03 | %                         |  |   |                      |   |                        |   |        |  | 4.88 | %

---

(1) Annualized



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##### Table of Contents

|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|-------------------------------------------------- |  | --------------------------------- | --------- | - | -------------------- | - | ---------------------- |  | ---- | ------------------------- |  | - | -------------------- | - | ---------------------- | - | ------ |  | ---- | -
|                                                   |  | For the Six Months Ended June 30, |          
|                                                   |  | 2006                              |           |   | 2005                 |  
|                                                   |  | AverageOutstandingBalance         |           |   | InterestEarned /Paid |   | AverageYield /Rate (1) |  |      | AverageOutstandingBalance |  |   | InterestEarned /Paid |   | AverageYield /Rate (1) |  
|                                                   |  | (Dollars in thousands)            |          
|ASSETS                                             |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-earning assets:                           |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total loans                                        |  | $                                 | 1,141,471 |   |                      | $ | 48,548                 |  | 8.58 | %                         |  | $ | 727,491              |   |                        | $ | 28,499 |  | 7.90 | %
|Taxable securities                                 |  |                                   | 243,166   |   |                      |   | 4,969                  |  | 4.12 |                           |  |   | 293,104              |   |                        |   | 5,577  |  | 3.84 |  
|Tax-exempt securities                              |  |                                   | 40,343    |   |                      |   | 815                    |  | 4.07 |                           |  |   | 10,599               |   |                        |   | 194    |  | 3.69 |  
|Federal funds sold                                 |  |                                   | 24,181    |   |                      |   | 568                    |  | 4.74 |                           |  |   | 2,848                |   |                        |   | 39     |  | 2.76 |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-earning assets                      |  |                                   | 1,449,161 |   |                      |   | 54,900                 |  | 7.64 |                           |  |   | 1,034,042            |   |                        |   | 34,309 |  | 6.69 |  
|Less: allowance for loan losses                    |  |                                   | (10,512   | ) |                      |   |                        |  |      |                           |  |   | (6,921               | ) |                        |   |        |  |      |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-earning assets, net of allowance    |  |                                   | 1,438,649 |   |                      |   |                        |  |      |                           |  |   | 1,027,121            |   |                        |   |        |  |      |  
|Noninterest-earning assets                         |  |                                   | 247,716   |   |                      |   |                        |  |      |                           |  |   | 157,838              |   |                        |   |        |  |      |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total assets                                       |  | $                                 | 1,686,365 |   |                      |   |                        |  |      |                           |  | $ | 1,184,959            |   |                        |   |        |  |      |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY               |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-bearing liabilities:                      |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-bearing demand deposits                   |  | $                                 | 232,149   |   |                      | $ | 1,872                  |  | 1.63 | %                         |  | $ | 229,304              |   |                        | $ | 1,488  |  | 1.31 | %
|Saving and money market accounts                   |  |                                   | 278,626   |   |                      |   | 2,987                  |  | 2.16 |                           |  |   | 158,494              |   |                        |   | 977    |  | 1.24 |  
|Time deposits                                      |  |                                   | 389,913   |   |                      |   | 7,287                  |  | 3.77 |                           |  |   | 306,858              |   |                        |   | 3,962  |  | 2.60 |  
|Federal funds purchased                            |  |                                   | 13,109    |   |                      |   | 333                    |  | 5.12 |                           |  |   | 27,521               |   |                        |   | 507    |  | 3.71 |  
|Junior subordinated deferrable interest debentures |  |                                   | 45,872    |   |                      |   | 1,724                  |  | 7.58 |                           |  |   | 17,520               |   |                        |   | 781    |  | 8.99 |  
|Repurchase agreements                              |  |                                   | 9,916     |   |                      |   | 98                     |  | 1.99 |                           |  |   | 5,874                |   |                        |   | 46     |  | 1.58 |  
|Other borrowings                                   |  |                                   | 203,473   |   |                      |   | 4,833                  |  | 4.79 |                           |  |   | 119,722              |   |                        |   | 1,547  |  | 2.61 |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-bearing liabilities                 |  |                                   | 1,173,058 |   |                      |   | 19,134                 |  | 3.29 |                           |  |   | 865,293              |   |                        |   | 9,308  |  | 2.17 |  
|Noninterest-bearing liabilities:                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Noninterest-bearing demand deposits                |  |                                   | 338,794   |   |                      |   |                        |  |      |                           |  |   | 195,364              |   |                        |   |        |  |      |  
|Other liabilities                                  |  |                                   | 18,390    |   |                      |   |                        |  |      |                           |  |   | 18,467               |   |                        |   |        |  |      |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total liabilities                                  |  |                                   | 1,530,242 |   |                      |   |                        |  |      |                           |  |   | 1,079,124            |   |                        |   |        |  |      |  
|Shareholders equity                               |  |                                   | 156,123   |   |                      |   |                        |  |      |                           |  |   | 105,835              |   |                        |   |        |  |      |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total liabilities and shareholders equity         |  | $                                 | 1,686,365 |   |                      |   |                        |  |      |                           |  | $ | 1,184,959            |   |                        |   |        |  |      |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Net interest income                                |  |                                   |           |   |                      | $ | 35,766                 |  |      |                           |  |   |                      |   |                        | $ | 25,001 |  |      |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|                                                   |  |                                   |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Net interest spread                                |  |                                   |           |   |                      |   |                        |  | 4.35 | %                         |  |   |                      |   |                        |   |        |  | 4.52 | %
|Net interest margin                                |  |                                   |           |   |                      |   |                        |  | 4.98 | %                         |  |   |                      |   |                        |   |        |  | 4.88 | %

---

(1) Annualized



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##### Table of Contents

The following tables present the dollar amount of changes in interest income and interest expense for the
major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) attributable to changes in outstanding balances and changes in interest rates for the three and six months ended
June 30, 2006 compared with the same three and six months ended June 30, 2005. For purposes of this table, changes attributable to both volume and rate have been allocated proportionately to the change due to volume and rate.



|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|-------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ----- |  | - | ------ | -
|                                                   |  | For the Three Months Ended       |       
|                                                   |  | June 30,                         |       
|                                                   |  | 2006 vs. 2005                    |       
|                                                   |  | Increase (Decrease) Due to       |        |   |      |  
|                                                   |  | Volume                           |        |   | Rate |   |        | Total | 
|                                                   |  | (In thousands)                   |       
|Interest-earning assets:                           |  |                                  |        |   |      |   |        |       |  |   |        |  
|Loans                                              |  | $                                | 9,295  |   |      | $ | 2,478  |       |  | $ | 11,773 |  
|Taxable securities                                 |  |                                  | (437   | ) |      |   | 166    |       |  |   | (271   | )
|Tax-exempt securities                              |  |                                  | 243    |   |      |   | 101    |       |  |   | 344    |  
|Federal funds sold                                 |  |                                  | 124    |   |      |   | 112    |       |  |   | 236    |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|Total increase in interest income                  |  |                                  | 9,225  |   |      |   | 2,857  |       |  |   | 12,082 |  
|                                                   |  |                                  |       
|Interest-bearing liabilities:                      |  |                                  |        |   |      |   |        |       |  |   |        |  
|Interest-bearing demand deposits                   |  | $                                | 54     |   |      | $ | 215    |       |  | $ | 269    |  
|Savings and money market accounts                  |  |                                  | 424    |   |      |   | 637    |       |  |   | 1,061  |  
|Time deposits                                      |  |                                  | 696    |   |      |   | 1,333  |       |  |   | 2,029  |  
|Federal funds purchased                            |  |                                  | (168   | ) |      |   | 68     |       |  |   | (100   | )
|Junior subordinated deferrable interest debentures |  |                                  | 725    |   |      |   | (151   | )     |  |   | 574    |  
|Repurchase agreements                              |  |                                  | 29     |   |      |   | 4      |       |  |   | 33     |  
|Other borrowings                                   |  |                                  | 392    |   |      |   | 1,458  |       |  |   | 1,850  |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|Total increase in interest expense                 |  |                                  | 2,152  |   |      |   | 3,564  |       |  |   | 5,716  |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|Increase (decrease) in net interest income         |  | $                                | 7,073  |   |      | $ | (707   | )     |  | $ | 6,366  |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|                                                   | 
|                                                   |  | For the Six Months EndedJune 30, |       
|                                                   |  | 2006 vs. 2005                    |       
|                                                   |  | Increase (Decrease)Due to        |        |   |      |  
|                                                   |  | Volume                           |        |   | Rate |   |        | Total | 
|                                                   |  | (In thousands)                   |       
|Interest-earning assets:                           |  |                                  |        |   |      |   |        |       |  |   |        |  
|Loans                                              |  | $                                | 16,217 |   |      | $ | 3,832  |       |  | $ | 20,049 |  
|Taxable securities                                 |  |                                  | (950   | ) |      |   | 342    |       |  |   | (608   | )
|Tax-exempt securities                              |  |                                  | 544    |   |      |   | 77     |       |  |   | 621    |  
|Federal funds sold                                 |  |                                  | 292    |   |      |   | 237    |       |  |   | 529    |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|Total increase in interest income                  |  |                                  | 16,103 |   |      |   | 4,488  |       |  |   | 20,591 |  
|                                                   |  |                                  |       
|Interest-bearing liabilities:                      |  |                                  |        |   |      |   |        |       |  |   |        |  
|Interest-bearing demand deposits                   |  | $                                | 18     |   |      | $ | 366    |       |  | $ | 384    |  
|Savings and money market accounts                  |  |                                  | 741    |   |      |   | 1,269  |       |  |   | 2,010  |  
|Time deposits                                      |  |                                  | 1,072  |   |      |   | 2,253  |       |  |   | 3,325  |  
|Federal funds purchased                            |  |                                  | (266   | ) |      |   | 92     |       |  |   | (174   | )
|Junior subordinated deferrable interest debentures |  |                                  | 1,264  |   |      |   | (321   | )     |  |   | 943    |  
|Repurchase agreements                              |  |                                  | 32     |   |      |   | 20     |       |  |   | 52     |  
|Other borrowings                                   |  |                                  | 1,082  |   |      |   | 2,204  |       |  |   | 3,286  |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|Total increase in interest expense                 |  |                                  | 3,943  |   |      |   | 5,883  |       |  |   | 9,826  |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  
|Increase (decrease) in net interest income         |  | $                                | 12,160 |   |      | $ | (1,395 | )     |  | $ | 10,765 |  
|                                                   |  |                                  |        |   |      |   |        |       |  |   |        |  



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##### Table of Contents

Provision for Loan Losses.Provisions for loan losses are charged to income to bring the
Companys allowance for loan losses to a level deemed appropriate by management. The provision for loan losses for the three months ended June 30, 2006 was $635,000, a decrease of $406,000 or 39.0% compared with $1.0 million for the same
three months of 2005. The decrease in the provision for loan losses for the three months ended June 30, 2006, compared with the same three months in 2005, was primarily due to a decrease in nonperforming loans.

The provision for loan losses for the six months ended June 30, 2006 was $1.2 million, a decrease of $568,000 or 32.2% compared with $1.8 million
for the same six months of 2005. The decrease in the provision for loan losses for the six months ended June 30, 2006 compared with the same six months in 2005, was primarily due to a decrease in nonperforming loans.

The allowance for loan losses at June 30, 2006 was approximately $11.0 million, an increase of $1.4 million or 14.6% compared with the allowance for
loan losses of $9.6 million at December 31, 2005, and an increase of $3.6 million or 48.9% compared with the allowance for loan losses of $7.4 million at June 30, 2005. At June 30, 2006, the ratio of the allowance for loan losses to
total loans was 0.88% compared with 0.93% at December 31, 2005 and 0.94% at June 30, 2005.

Noninterest Income. Total
noninterest income for the three months ended June 30, 2006 was $6.7 million, an increase of $1.5 million or 28.2% compared with $5.2 million for the same three months of 2005. Service charges on deposit accounts for the three months ended
June 30, 2006 were $3.1 million, an increase of $1.1 million or 55.8% compared with $2.0 million for the same three months of 2005. Other noninterest income for the three months ended June 30, 2006 was $1.5 million, an increase of $770,000
or 109.4% compared with $704,000 for the same three months of 2005. The increase in service charges on deposit accounts and in other noninterest income was primarily the result of increased revenues received on an expanded customer base as a result
of the recent acquisitions and internal growth.

Mortgage servicing revenue for the three months ended June 30, 2006 was $451,000, an
increase of $188,000 or 71.5% compared with $263,000 for the same three months of 2005. Net losses on sales of securities for the three months ended June 30, 2006 were $134,000, an increase of $50,000 or 59.5% compared with net losses of
$84,000 for the same three months of 2005. The increase in net losses on sales of securities was primarily the result of investment portfolio repositioning in order to maximize yields on earning assets. Net gains on sales of loans for the three
months ended June 30, 2006 were $1.9 million, a decrease of $533,000 or 22.3% compared with $2.4 million for the same three months of 2005. This was primarily due to changes between original loan pricing expectations and actual market results
which have been influenced by increasing market interest rates.

Total noninterest income for the six months ended June 30, 2006 was
$13.5 million, an increase of $1.9 million or 16.7% compared with $11.5 million for the same six months of 2005. Service charges on deposit accounts for the six months ended June 30, 2006 were $5.6 million, an increase of $1.8 million or 47.4%
compared with $3.8 million for the same six months of 2005. Other noninterest income for the six months ended June 30, 2006 was $3.7 million, an increase of $1.4 million or 60.7% compared with $2.3 million for the same six months of 2005. The
increase in service charges on deposit accounts and in other noninterest income was primarily the result of increased revenues received on an expanded customer base as a result of internal growth and the recent acquisitions, in addition to a
$433,000 gain on sale of other real estate (recognized in the first quarter of 2006), previously acquired in connection with the Gateway acquisition.

Mortgage servicing revenue for the six months ended June 30, 2006 was $677,000, an increase of $118,000 or 21.1% compared with $559,000 for the same six months of 2005. Net losses on sales of securities for the
six months ended June 30, 2006 were $132,000, an increase of $10,000 or 8.2% compared with net losses of $122,000 for the same six months of 2005. Net gains on sales of loans for the six months ended June 30, 2006 were $3.6 million, a
decrease of $1.4 million or 28.0% compared with $5.0 million for the same six months of 2005. This decrease was primarily due to changes between original loan pricing expectations and actual market results which have been influenced by continued
increases in market interest rates.



24



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##### Table of Contents

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



|                                    |  |                                    |       |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|----------------------------------- |  | ---------------------------------- | ----- | - | -------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                    |  | For the Three MonthsEnded June 30, |       |   | For the Six MonthsEnded June 30, |  
|                                    |  | 2006                               |       |   | 2005                             |   |       | 2006 |  |   | 2005   |  
|                                    |  | (In thousands)                     |      
|                                    |  |                                    |       |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Service charges on deposit accounts |  | $                                  | 3,082 |   |                                  | $ | 1,978 |      |  | $ | 5,618  |   |  | $ | 3,812  |  
|Mortgage servicing revenue          |  |                                    | 451   |   |                                  |   | 263   |      |  |   | 677    |   |  |   | 559    |  
|Net loss on sales of securities     |  |                                    | (134  | ) |                                  |   | (84   | )    |  |   | (132   | ) |  |   | (122   | )
|Net gain on sales of mortgage loans |  |                                    | 1,852 |   |                                  |   | 2,385 |      |  |   | 3,584  |   |  |   | 4,975  |  
|Other noninterest income            |  |                                    | 1,474 |   |                                  |   | 704   |      |  |   | 3,727  |   |  |   | 2,319  |  
|                                    |  |                                    |       |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Total noninterest income            |  | $                                  | 6,725 |   |                                  | $ | 5,246 |      |  | $ | 13,474 |   |  | $ | 11,543 |  
|                                    |  |                                    |       |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|                                    |  |                                    |       |   |                                  |   |       |      |  |   |        |   |  |   |        |  

Noninterest Expense. Total noninterest expense for the three months ended June 30,
2006 was $19.3 million, an increase of $6.1 million or 46.2% compared with $13.2 million for the same three months of 2005. The increase in total noninterest expense for the three months ended June 30, 2006, compared with the same three months
of 2005, primarily reflects the impact of the Companys acquisition activities which includes the acquisitions of Gateway, Express, and Northwest. The efficiency ratio for the three months ended June 30, 2006 was 71.29%, an increase of 68
basis points compared with 70.61% for the same three months of 2005. The Companys efficiency ratios are calculated on a net basis which excludes intangible amortization and securities gains and losses, and includes interest income on a fully
tax-equivalent basis.

Employee compensation and benefits expense for the three months ended June 30, 2006 represented 56.1% of total
noninterest expense and was $10.8 million, an increase of $2.6 million or 32.2% compared with $8.2 million for the same three months of 2005. The increase reflects additional staff acquired with the acquisitions of Gateway, Express, and Northwest,
staff to operate State Banks three new full-service banking centers opened in the third and fourth quarters of 2005, and customary annual employee salary increases. Also included in employee compensation and benefits expense for the three
months ended June 30, 2006 was $470,000 associated with incentive payments projected for 2006.

Non-staff expense for the three months
ended June 30, 2006 was $8.5 million, an increase of $3.5 million or 68.9% compared with $5.0 million for the same three months of 2005. The increase of $3.5 million in non-staff expense for the three months ended June 30, 2006, compared
with the same three months of 2005, was primarily the result of added operating expense with the acquisitions of Gateway, Express, and Northwest, mainly within the categories of net occupancy, depreciation and amortization, legal and professional
fees and other noninterest expense. The increase in net occupancy was primarily the result of added occupancy costs associated with the recent acquisitions. The increase in legal and professional fees was primarily associated with the acquisition
projects and related compliance costs. The increase in other noninterest expense for the three months ended June 30, 2006 was also primarily the result of added operating costs associated with the recent acquisitions. Also included in other
noninterest expense for the three months ended June 30, 2006 was $365,600 of stock appreciation rights expense as a result of recent appreciation in the Companys stock price and $88,200 of restricted stock compensation expense and $39,600
of stock option compensation expense.

Total noninterest expense for the six months ended June 30, 2006 was $36.4 million, an increase
of $9.7 million or 36.6% compared with $26.6 million for the same six months of 2005. The increase in total noninterest expense for the six months ended June 30, 2006, compared with the same six months of 2005, primarily reflects the impact of
the Companys acquisition activities which includes the acquisitions of Gateway, Express, and Northwest. The efficiency ratio for the six



25



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##### Table of Contents

months ended June 30, 2006 was 71.40%, an increase of 32 basis points compared with 71.08% for the same six months of 2005.

Employee compensation and benefits expense for the six months ended June 30, 2006 represented 57.8% of total noninterest expense and was $21.0
million, an increase of $5.8 million or 38.0% compared with $15.2 million for the same six months of 2005. The increase reflects the additional staff acquired with the acquisitions of Gateway, Express, and Northwest, staff to operate State
Banks three new full-service banking centers opened in the third and fourth quarters of 2005, and normal annual employee salary increases. Also included in employee compensation and benefits expense for the six months ended June 30, 2006
was $700,000 associated with incentive payments projected for 2006.

Non-staff expense for the six months ended June 30, 2006 was
$15.3 million, an increase of $3.9 million or 34.7% compared with $11.4 million for the same six months of 2005. The increase was primarily due to added operating expense with the acquisitions of Gateway, Express, and Northwest mainly within the
categories of net occupancy, depreciation and amortization, legal and professional fees and other noninterest expense, mentioned above. Included in other noninterest expense for the six months ended June 30, 2006 was $554,900 of stock
appreciation rights expense as a result of recent appreciation in the Companys stock price and $164,500 of restricted stock compensation expense and $77,300 of stock option compensation expense.

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



|                                   |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|---------------------------------- |  | ---------------------------------- | ------ | -------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                   |  | For the Three MonthsEnded June 30, |        | For the Six MonthsEnded June 30,
|                                   |  | 2006                               |        | 2005                             |   | 2006   |  | 2005
|                                   |  | (In thousands)                    
|                                   |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|Employee compensation and benefits |  | $                                  | 10,818 |                                  | $ | 8,180  |  | $    | 21,035 |  | $ | 15,241
|Non-staff expenses:                |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|Net occupancy                      |  |                                    | 1,511  |                                  |   | 513    |  |      | 2,908  |  |   | 2,318 
|Depreciation and amortization      |  |                                    | 2,062  |                                  |   | 723    |  |      | 3,263  |  |   | 1,829 
|Data processing                    |  |                                    | 439    |                                  |   | 329    |  |      | 763    |  |   | 540   
|Legal and professional             |  |                                    | 1,004  |                                  |   | 586    |  |      | 1,466  |  |   | 1,114 
|Advertising                        |  |                                    | 111    |                                  |   | 356    |  |      | 291    |  |   | 576   
|Printing and supplies              |  |                                    | 288    |                                  |   | 245    |  |      | 488    |  |   | 459   
|Telecommunications                 |  |                                    | 364    |                                  |   | 301    |  |      | 745    |  |   | 555   
|Mortgage servicing expense         |  |                                    | 197    |                                  |   | 307    |  |      | 367    |  |   | 571   
|Other noninterest expense          |  |                                    | 2,500  |                                  |   | 1,657  |  |      | 5,053  |  |   | 3,433 
|                                   |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|Total non-staff expenses           |  |                                    | 8,476  |                                  |   | 5,017  |  |      | 15,344 |  |   | 11,395
|                                   |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|Total noninterest expense          |  | $                                  | 19,294 |                                  | $ | 13,197 |  | $    | 36,379 |  | $ | 26,636
|                                   |  |                                    |        |                                  |   |        |  |      |        |  |   |       



26



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##### Table of Contents

Financial Condition

Loan Portfolio.Total loans, including loans held for sale, at June 30, 2006 were $1.255 billion, an increase of $223.4 million or 21.6% compared with total loans of $1.032 billion at December 31,
2005. For the six months ended June 30, 2006, acquired loan growth contributed approximately $126.5 million or 56.6% of total loan growth while organic loan growth contributed approximately $96.9 million or 43.4% of total loan growth.
Approximately $107.1 million or 84.7% of the acquired loan growth was attributed to the acquisition of Northwest in the second quarter of 2006 and approximately $19.4 million or 15.3% of the acquired loan growth was attributed to the acquisition of
Express in the first quarter of 2006. At June 30, 2006, and December 31, 2005, the ratio of total loans to total deposits was 94.91% and 92.01%, respectively, and total loans represented 69.0% and 66.5% of total assets, respectively.

The following table summarizes the loan portfolio of the Company by type of loan at the dates indicated:



|                                            |  |                        |           |                   |         |        |        |   |           |         |  |       
|------------------------------------------- |  | ---------------------- | --------- | ----------------- | ------- | ------ | ------ | - | --------- | ------- |  | ------
|                                            |  | June 30, 2006          |           | December 31, 2005
|                                            |  | Amount                 |           |                   | Percent |        | Amount |   |           | Percent
|                                            |  | (Dollars in thousands)
|                                            |  |                        |           |                   |         |        |        |   |           |         |  |       
|Commercial and industrial                   |  | $                      | 259,332   |                   |         | 20.7%  |        | $ | 243,114   |         |  | 23.5% 
|Real estate:                                |  |                        |           |                   |         |        |        |   |           |         |  |       
|1-4 family residential                      |  |                        | 356,456   |                   |         | 28.4   |        |   | 270,951   |         |  | 26.3  
|Commercial real estate                      |  |                        | 442,832   |                   |         | 35.3   |        |   | 289,607   |         |  | 28.1  
|Held for sale                               |  |                        | 25,728    |                   |         | 2.0    |        |   | 17,537    |         |  | 1.7   
|Other                                       |  |                        | 80,350    |                   |         | 6.4    |        |   | 133,455   |         |  | 12.9  
|Consumer and other, net                     |  |                        | 90,519    |                   |         | 7.2    |        |   | 77,174    |         |  | 7.5   
|                                            |  |                        |           |                   |         |        |        |   |           |         |  |       
|Total loans (including loans held for sale) |  |                        | 1,255,217 |                   |         | 100.0% |        |   | 1,031,838 |         |  | 100.0%
|                                            |  |                        |           |                   |         |        |        |   |           |         |  |       
|Allowance for loan losses                   |  |                        | (10,995   | )                 |         |        |        |   | (9,592    | )       |  |       
|                                            |  |                        |           |                   |         |        |        |   |           |         |  |       
|Net loans (including loans held for sale)   |  | $                      | 1,244,222 |                   |         |        |        | $ | 1,022,246 |         |  |       
|                                            |  |                        |           |                   |         |        |        |   |           |         |  |       
|                                            |  |                        |           |                   |         |        |        |   |           |         |  |       



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Nonperforming Assets. The Company generally places a loan on nonaccrual status and ceases to
accrue interest when loan payment performance is deemed unsatisfactory. Loans where the interest payments jeopardize the collection of principal are placed on nonaccrual status, unless the loan is both well-secured and in the process of collection.
Cash payments received while a loan is classified as nonaccrual, are recorded as a reduction of principal as long as doubt exists as to collection. Nonperforming assets consist of nonaccrual loans, accruing loans 90 days or more past due, and other
real estate and repossessed assets. At June 30, 2006, total nonperforming assets were $6.5 million or 0.36% of total assets, a decrease of $530,000 or 7.5% compared with nonperforming assets of $7.1 million or 0.46% of total assets at
December 31, 2005.

Nonperforming loans (nonaccrual loans and accruing loans 90 days or more past due) at June 30, 2006 totaled
$5.0 million or 0.40% of total loans, an increase of $305,000 or 6.5% compared with nonperforming loans of $4.7 million or 0.46% of total loans at December 31, 2005. Other real estate and repossessed assets at June 30, 2006 totaled $1.5
million, a decrease of $835,000 or 35.4% compared with other real estate and repossessed assets of $2.4 million at December 31, 2005.

The following table presents information regarding nonperforming assets at the dates indicated:



|                                                                              |  |                        |       |                  |   |      
|----------------------------------------------------------------------------- |  | ---------------------- | ----- | ---------------- | - | -----
|                                                                              |  | June 30, 2006          |       | December 31,2005
|                                                                              |  | (Dollars in thousands)
|                                                                              |  |                        |       |                  |   |      
|Nonaccrual loans                                                              |  | $                      | 3,479 |                  | $ | 2,544
|Accruing loans past due 90 days or more                                       |  |                        | 1,542 |                  |   | 2,172
|Other real estate and other repossessed assets                                |  |                        | 1,525 |                  |   | 2,360
|                                                                              |  |                        |       |                  |   |      
|Total nonperforming assets                                                    |  | $                      | 6,546 |                  | $ | 7,076
|                                                                              |  |                        |       |                  |   |      
|                                                                              |  |                        |       |                  |   |      
|Nonperforming assets to total assets                                          |  |                        | 0.36% |                  |   | 0.46%
|Nonperforming assets to total loans, other real estate and repossessed assets |  |                        | 0.52% |                  |   | 0.68%
|Nonperforming loans to total loans                                            |  |                        | 0.40% |                  |   | 0.46%
|                                                                              |  |                        |       |                  |   |      

Allowance for Loan Losses.The Company has several systems in place to assist it in
maintaining the overall quality of its loan portfolio. The Company has established underwriting guidelines to be followed at each of its banking centers. Management actively monitors Texas Uniteds asset quality and provides specific loss
allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ from the
assumptions used in making the initial determinations. There can be no assurance, however, that the Companys loan portfolio will not become subject to increasing pressure from deteriorating borrower credit due to general economic conditions.



28



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##### Table of Contents

The allowance for loan losses is a reserve established through charges to earnings in the form of a
provision for loan losses. The Company utilizes a model to determine the specific and general portions of the allowance for loan losses. Through the loan review process, management assigns one of four loan grades to each loan, according to payment
history, collateral values and financial condition of the borrower. Specific reserves are allocated for loans assigned to a grade of watch or below, meaning that management has determined that deterioration in a loan has occurred. The
percentage of the specific allocation for each loan is based on the risk elements attributable to that particular loan. In addition, a general allocation is made for all loans in an amount determined based on general economic conditions, historical
loan loss experience, loan growth within a category, amount of past due loans and peer averages. Management maintains the allowance based on the amounts determined using the procedures set forth above.

For the six months ended June 30, 2006, net charge-offs were $1.4 million or 0.25% of average total loans, an increase of approximately $327,000 or
30.7% compared with $1.1 million or 0.30% of average total loans for the same six months of 2005. The allowance for loan losses at June 30, 2006 was $11.0 million or 0.88% of total loans, an increase of $1.4 million or 14.6% compared with $9.6
million or 0.93% of total loans at December 31, 2005. The ratio of the allowance for loan losses to nonperforming loans at June 30, 2006 was 218.98% compared with 203.39% at December 31, 2005.

The following table presents an analysis of the allowance for loan losses and other related data:



|                                                          |  |                               |           |   |                             |   |           |  
|--------------------------------------------------------- |  | ----------------------------- | --------- | - | --------------------------- | - | --------- | -
|                                                          |  | Six Months EndedJune 30, 2006 |           |   | Year EndedDecember 31, 2005 |  
|                                                          |  | (Dollars in thousands)        |          
|                                                          |  |                               |           |   |                             |   |           |  
|Average loans outstanding                                 |  | $                             | 1,141,471 |   |                             | $ | 783,512   |  
|                                                          |  |                               |           |   |                             |   |           |  
|Gross loans outstanding at end of period                  |  | $                             | 1,255,217 |   |                             | $ | 1,031,838 |  
|                                                          |  |                               |           |   |                             |   |           |  
|                                                          |  |                               |           |   |                             |   |           |  
|Allowance for loan losses at beginning of period          |  | $                             | 9,592     |   |                             | $ | 6,685     |  
|Provision for loan losses                                 |  |                               | 1,195     |   |                             |   | 3,838     |  
|Balances from acquisitions                                |  |                               | 1,600     |   |                             |   | 1,799     |  
|Charge-offs:                                              |  |                               |           |   |                             |   |           |  
|Commercial and industrial                                 |  |                               | (876      | ) |                             |   | (1,249    | )
|Real estate                                               |  |                               | (241      | ) |                             |   | (768      | )
|Consumer                                                  |  |                               | (211      | ) |                             |   | (827      | )
|Other                                                     |  |                               | (592      | ) |                             |   | (812      | )
|                                                          |  |                               |           |   |                             |   |           |  
|Total charge-offs                                         |  |                               | (1,920    | ) |                             |   | (3,656    | )
|Recoveries:                                               |  |                               |           |   |                             |   |           |  
|Commercial and industrial                                 |  |                               | 76        |   |                             |   | 359       |  
|Real estate                                               |  |                               | 76        |   |                             |   | 180       |  
|Consumer                                                  |  |                               | 90        |   |                             |   | 119       |  
|Other                                                     |  |                               | 286       |   |                             |   | 268       |  
|                                                          |  |                               |           |   |                             |   |           |  
|Total recoveries                                          |  |                               | 528       |   |                             |   | 926       |  
|                                                          |  |                               |           |   |                             |   |           |  
|Net charge-offs                                           |  |                               | (1,392    | ) |                             |   | (2,730    | )
|                                                          |  |                               |           |   |                             |   |           |  
|Allowance for loan losses at end of period                |  | $                             | 10,995    |   |                             | $ | 9,592     |  
|                                                          |  |                               |           |   |                             |   |           |  
|                                                          |  |                              
|Ratio of allowance for loan losses to end of period loans |  |                               | 0.88      | % |                             |   | 0.93      | %
|Ratio of net charge-offs to average loans (annualized)    |  |                               | 0.25      | % |                             |   | 0.35      | %
|Ratio of allowance for loan losses to nonperforming loans |  |                               | 218.98    | % |                             |   | 203.39    | %



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##### Table of Contents

Securities.At June 30, 2006, the investment securities portfolio totaled $280.6 million, an
increase of $11.5 million or 4.3% compared with total investment securities of $269.2 million at December 31, 2005, and a decrease of $23.8 million or 7.8% compared with total investment securities of $304.5 million at June 30, 2005.
During the six months ended June 30, 2006, the Company acquired $5.4 million and purchased $1.083 billion in investment securities that was partially offset by sales, maturities and principal pay-downs on investment securities of $1.073
billion, an unrealized net loss on available-for-sale securities of $3.5 million and net premium amortization of $335,000.

The following
tables summarize the amortized cost and their approximate fair values of securities classified as available-for-sale and held-to-maturity as of June 30, 2006:



|                                                                     |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|-------------------------------------------------------------------- |  | -------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                     |  | June 30, 2006 
|                                                                     |  | AmortizedCost  |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|                                                                     |  | (In thousands)
|Available-for-Sale Securities:                                       |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|U.S. Treasury securities and obligations of U.S. government agencies |  | $              | 87,626  |                      | $ |                      |  | $ | (2,803     | ) |  | $ | 84,823 
|Mortgage-backed securities                                           |  |                | 142,069 |                      |   |                      |  |   | (6,366     | ) |  |   | 135,703
|State and municipal securities                                       |  |                | 18,724  |                      |   |                      |  |   | (216       | ) |  |   | 18,508 
|Other                                                                |  |                | 16,152  |                      |   |                      |  |   | (135       | ) |  |   | 16,017 
|                                                                     |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                                |  | $              | 264,571 |                      | $ |                      |  | $ | (9,520     | ) |  | $ | 255,051
|                                                                     |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                     | 
|                                                                     |  | June 30, 2006 
|                                                                     |  | AmortizedCost  |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|                                                                     |  | (In thousands)
|Held-to-Maturity Securities:                                         |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|U.S. Treasury securities and obligations of U.S. government agencies |  | $              |        |                      | $ |                      |  | $ |           |   |  | $ |       
|Mortgage-backed securities                                           |  |                |        |                      |   |                      |  |   |           |   |  |   |       
|State and municipal securities                                       |  |                | 25,582  |                      |   | 43                    |  |   | (219       | ) |  |   | 25,406 
|Other                                                                |  |                |        |                      |   |                      |  |   |           |   |  |   |       
|                                                                     |  |                |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                                |  | $              | 25,582  |                      | $ | 43                    |  | $ | (219       | ) |  | $ | 25,406 
|                                                                     |  |                |         |                      |   |                       |  |   |            |   |  |   |        



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##### Table of Contents

Deposits. Total deposits at June 30, 2006 were $1.323 billion, an increase of $201.1 million
or 17.9% compared with total deposits of $1.121 billion at December 31, 2005. For the six months ended June 30, 2006, acquired deposit growth contributed approximately $158.9 million or 79.0% of total deposit growth while organic deposit
growth contributed approximately $42.2 million or 21.0% of total deposit growth. Approximately $121.2 million or 76.3% of the acquired deposit growth came from the acquisition of Northwest in the second quarter of 2006 and approximately $37.7
million or 23.7% of the acquired deposit growth came from the acquisition of Express in the first quarter of 2006.

Noninterest-bearing
demand deposits at June 30, 2006 were $377.0 million, an increase of $59.3 million or 18.7% compared with noninterest-bearing demand deposits of $317.7 million at December 31, 2005. The ratios of noninterest-bearing demand deposits to
total deposits at June 30, 2006 and December 31, 2005 were 28.5% and 28.3%, respectively. Interest-bearing deposits at June 30, 2006 were $945.5 million, an increase of $141.8 million or 17.6% compared with interest-bearing deposits
of $803.7 at December 31, 2005.

The following table presents, for the periods indicated, the daily average deposit balances and the
related interest expense and weighted average interest rates paid on interest-bearing deposits:



|                                |  |                                       |           |                                     |   |             |  |                           |  |              |         |             |   |        |  |      
|------------------------------- |  | ------------------------------------- | --------- | ----------------------------------- | - | ----------- |  | ------------------------- |  | ------------ | ------- | ----------- | - | ------ |  | -----
|                                |  | For the Six Months EndedJune 30, 2006 |           | For the Year EndedDecember 31, 2005
|                                |  | AverageOutstandingBalance             |           | InterestPaid                        |   | AverageRate |  | AverageOutstandingBalance |  | InterestPaid |         | AverageRate
|                                |  | (Dollars in thousands)               
|                                |  |                                       |           |                                     |   |             |  |                           |  |              |         |             |   |        |  |      
|Noninterest-bearing demand      |  | $                                     | 338,794   |                                     | $ |            |  |   %                      |  | $            | 205,721 |             | $ |       |  |   % 
|Interest-bearing demand         |  |                                       | 232,149   |                                     |   | 1,872       |  | 1.63                      |  |              | 213,106 |             |   | 2,746  |  | 1.29 
|Savings and money market        |  |                                       | 278,626   |                                     |   | 2,987       |  | 2.16                      |  |              | 163,332 |             |   | 2,378  |  | 1.46 
|Time                            |  |                                       | 389,913   |                                     |   | 7,287       |  | 3.77                      |  |              | 305,627 |             |   | 8,900  |  | 2.91 
|                                |  |                                       |           |                                     |   |             |  |                           |  |              |         |             |   |        |  |      
|Total interest-bearing deposits |  |                                       | 900,688   |                                     |   | 12,146      |  | 2.72                      |  |              | 682,065 |             |   | 14,024 |  | 2.06 
|                                |  |                                       |           |                                     |   |             |  |                           |  |              |         |             |   |        |  |      
|Total deposits                  |  | $                                     | 1,239,482 |                                     | $ | 12,146      |  | 1.98%                     |  | $            | 887,786 |             | $ | 14,024 |  | 1.58%
|                                |  |                                       |           |                                     |   |             |  |                           |  |              |         |             |   |        |  |      
|                                |  |                                       |           |                                     |   |             |  |                           |  |              |         |             |   |        |  |      



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##### Table of Contents

Borrowings.The Company utilizes borrowings as an alternative funding source to supplement
deposits in funding its lending and investing activities. Total borrowings consist of short-term and long-term advances from the Federal Home Loan Bank (FHLB), advances on a revolving credit line with a correspondent bank, and Federal
Funds purchased.

At June 30, 2006, borrowings totaled $220.3 million, an increase of $14.5 million or 7.1% compared with borrowings
of $205.8 million at December 31, 2005. At June 30, 2006, FHLB advances were $211.3 million, an increase of $8.0 million or 3.9% compared with $203.3 million at December 31, 2005. The FHLB advances, at June 30, 2006, had maturity
dates ranging from 2006 to 2025 with interest rates ranging from 2.92% to 6.56%. At June 30, 2006, the credit line with a correspondent bank had a balance of $9.0 million, an increase of $6.5 million compared with $2.5 million at
December 31, 2005. The credit line bears interest at the effective Prime lending rate minus 1.00% and expires, with renewal options, in July 2007. Federal Funds purchased at June 30, 2006 were $30.8 million, an increase of $8.9 million or
40.7% compared with Federal Funds purchased of $21.9 million at December 31, 2005.

The following table presents the Companys
borrowings at June 30, 2006 and December 31, 2005:



|                                             |  |                |         |                  |   |        
|-------------------------------------------- |  | -------------- | ------- | ---------------- | - | -------
|                                             |  | June 30,2006   |         | December 31,2005
|                                             |  | (In thousands)
|                                             |  |                |         |                  |   |        
|FHLB advances                                |  | $              | 211,278 |                  | $ | 203,255
|Balance on $20.0 million line of credit      |  |                | 9,000   |                  |   | 2,500  
|                                             |  |                |         |                  |   |        
|Total borrowings                             |  |                | 220,278 |                  |   | 205,755
|Federal Funds purchased                      |  |                | 30,807  |                  |   | 21,901 
|                                             |  |                |         |                  |   |        
|Total borrowings and Federal Funds purchased |  | $              | 251,085 |                  | $ | 227,656
|                                             |  |                |         |                  |   |        



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Junior Subordinated Deferrable Interest Debentures. Junior subordinated deferrable interest
debentures at June 30, 2006 were approximately $50.0 million, an increase of $12.4 million or 32.9% compared with $37.6 million at December 31, 2005, and an increase of $32.5 million or 185.7% compared with $17.5 million at June 30,
2005. The increase for the six months ended June 30, 2006, compared with December 31, 2005 was related to $12.4 million in junior subordinated deferrable interest debentures issued to a newly formed subsidiary trust on March 31, 2006.
The Companys outstanding junior subordinated deferrable interest debentures issued to its subsidiary trusts as of June 30, 2006 are detailed as follows (dollars in thousands):



|                              |  |              |  |            |  |                                     |        |                   |                           |                                      |   |                   |  |           
|----------------------------- |  | ------------ |  | ---------- |  | ----------------------------------- | ------ | ----------------- | ------------------------- | ------------------------------------ | - | ----------------- |  | ----------
|Description                   |  | IssuanceDate |  | Call Date  |  | TrustPreferredSecuritiesOutstanding |        | Interest Rate (1) |                           | JuniorSubordinatedDebt OwedTo Trusts |   | FinalMaturityDate
|                              |  |              |  |            |  |                                     |        |                   |                           |                                      |   |                   |  |           
|TXUI Statutory Trust I        |  | 09/07/2000   |  | 09/07/2010 |  | $                                   | 7,000  |                   | 10.60%                    |                                      | $ | 7,210             |  | 09/07/2030
|TXUI Statutory Trust II       |  | 12/19/2003   |  | 12/19/2008 |  |                                     | 5,000  |                   | 6.45% (2)                 |                                      |   | 5,155             |  | 12/19/2033
|GNB Capital Trust I (3)       |  | 11/14/2001   |  | 11/14/2006 |  |                                     | 5,000  |                   | 9.95%                     |                                      |   | 5,155             |  | 11/14/2031
|TXUI Statutory Trust III (4)  |  | 11/30/2005   |  | 12/15/2010 |  |                                     | 15,500 |                   | 3-Month LIBOR + 1.39%     |                                      |   | 15,980            |  | 12/15/2035
|Gateway Statutory Trust I (5) |  | 03/26/2002   |  | 03/26/2007 |  |                                     | 4,000  |                   | 3-Month LIBOR + 3.60% (6) |                                      |   | 4,124             |  | 03/26/2032
|TXUI Statutory Trust IV (7)   |  | 03/31/2006   |  | 06/30/2011 |  |                                     | 12,000 |                   | 3-Month LIBOR + 1.39%     |                                      |   | 12,372            |  | 06/30/2041

---

|(1) | The 3-Month LIBOR in effect as of June 30, 2006 was 5.51%.
|--- | ----------------------------------------------------------

|(2) | The debentures bear a fixed interest rate until December 19, 2008, when the rate begins to float on a quarterly basis based on the
        3-Month LIBOR plus 2.85%.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Assumed in connection with the acquisition of GNB Bancshares, Inc. on October 1, 2004.
|--- | --------------------------------------------------------------------------------------

|(4) | Issued to facilitate the acquisition of Gateway Holding Company, Inc. on December 1, 2005.
|--- | ------------------------------------------------------------------------------------------

|(5) | Assumed in connection with the acquisition of Gateway Holding Company, Inc. on December 1, 2005.
|--- | ------------------------------------------------------------------------------------------------

|(6) | The debentures bore a fixed interest rate of 5.59% until June 26, 2002, when the rate began to float on a quarterly basis based on
        the 3-Month LIBOR plus 3.60%; provided that prior to March 26, 2007, the rate will not exceed 11.00%.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Issued to facilitate the acquisition of Northwest Bancshares, Inc. on April 1, 2006.
|--- | ------------------------------------------------------------------------------------



Liquidity. Liquidity involves the Companys ability to raise funds to
support asset growth or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate the Company on an ongoing basis. The Companys liquidity needs are primarily met by
growth in core deposits. Core deposits exclude time deposits over $100,000. These jumbo deposits are characteristically more sensitive to changes in interest rates and, thus, are not considered a part of core funding. Although access to
purchased funds from correspondent banks is available and has been utilized on occasion to take advantage of investment opportunities, the Company does not rely on these external funding sources. The Company maintains investments in liquid assets
based upon managements assessment of cash needs, expected deposit flows, objectives of its asset/liability management program, availability of federal funds or FHLB advances, and other available liquid assets. Several options are available to
increase liquidity, including sale of investment securities, increasing deposit marketing activities, and borrowing from the FHLB or correspondent banks. The cash and federal funds sold position, supplemented by amortizing investments along with
payments and maturities within the loan portfolio, have historically created an adequate liquidity position.

Asset liquidity is provided
by cash and assets which are readily marketable or which will mature in the near future. At June 30, 2006, the Company had cash and cash equivalents of $76.2 million, a decrease of approximately $19.2 million or 20.1% compared with $95.4
million at December 31, 2005. The Company views time deposits as a stable means of supporting loan growth. The Company believes, based on its historical experience, that its large time deposits have core-type characteristics. The Company
anticipates that this source of funding will continue to sustain a portion of the Companys asset growth in the future.



33



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##### Table of Contents

Capital Resources. Shareholders equity at June 30, 2006 was $169.3 million, an increase
of $31.4 million or 22.8% compared with shareholders equity of $137.9 million at December 31, 2005. The increase in shareholders equity for the six months ended June 30, 2006, compared with December 31, 2005, was primarily
the result of common stock issued in connection with the acquisitions of Northwest and Express, net earnings and the issuance of common stock to employees upon the exercise of stock options. At June 30, 2006, there were approximately 10,641,000
shares of the Companys common stock outstanding. The ratio of average equity to average assets for the six months ended June 30, 2006 was 9.26%, an increase of 33 basis points compared with 8.93% for the year ended December 31, 2005,
and an increase of 33 basis points compared with 8.93% for the six months ended June 30, 2005.

The following table provides a
comparison of the leverage and risk-weighted capital ratios to the minimum and well-capitalized regulatory standards for the Company, State Bank, GNB Financial, Gateway National Bank, and Northwest Bank as of June 30, 2006:



|                                |  |                                             |  |                                                                             |  |                             
|------------------------------- |  | ------------------------------------------- |  | --------------------------------------------------------------------------- |  | ----------------------------
|                                |  | MinimumRequired ForCapitalAdequacy Purposes |  | To Be Categorizedas WellCapitalized UnderPrompt CorrectiveAction Provisions |  | Actual Ratio atJune 30, 2006
|Texas United:                   |  |                                             |  |                                                                             |  |                             
|Leverage ratio                  |  | 4.00%(1)                                    |  | N/A                                                                         |  | 7.35%                       
|Tier 1 risk-based capital ratio |  | 4.00                                        |  | N/A                                                                         |  | 9.31                        
|Risk-based capital ratio        |  | 8.00                                        |  | N/A                                                                         |  | 10.13                       
|State Bank:                     |  |                                             |  |                                                                             |  |                             
|Leverage ratio                  |  | 4.00%(2)                                    |  | 5.00%                                                                       |  | 7.44%                       
|Tier 1 risk-based capital ratio |  | 4.00                                        |  | 6.00                                                                        |  | 9.40                        
|Risk-based capital ratio        |  | 8.00                                        |  | 10.00                                                                       |  | 10.15                       
|GNB Financial:                  |  |                                             |  |                                                                             |  |                             
|Leverage ratio                  |  | 4.00%(3)                                    |  | 5.00%                                                                       |  | 9.53%                       
|Tier 1 risk-based capital ratio |  | 4.00                                        |  | 6.00                                                                        |  | 11.56                       
|Risk-based capital ratio        |  | 8.00                                        |  | 10.00                                                                       |  | 12.39                       
|Gateway National Bank:          |  |                                             |  |                                                                             |  |                             
|Leverage ratio                  |  | 4.00%(3)                                    |  | 5.00%                                                                       |  | 7.47%                       
|Tier 1 risk-based capital ratio |  | 4.00                                        |  | 6.00                                                                        |  | 10.98                       
|Risk-based capital ratio        |  | 8.00                                        |  | 10.00                                                                       |  | 12.09                       
|Northwest Bank:                 |  |                                             |  |                                                                             |  |                             
|Leverage ratio                  |  | 4.00%(3)                                    |  | 5.00%                                                                       |  | 8.73%                       
|Tier 1 risk-based capital ratio |  | 4.00                                        |  | 6.00                                                                        |  | 9.90                        
|Risk-based capital ratio        |  | 8.00                                        |  | 10.00                                                                       |  | 10.82                       
|                                |  |                                             |  |                                                                             |  |                             

---

|(1) | The Federal Reserve Board may require the Company to maintain a leverage ratio above the required minimum.
|--- | ----------------------------------------------------------------------------------------------------------

|(2) | The FDIC may require State Bank and/or Northwest Bank to maintain a leverage ratio above the required minimum.
|--- | --------------------------------------------------------------------------------------------------------------

|(3) | The OCC may require GNB Financial and/or Gateway National Bank to maintain a leverage ratio above the required minimum.
|--- | -----------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

There have been no
material changes since December 31, 2005. For more information regarding quantitative and qualitative disclosures about market risk, please refer to the Companys Annual Report on Form 10-K as of and for the year ended December 31,
2005, and in particular, Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Sensitivity and Market Risk.

Item 4.Controls and Procedures

Disclosure Controls and Procedures.As of the end
of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported to the Companys management within the time periods specified in the Securities and Exchange
Commissions rules and forms.

Changes in Internal Control Over Financial Reporting.There were no changes in the
Companys internal control over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART II

OTHER INFORMATION

Item 1.Legal Proceedings

The Company is a defendant in various legal proceedings arising
in the normal course of business. The Company does not believe that the outcome of any such proceedings will have a material effect on its consolidated financial position, results of operations or cash flows.

Item 1A.Risk Factors

Other than with respect to the risk factors below, there have been
no material changes from the risk factors disclosed in the Risk Factors section of the Companys Annual Report on Form 10-K for the year ended December 31, 2005.

Risks Associated with the Companys Pending Merger with Prosperity Bancshares, Inc.

Failure to complete
the pending merger with Prosperity Bancshares, Inc. could materially and adversely affect the Companys stock price and results of operations.

On July 18, 2006, the Company entered into a definitive merger agreement with Prosperity Bancshares, Inc. whereby it would merge with and into Prosperity. Completion of the merger is subject to certain
conditions, including approval by the Companys shareholders and the shareholders of Prosperity, regulatory approvals, and various other closing conditions. The Company cannot assure you that these conditions will be met or waived, that the
necessary approvals will be obtained or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all. If the merger is not completed:



| |  |  | the market price of the Companys common stock may decline to the extent that the current market price includes a market assumption that the merger will be completed;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs related to the merger, and may not receive any
termination fee from Prosperity;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability to retain employees in the interim period may be significant and the Company may find it difficult to continue as a stand-alone entity; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company may experience a negative reaction to the termination of the merger from its customers, employees or affiliates which may adversely impact its future results of
operations as a stand-alone entity.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The occurrence of any of these events individually or in combination could have a
material adverse effect on the Companys financial condition, results of operations and its stock price. In addition, if the merger agreement is terminated and the Companys board of directors seeks another merger or business combination,
the Company may not be able to find a party willing to pay a price equal to or more attractive than the price Prosperity has agreed to pay.



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Fluctuations in market prices of Prosperity common stock will affect the value that the Companys shareholders
receive for their shares of its common stock.

Upon completion of the merger, shares of the Companys common stock (other than
any dissenting shares) will be converted into shares of Prosperity common stock. While the merger consideration has been generally structured to provide that the Companys shareholders will receive, for each of their shares of common stock, one
(1) share of Prosperity common stock, in the event the average closing price of Prosperity common stock during the 20 consecutive trading days ending on and including the tenth trading day prior to the closing date of the merger falls below
$28.50, the Company may give notice to terminate the merger agreement, subject to Prosperitys right, in its sole discretion, to increase the exchange ratio with respect to the number of shares of Prosperity common stock that the Companys
shareholders will receive, to a number of shares that will result in a per share consideration valued at $28.50 based on the average closing price of Prosperity common stock. In the event the average closing price of Prosperity common stock for
the same time period rises above $34.84, the exchange ratio shall automatically be decreased to a number of shares of Prosperity common stock that will result in a per share consideration valued at $34.84 based on the average closing price of
Prosperity common stock.

In the event Prosperity elects to increase the exchange ratio or the exchange ratio is automatically decreased,
the Companys shareholders will receive a number of shares of Prosperity common stock greater or less than one, as the case may be, for each share of the Company common stock they hold. Because the price of Prosperity common stock will
fluctuate prior to the merger, Prosperity cannot assure the Companys shareholders of the market value or number of the shares of Prosperity common stock or of the amount of cash that they will receive in the merger.

The price of Prosperity common stock may vary from its price on the date of the joint proxy statement/ prospectus that will be sent to the Companys
shareholders, the date of the special meeting of shareholders and the date for determining the average closing price discussed above. Stock price fluctuations may result from a variety of factors, some of which are beyond the control of Prosperity,
including, among other things, changes in Prosperitys businesses, operations and prospects, regulatory considerations and general market and economic conditions. Because the date the merger is to be completed will be later than the date of the
special meeting, the price of the Prosperity common stock on the date of the special meeting may not be indicative of its price on the date the merger is to be completed.

If the price of Prosperity common stock falls and the decrease exceeds a certain pre-agreed level, and if Prosperity does not elect to alter the exchange ratio to provide more shares, the Company has the right
to terminate the merger agreement and the merger will not occur.

The number of shares of Prosperity common stock that the
Companys shareholders will receive in the merger may increase from the date of merger agreement until completion of the merger. More specifically, if the average closing price for Prosperity common stock during the 20 consecutive trading days
ending on and including the tenth trading day prior to the closing date of the merger is less than $28.50 per share, the exchange ratio may be increased at the option of Prosperity. If Prosperity elects not to increase the exchange ratio, the
Company may terminate the merger agreement.

As a result, even if the merger is approved by the Companys shareholders, the merger may
ultimately not be completed. Although the Prosperity board of directors has the ability to increase the exchange ratio and the Companys board of directors has the power to terminate the merger agreement and abandon the merger if the second
condition listed above occurs, there is no obligation of either board to exercise such power.

Prosperity may have difficulty combining the
Companys operations with its own operations or realizing the anticipated benefits of the merger.

Because the markets and
industries in which the Company and Prosperity operate are highly competitive, and due to the inherent uncertainties associated with the integration of acquired companies, Prosperity may not be able to integrate the Companys operations without
encountering difficulties, including, without limitation, the loss of key employees and customers, the disruption of their respective ongoing businesses and possible inconsistencies in standards, controls and



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procedures. The Company expects the merger to result in certain benefits for the combined company, such as cost savings and other financial and operational
benefits. The Company cannot assure you, however, when, if ever, or to the extent to which the combined company will be able to realize these benefits. Difficulties associated with integrating the two companies could have a material adverse effect
on the combined company and the market price of the Prosperity common stock.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3.Defaults Upon Senior Securities

Not applicable

Item 4.Submission of Matters to a Vote of Security Holders

The Companys Annual
Meeting of Shareholders was held on May 18, 2006. At the meeting, the shareholders of the Company considered and acted upon the following proposals:

1. Election of Directors



| | a. | Jimmy Jack Biffle was elected as Class II director to serve on the Companys Board of Directors until the Companys 2009 Annual Meeting of Shareholders and until his
successor is duly elected and qualified. A total of 6,757,690 shares were voted in favor of Mr. Biffle and 410,227 shares were withheld from voting.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Bryan Mitchell was elected as Class II director to serve on the Companys Board of Directors until the Companys 2009 Annual Meeting of Shareholders and until his
successor is duly elected and qualified. A total of 6,762,425 shares were voted in favor of Mr. Mitchell and 405,092 shares were withheld from voting.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | Lee D. Mueller, Jr. was elected as Class II director to serve on the Companys Board of Directors until the Companys 2009 Annual Meeting of Shareholders and until his
successor is duly elected and qualified. A total of 6,767,490 shares were voted in favor of Mr. Mueller and 400,427 shares were withheld from voting.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Michael Steinhauser was elected as Class II director to serve on the Companys Board of Directors until the Companys 2009 Annual Meeting of Shareholders and until his
successor is duly elected and qualified. A total of 6,772,247 shares were voted in favor of Mr. Steinhauser and 395,670 shares were withheld from voting.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | Joe A. Hargis was elected as Class III director to serve on the Companys Board of Directors until the Companys 2007 Annual Meeting of Shareholders and until his
successor is duly elected and qualified. A total of 6,761,785 shares were voted in favor of Mr. Hargis and 406,132 shares were withheld from voting.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following Class I and Class III directors continued in office after the Companys Annual Meeting of Shareholders: Bruce Frenzel, Michael Kulhanek, Hank Novak, Riley C. Peveto, L. Don Stricklin and Ervan
Zouzalik.

2. Ratification of Appointment of Independent Registered Public Accounting Firm

The appointment of BKD, LLP as the independent registered public accounting firm of the Company for the fiscal year ending
December 31, 2006 was ratified. A total of 7,129,522 shares voted in favor of the appointment, 11,038 voted against and 27,357 shares abstained from voting on the proposal.

Item 5.Other Information

Not applicable



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Item 6.Exhibits



|              |   |  |                                                                                                                                                                                                   
|------------- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |   |  | Identification of Exhibit                                                                                                                                                                         
|              |  
|3.1           |   |  | Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 4.1 to the Companys Registration Statement on Form S-8 (Registration No.
333-124055)).
|              |  
|3.2           |   |  | Bylaws of the Company, as amended and restated (incorporated herein by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (Registration No. 333-116542)).                         
|              |  
|4.1           |   |  | Specimen certificate representing shares of Texas United common stock (incorporated herein by reference to Exhibit 4.1 to there Registration Statement on Form S-4 (Registration No.
333-84644)). 
|              |  
|31.1          | * |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                       
|              |  
|31.2          | * |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                       
|              |  
|32.1          | * |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                               
|              |  
|32.2          | * |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                               

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|* | filed herewith.
|- | ---------------



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |  |  |     |  |                      |  |                                                                                     
|-------------------- |  |  |  | --- |  | -------------------- |  | ------------------------------------------------------------------------------------
|                     |  |  | 
|Date: August 7, 2006 |  |  |  | By: |  | /s/ L. Don Stricklin
|                     |  |  |  |     |  |                      |  | L. Don Stricklin President and Chief Executive Officer (principal executive officer)



|                     |  |  |  |     |  |                          |  |                                                                                                                                      
|-------------------- |  |  |  | --- |  | ------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------
|                     |  |  | 
|Date: August 7, 2006 |  |  |  | By: |  | /s/ Jeffrey A. Wilkinson
|                     |  |  |  |     |  |                          |  | Jeffrey A. Wilkinson Executive Vice President and Chief Financial Officer (principal financial officer/ principal accounting officer)



40