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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, 2005



| ̈ | 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.)



202 W. COLORADO

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 an accelerated filer (as defined in Rule 12-b-2 of the Exchange
Act).    Yes ̈No  x.



As of July 31, 2005, the number of outstanding shares of Common Stock, par
value $1.00 per share was 7,805,372.



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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, 2005 |           |   | December 31,2004 |  
|                                                                                                                                                                                                          |  | (Unaudited)   |           |   |                  |  
|ASSETS                                                                                                                                                                                                    |  |               |           |   |                  |   |           |  
|Cash and cash equivalents:                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                                                   |  | $             | 36,927    |   |                  | $ | 36,752    |  
|Federal funds sold and other temporary investments                                                                                                                                                        |  |               | 4,085     |   |                  |   | 4,015     |  
|                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Total cash and cash equivalents                                                                                                                                                                           |  |               | 41,012    |   |                  |   | 40,767    |  
|Investment securities available-for-sale, at fair value                                                                                                                                                   |  |               | 291,631   |   |                  |   | 301,631   |  
|Investment securities held-to-maturity, at cost                                                                                                                                                           |  |               | 12,825    |   |                  |   |          |  
|Loans, net                                                                                                                                                                                                |  |               | 769,922   |   |                  |   | 659,884   |  
|Loans held for sale                                                                                                                                                                                       |  |               | 9,370     |   |                  |   | 26,979    |  
|Premises and equipment, net                                                                                                                                                                               |  |               | 42,288    |   |                  |   | 39,730    |  
|Accrued interest receivable                                                                                                                                                                               |  |               | 6,114     |   |                  |   | 5,214     |  
|Goodwill                                                                                                                                                                                                  |  |               | 40,117    |   |                  |   | 40,117    |  
|Core deposit intangibles                                                                                                                                                                                  |  |               | 4,969     |   |                  |   | 5,341     |  
|Mortgage servicing rights                                                                                                                                                                                 |  |               | 4,738     |   |                  |   | 4,698     |  
|Other assets                                                                                                                                                                                              |  |               | 19,017    |   |                  |   | 17,005    |  
|                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                              |  | $             | 1,242,003 |   |                  | $ | 1,141,366 |  
|                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                      |  |               |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                                 |  |               |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                                                                       |  | $             | 212,516   |   |                  | $ | 187,454   |  
|Interest-bearing                                                                                                                                                                                          |  |               | 689,840   |   |                  |   | 692,621   |  
|                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                                            |  |               | 902,356   |   |                  |   | 880,075   |  
|                                                                                                                                                                                                          |  |              
|Federal funds purchased                                                                                                                                                                                   |  |               | 31,921    |   |                  |   | 15,125    |  
|Other liabilities                                                                                                                                                                                         |  |               | 11,865    |   |                  |   | 11,603    |  
|Borrowings                                                                                                                                                                                                |  |               | 164,529   |   |                  |   | 105,940   |  
|Securities sold under repurchase agreements                                                                                                                                                               |  |               | 6,367     |   |                  |   | 6,291     |  
|Junior subordinated deferrable interest debentures                                                                                                                                                        |  |               | 17,520    |   |                  |   | 17,520    |  
|                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                         |  |               | 1,134,558 |   |                  |   | 1,036,554 |  
|                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Commitments and contingencies                                                                                                                                                                             |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                                          |  |              
|Shareholders equity:                                                                                                                                                                                     |  |               |           |   |                  |   |           |  
|Preferred stock, no par value, 500,000 shares authorized, none of which are issued and outstanding                                                                                                        |  |               |          |   |                  |   |          |  
|Common stock, $1.00 par value, 20,000,000 authorized; 7,811,467 shares issued and 7,805,372 outstanding as of June 30, 2005 and 7,802,467
shares issued and 7,796,372 outstanding as of December 31, 2004 |  |               | 7,811     |   |                  |   | 7,802     |  
|Additional paid-in capital                                                                                                                                                                                |  |               | 75,978    |   |                  |   | 75,935    |  
|Retained earnings                                                                                                                                                                                         |  |               | 26,087    |   |                  |   | 21,921    |  
|Accumulated other comprehensive loss                                                                                                                                                                      |  |               | (2,314    | ) |                  |   | (729      | )
|Less treasury stock, at cost                                                                                                                                                                              |  |               | (117      | ) |                  |   | (117      | )
|                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                                |  |               | 107,445   |   |                  |   | 104,812   |  
|                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                |  | $             | 1,242,003 |   |                  | $ | 1,141,366 |  
|                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  



See accompanying notes
to condensed consolidated financial statements.



1



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Earnings



(In thousands, except per share data)

(Unaudited)



|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|--------------------------------------------------- |  | ---------------------------------- | ------ | -------------------------------- | ---- | - | ----- |  | - | ------ | - |  | - | ------
|                                                    |  | For the Three MonthsEnded June 30, |        | For the Six MonthsEnded June 30,
|                                                    |  | 2005                               |        |                                  | 2004 |   | 2005  |  |   | 2004  
|Interest income:                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Loans                                               |  | $                                  | 16,189 |                                  |      | $ | 7,991 |  | $ | 30,294 |   |  | $ | 15,508
|Investment securities:                              |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Taxable                                             |  |                                    | 2,810  |                                  |      |   | 1,825 |  |   | 5,577  |   |  |   | 3,412 
|Tax-exempt                                          |  |                                    | 97     |                                  |      |   | 97    |  |   | 194    |   |  |   | 195   
|Federal funds sold and other temporary investments  |  |                                    | 31     |                                  |      |   | 3     |  |   | 39     |   |  |   | 7     
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Total interest income                               |  |                                    | 19,127 |                                  |      |   | 9,916 |  |   | 36,104 |   |  |   | 19,122
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Interest expense:                                   |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Deposits                                            |  |                                    | 3,350  |                                  |      |   | 2,035 |  |   | 6,427  |   |  |   | 3,824 
|Federal funds purchased                             |  |                                    | 331    |                                  |      |   | 48    |  |   | 507    |   |  |   | 62    
|Borrowings                                          |  |                                    | 738    |                                  |      |   | 419   |  |   | 1,547  |   |  |   | 892   
|Securities sold under agreements to repurchase      |  |                                    | 26     |                                  |      |   |      |  |   | 46     |   |  |   |      
|Junior subordinated deferrable interest debentures  |  |                                    | 391    |                                  |      |   | 266   |  |   | 781    |   |  |   | 532   
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Total interest expense                              |  |                                    | 4,836  |                                  |      |   | 2,768 |  |   | 9,308  |   |  |   | 5,310 
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Net interest income                                 |  |                                    | 14,291 |                                  |      |   | 7,148 |  |   | 26,796 |   |  |   | 13,812
|Provision for loan losses                           |  |                                    | 1,041  |                                  |      |   | 300   |  |   | 1,763  |   |  |   | 450   
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Net interest income after provision for loan losses |  |                                    | 13,250 |                                  |      |   | 6,848 |  |   | 25,033 |   |  |   | 13,362
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Noninterest income:                                 |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Service charges on deposit accounts                 |  |                                    | 1,978  |                                  |      |   | 2,228 |  |   | 3,812  |   |  |   | 3,825 
|Mortgage servicing revenue                          |  |                                    | 263    |                                  |      |   | 290   |  |   | 559    |   |  |   | 498   
|(Loss) gain on sale of investment securities, net   |  |                                    | (84    | )                                |      |   | 71    |  |   | (122   | ) |  |   | 148   
|Net gain on sale of loans                           |  |                                    | 1,036  |                                  |      |   | 1,238 |  |   | 3,180  |   |  |   | 3,142 
|Other noninterest income                            |  |                                    | 704    |                                  |      |   | 840   |  |   | 2,319  |   |  |   | 958   
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Total noninterest income                            |  |                                    | 3,897  |                                  |      |   | 4,667 |  |   | 9,748  |   |  |   | 8,571 
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Noninterest expense:                                |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Employee compensation and benefits                  |  |                                    | 8,180  |                                  |      |   | 5,722 |  |   | 15,241 |   |  |   | 9,996 
|Occupancy                                           |  |                                    | 1,970  |                                  |      |   | 1,117 |  |   | 3,775  |   |  |   | 2,205 
|Other noninterest expense                           |  |                                    | 3,047  |                                  |      |   | 2,357 |  |   | 7,620  |   |  |   | 5,145 
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Total noninterest expense                           |  |                                    | 13,197 |                                  |      |   | 9,196 |  |   | 26,636 |   |  |   | 17,346
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Earnings before provision for income taxes          |  |                                    | 3,950  |                                  |      |   | 2,319 |  |   | 8,145  |   |  |   | 4,587 
|Provision for income taxes                          |  |                                    | 1,338  |                                  |      |   | 824   |  |   | 2,731  |   |  |   | 1,527 
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Net earnings                                        |  | $                                  | 2,612  |                                  |      | $ | 1,495 |  | $ | 5,414  |   |  | $ | 3,060 
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Earnings per common share:                          |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Basic                                               |  | $                                  | 0.33   |                                  |      | $ | 0.37  |  | $ | 0.69   |   |  | $ | 0.76  
|Diluted                                             |  | $                                  | 0.33   |                                  |      | $ | 0.36  |  | $ | 0.68   |   |  | $ | 0.73  
|Weighted average shares outstanding:                |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Basic                                               |  |                                    | 7,805  |                                  |      |   | 4,020 |  |   | 7,802  |   |  |   | 4,015 
|Diluted                                             |  |                                    | 7,964  |                                  |      |   | 4,200 |  |   | 7,966  |   |  |   | 4,197 



See accompanying notes
to condensed consolidated financial statements.



2



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Comprehensive Income (Loss)



(In thousands)

(Unaudited)



|                                                                                     |  |                                    |       |   |                                  |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ---------------------------------- | ----- | - | -------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                     |  | For the Three MonthsEnded June 30, |       |   | For the Six MonthsEnded June 30, |  
|                                                                                     |  | 2005                               |       |   | 2004                             |   |        | 2005 |  |   | 2004   |  
|Net earnings                                                                         |  | $                                  | 2,612 |   |                                  | $ | 1,495  |      |  | $ | 5,414  |   |  | $ | 3,060  |  
|                                                                                     |  |                                    |       |   |                                  |   |        |      |  |   |        |   |  |   |        |  
|Other comprehensive income (loss), net of tax:                                       |  |                                    |       |   |                                  |   |        |      |  |   |        |   |  |   |        |  
|Unrealized holding gains (losses) on investment securities arising during the period |  |                                    | 1,223 |   |                                  |   | (4,486 | )    |  |   | (1,666 | ) |  |   | (3,083 | )
|Reclassification adjustment for (losses) gains included in net earnings              |  |                                    | (55   | ) |                                  |   | 48     |      |  |   | (81    | ) |  |   | 98     |  
|                                                                                     |  |                                    |       |   |                                  |   |        |      |  |   |        |   |  |   |        |  
|Other comprehensive income (loss)                                                    |  |                                    | 1,278 |   |                                  |   | (4,534 | )    |  |   | (1,585 | ) |  |   | (3,181 | )
|                                                                                     |  |                                    |       |   |                                  |   |        |      |  |   |        |   |  |   |        |  
|Total comprehensive income (loss)                                                    |  | $                                  | 3,890 |   |                                  | $ | (3,039 | )    |  | $ | 3,829  |   |  | $ | (121   | )
|                                                                                     |  |                                    |       |   |                                  |   |        |      |  |   |        |   |  |   |        |  



See accompanying notes
to condensed consolidated financial statements.



3



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Changes in Shareholders Equity



Year Ended December 31, 2004 and

Six Months Ended June 30, 2005

(In
thousands, except share amounts)



|                                                                                 |  |              |  |                   |       |          |   |          |                                |   |        |                |  |         |      |   |       |   |      |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------ |  | ----------------- | ----- | -------- | - | -------- | ------------------------------ | - | ------ | -------------- |  | ------- | ---- | - | ----- | - | ---- | - |  | - | ------- | -
|                                                                                 |  | Common Stock |  | AdditionalPaid-in |       | Retained |   |          | Accumulated OtherComprehensive |   |        | Treasury Stock |  |         |      |  
|                                                                                 |  | Shares       |  | Amount            |       | Capital  |   | Earnings |                                |   | Loss   |                |  | at Cost |      |   | Total |  
|Balance at January 1, 2004                                                       |  | 4,008,192    |  | $                 | 4,008 |          | $ | 16,911   |                                | $ | 17,422 |                |  | $       | (237 | ) |       | $ | (117 | ) |  | $ | 37,987  |  
|Net earnings                                                                     |  |             |  |                   |      |          |   |         |                                |   | 6,050  |                |  |         |     |   |       |   |     |   |  |   | 6,050   |  
|Unrealized loss on securities, net of tax and reclassification adjustment        |  |             |  |                   |      |          |   |         |                                |   |       |                |  |         | (492 | ) |       |   |     |   |  |   | (492    | )
|                                                                                 |  |              |  |                   |       |          |   |          |                                |   |        |                |  |         |      |   |       |   |      |   |  |   |         |  
|Other comprehensive income                                                       |  |             |  |                   |      |          |   |         |                                |   |       |                |  |         |     |   |       |   |     |   |  |   | 5,558   |  
|Issuance of common stock related to the acquisition of Community Home Loan, Inc. |  | 11,765       |  |                   | 12    |          |   | 188      |                                |   |       |                |  |         |     |   |       |   |     |   |  |   | 200     |  
|Issuance of common stock in public offering                                      |  | 2,300,000    |  |                   | 2,300 |          |   | 33,729   |                                |   |       |                |  |         |     |   |       |   |     |   |  |   | 36,029  |  
|Issuance of common stock related to the acquisition of GNB Bancshares, Inc.      |  | 1,456,819    |  |                   | 1,457 |          |   | 24,980   |                                |   |       |                |  |         |     |   |       |   |     |   |  |   | 26,437  |  
|Issuance of common stock upon exercise of employee stock options                 |  | 25,691       |  |                   | 25    |          |   | 127      |                                |   |       |                |  |         |     |   |       |   |     |   |  |   | 152     |  
|Dividends ($0.28 per share)                                                      |  |             |  |                   |      |          |   |         |                                |   | (1,551 | )              |  |         |     |   |       |   |     |   |  |   | (1,551  | )
|                                                                                 |  |              |  |                   |       |          |   |          |                                |   |        |                |  |         |      |   |       |   |      |   |  |   |         |  
|Balance at December 31, 2004                                                     |  | 7,802,467    |  | $                 | 7,802 |          | $ | 75,935   |                                | $ | 21,921 |                |  | $       | (729 | ) |       | $ | (117 | ) |  | $ | 104,812 |  
|                                                                                 |  |              |  |                   |       |          |   |          |                                |   |        |                |  |         |      |   |       |   |      |   |  |   |         |  



(Unaudited)



|                                                                          |  |              |  |                   |       |          |   |          |                                 |   |        |                |  |         |        |   |       |   |      |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------ |  | ----------------- | ----- | -------- | - | -------- | ------------------------------- | - | ------ | -------------- |  | ------- | ------ | - | ----- | - | ---- | - |  | - | ------- | -
|                                                                          |  | Common Stock |  | AdditionalPaid-in |       | Retained |   |          | Accumulated Other Comprehensive |   |        | Treasury Stock |  |         |        |  
|                                                                          |  | Shares       |  | Amount            |       | Capital  |   | Earnings |                                 |   | Loss   |                |  | at Cost |        |   | Total |  
|Balance at January 1, 2005                                                |  | 7,802,467    |  | $                 | 7,802 |          | $ | 75,935   |                                 | $ | 21,921 |                |  | $       | (729   | ) |       | $ | (117 | ) |  | $ | 104,812 |  
|Net earnings                                                              |  |             |  |                   |      |          |   |         |                                 |   | 5,414  |                |  |         |       |   |       |   |     |   |  |   | 5,414   |  
|Unrealized loss on securities, net of tax and reclassification adjustment |  |             |  |                   |      |          |   |         |                                 |   |       |                |  |         | (1,585 | ) |       |   |     |   |  |   | (1,585  | )
|                                                                          |  |              |  |                   |       |          |   |          |                                 |   |        |                |  |         |        |   |       |   |      |   |  |   |         |  
|Other comprehensive income                                                |  |             |  |                   |      |          |   |         |                                 |   |       |                |  |         |       |   |       |   |     |   |  |   | 3,829   |  
|Issuance of common stock upon exercise of employee stock options          |  | 9,000        |  |                   | 9     |          |   | 43       |                                 |   |       |                |  |         |       |   |       |   |     |   |  |   | 52      |  
|Dividends ($0.16 per share)                                               |  |             |  |                   |      |          |   |         |                                 |   | (1,248 | )              |  |         |       |   |       |   |     |   |  |   | (1,248  | )
|                                                                          |  |              |  |                   |       |          |   |          |                                 |   |        |                |  |         |        |   |       |   |      |   |  |   |         |  
|Balance at June 30, 2005                                                  |  | 7,811,467    |  | $                 | 7,811 |          | $ | 75,978   |                                 | $ | 26,087 |                |  | $       | (2,314 | ) |       | $ | (117 | ) |  | $ | 107,445 |  
|                                                                          |  |              |  |                   |       |          |   |          |                                 |   |        |                |  |         |        |   |       |   |      |   |  |   |         |  



See accompanying notes
to condensed consolidated financial statements.



4



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Cash Flows



(In thousands)

(Unaudited)



|                                                                                                                          |  |                                   |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                          |  | For the Six Months Ended June 30, |         
|                                                                                                                          |  | 2005                              |          |   | 2004 |  
|Cash flows from operating activities net of effects of acquisition:                                                       |  |                                   |          |   |      |   |          |  
|Net earnings                                                                                                              |  | $                                 | 5,414    |   |      | $ | 3,060    |  
|Adjustments to reconcile net earnings to net cash provided (used) by operating activities net of effects of acquisitions: |  |                                   |          |   |      |   |          |  
|Depreciation and amortization                                                                                             |  |                                   | 2,410    |   |      |   | 1,511    |  
|Reversal of mortgage servicing rights impairment                                                                          |  |                                   |         |   |      |   | (263     | )
|Provision for loan losses                                                                                                 |  |                                   | 1,763    |   |      |   | 450      |  
|Loss (gain) on sales of securities, net                                                                                   |  |                                   | 122      |   |      |   | (148     | )
|Gain on sale of other real estate and premises and equipment                                                              |  |                                   | (544     | ) |      |   | (523     | )
|Gain on sales of loans                                                                                                    |  |                                   | (3,180   | ) |      |   | (3,142   | )
|Amortization of premium, net of discounts on securities                                                                   |  |                                   | 636      |   |      |   | 667      |  
|Changes in:                                                                                                               |  |                                   |          |   |      |   |          |  
|Loans held for sale                                                                                                       |  |                                   | 17,609   |   |      |   | (2,833   | )
|Other assets                                                                                                              |  |                                   | (3,533   | ) |      |   | (2,391   | )
|Other liabilities                                                                                                         |  |                                   | 177      |   |      |   | (1,485   | )
|                                                                                                                          |  |                                   |          |   |      |   |          |  
|Net cash provided (used) by operating activities                                                                          |  |                                   | 20,874   |   |      |   | (5,097   | )
|                                                                                                                          |  |                                   |          |   |      |   |          |  
|Cash flows from investing activities net of effects of acquisition:                                                       |  |                                   |          |   |      |   |          |  
|Purchases of securities, available-for-sale                                                                               |  |                                   | (27,934  | ) |      |   | (103,019 | )
|Purchases of securities, held-to-maturity                                                                                 |  |                                   | (12,826  | ) |      |   |         |  
|Proceeds from sales, maturities, and principal paydowns of securities available-for-sale                                  |  |                                   | 35,592   |   |      |   | 42,426   |  
|Net change in loans                                                                                                       |  |                                   | (111,801 | ) |      |   | (38,332  | )
|Proceeds from sale of other real estate, loans, premises and equipment                                                    |  |                                   | 3,724    |   |      |   | 3,452    |  
|Acquisition of Community Home Loan, Inc. (net of cash acquired of $762)                                                   |  |                                   |         |   |      |   | (300     | )
|Purchases of premises and equipment                                                                                       |  |                                   | (4,015   | ) |      |   | (3,120   | )
|                                                                                                                          |  |                                   |          |   |      |   |          |  
|Net cash used by investing activities                                                                                     |  |                                   | (117,260 | ) |      |   | (98,893  | )
|                                                                                                                          |  |                                   |          |   |      |   |          |  
|Cash flows from financing activities net of effects of acquisition:                                                       |  |                                   |          |   |      |   |          |  
|Net change in:                                                                                                            |  |                                   |          |   |      |   |          |  
|Deposits                                                                                                                  |  |                                   | 22,281   |   |      |   | 66,304   |  
|Other borrowings                                                                                                          |  |                                   | 58,589   |   |      |   | 6,091    |  
|Federal funds purchased                                                                                                   |  |                                   | 16,796   |   |      |   | 26,146   |  
|Securities sold under repurchase agreements                                                                               |  |                                   | 76       |   |      |   | 7,173    |  
|Net proceeds from issuance of common stock upon exercise of employee stock options                                        |  |                                   | 52       |   |      |   | 67       |  
|Dividends paid                                                                                                            |  |                                   | (1,163   | ) |      |   | (558     | )
|                                                                                                                          |  |                                   |          |   |      |   |          |  
|Net cash provided by financing activities                                                                                 |  |                                   | 96,631   |   |      |   | 105,223  |  
|                                                                                                                          |  |                                   |          |   |      |   |          |  
|Net increase in cash and cash equivalents                                                                                 |  |                                   | 245      |   |      |   | 1,233    |  
|Cash and cash equivalents at beginning of period                                                                          |  |                                   | 40,767   |   |      |   | 17,268   |  
|                                                                                                                          |  |                                   |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                                                                |  | $                                 | 41,012   |   |      | $ | 18,501   |  
|                                                                                                                          |  |                                   |          |   |      |   |          |  



See accompanying notes
to condensed consolidated financial statements



5



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1. BASIS OF
PRESENTATION AND STOCK BASED COMPENSATION



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, Inc. (TUNI), State Bank (State), GNB Financial, n.a.
(GNB) and Community Home Loan, Inc. (CHL). All material intercompany accounts and transactions have been eliminated in the 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, 2005, the Companys consolidated results of operations
for the three and six months ended June 30, 2005 and 2004, respectively, consolidated cash flows for the six months ended June 30, 2005 and 2004, and consolidated changes in shareholders equity for the six months ended June 30, 2005, and the
year ended December 31, 2004. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. The 2004 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 affect 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, 2004 appearing in the Companys Annual Report on Form 10-K.



Stock Based Compensation



The Company accounts for its stock based employee compensation plans on the
intrinsic value method provided in Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Because the exercise price of the Companys employee
stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized on option plans.



Statement of Financial Accounting Standards (SFAS) No. 123, (SFAS 123) Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure, requires pro forma disclosures of net earnings and earnings per share for companies not adopting the fair value accounting method for stock-based
employee compensation.



6



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The pro forma disclosures below use the fair value method of SFAS 123 to measure compensation expense
for stock-based compensation plans.



|                                                                                                               |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|-------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ----- | -------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                                                                                               |  | For the Three MonthsEnded June 30, |       | For the Six MonthsEnded June 30,
|                                                                                                               |  | 2005                               |       | 2004                             |   | 2005  |  | 2004
|                                                                                                               |  | (In thousands)                    
|Net earnings, as reported                                                                                      |  | $                                  | 2,612 |                                  | $ | 1,495 |  | $    | 5,414 |  | $ | 3,060
|Less: Total stock-based compensation expense determined under the fair value method for all awards, net of tax |  |                                    | 25    |                                  |   | 3     |  |      | 38    |  |   | 10   
|                                                                                                               |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|Pro forma net earnings                                                                                         |  | $                                  | 2,587 |                                  | $ | 1,492 |  | $    | 5,376 |  | $ | 3,050
|                                                                                                               |  |                                    |       |                                  |   |       |  |      |       |  |   |      



|                      |  |                                    |      |                                  |   |      |  |      |      |  |   |     
|--------------------- |  | ---------------------------------- | ---- | -------------------------------- | - | ---- |  | ---- | ---- |  | - | ----
|                      |  | For the Three MonthsEnded June 30, |      | For the Six MonthsEnded June 30,
|                      |  | 2005                               |      | 2004                             |   | 2005 |  | 2004
|Earnings per share:   |  |                                    |      |                                  |   |      |  |      |      |  |   |     
|Basic - as reported   |  | $                                  | 0.33 |                                  | $ | 0.37 |  | $    | 0.69 |  | $ | 0.76
|Basic - pro forma     |  |                                    | 0.33 |                                  |   | 0.37 |  |      | 0.69 |  |   | 0.76
|                      |  |                                    |      |                                 
|Diluted - as reported |  | $                                  | 0.33 |                                  | $ | 0.36 |  | $    | 0.68 |  | $ | 0.73
|Diluted - pro forma   |  |                                    | 0.32 |                                  |   | 0.36 |  |      | 0.67 |  |   | 0.73



During the six months
ended June 30, 2005, the Company granted options to acquire 41,300 shares of its common stock at an exercise price ranging from $17.19 to $18.00 per share pursuant to the Texas United Bancshares, Inc. 2004 Stock Incentive Plan. In addition, the
Company granted 8,100 Stock Appreciation Rights with a value of $18.00 per share pursuant to the Texas United Bancshares, Inc. Stock Appreciation Rights Plan.



2. 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 stock options granted.



|                                                                                          |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|----------------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | -------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                                                                          |  | For the Three MonthsEnded June 30,    |       | For the Six MonthsEnded June 30,
|                                                                                          |  | 2005                                  |       | 2004                             |   | 2005  |  | 2004
|                                                                                          |  | (In thousands, except per share data)
|Net earnings available to common shareholders used in basic and diluted EPS               |  | $                                     | 2,612 |                                  | $ | 1,495 |  | $    | 5,414 |  | $ | 3,060
|                                                                                          |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Weighted-average common shares used in basic EPS                                          |  |                                       | 7,805 |                                  |   | 4,020 |  |      | 7,802 |  |   | 4,015
|Effect of dilutive securities:                                                            |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Stock options                                                                             |  |                                       | 159   |                                  |   | 180   |  |      | 164   |  |   | 182  
|                                                                                          |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Weighted-average common shares and potentially dilutive common shares used in diluted EPS |  |                                       | 7,964 |                                  |   | 4,200 |  |      | 7,966 |  |   | 4,197
|                                                                                          |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Basic EPS                                                                                 |  | $                                     | 0.33  |                                  | $ | 0.37  |  | $    | 0.69  |  | $ | 0.76 
|Diluted EPS                                                                               |  | $                                     | 0.33  |                                  | $ | 0.36  |  | $    | 0.68  |  | $ | 0.73 



The amounts shown
above do not give effect to the additional shares that the Company will issue related to the pending acquisition of Gateway Holding Company, Inc., as more fully described in Note 7.



7



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



3. INTANGIBLE ASSETS



The gross carrying amount of intangible assets and associated amortization at June 30, 2005 is presented in the following table:



|                             |  |                     |       |                                        |   |      
|---------------------------- |  | ------------------- | ----- | -------------------------------------- | - | -----
|                             |  | GrossCarryingAmount |       | AccumulatedAmortization and Impairment
|                             |  | (In thousands)     
|Amortized intangible assets: |  |                     |       |                                        |   |      
|Mortgage servicing rights    |  | $                   | 7,712 |                                        | $ | 2,974
|Core deposit intangibles     |  | $                   | 5,804 |                                        | $ | 835  



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, 2005. 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:



|                                              |  |                         |     |                         |   |       |  |   |      
|--------------------------------------------- |  | ----------------------- | --- | ----------------------- | - | ----- |  | - | -----
|                                              |  | MortgageServicingRights |     | Core DepositIntangibles |   | Total
|                                              |  | (In thousands)         
|Six months ended June 30, 2005 (actual)       |  | $                       | 519 |                         | $ | 372   |  | $ | 891  
|Six months ended December 31, 2005 (estimate) |  |                         | 546 |                         |   | 371   |  |   | 917  
|                                              |  |                         |    
|Estimate for the year ended December 31,      |  |                         |     |                         |   |       |  |   |      
|2006                                          |  | $                       | 991 |                         | $ | 727   |  | $ | 1,718
|2007                                          |  |                         | 991 |                         |   | 711   |  |   | 1,702
|2008                                          |  |                         | 915 |                         |   | 695   |  |   | 1,610
|2009                                          |  |                         | 915 |                         |   | 680   |  |   | 1,595
|2010                                          |  |                         | 915 |                         |   | 664   |  |   | 1,579



4. NEW ACCOUNTING PRONOUNCEMENTS



Variable Interest Entities



FIN No. 46 (FIN 46R), Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin No. 51 (Revised December 2003) establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. The
primary beneficiary of a VIE is the entity that absorbs a majority of the VIEs expected losses, receives a majority of the VIEs expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship
or other business relationship with the VIE. Prior to the implementation of FIN 46R, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest
in the entity. The provisions of FIN 46R were effective immediately for all arrangements entered after January 31, 2003, and were otherwise effective at the beginning of the first interim or annual period ending after December 15, 2003.



The Company has identified TXUI Statutory Trust I (Trust I), TXUI
Statutory Trust II (Trust II) and GNB Capital Trust I (GNB Trust) (GNB Trust was assumed in connection with the acquisition of GNB Bancshares, Inc. in October 2004) as VIEs. The Company adopted FIN 46R in connection with its consolidated
financial statements as of and for the year ended December 31, 2003. The primary impact of this change was to report the Companys subordinated debt to the trust on the face of the accompanying balance sheets rather than the minority interest
in the trust. This change did not have a material impact on the Companys total assets, liabilities, shareholders equity or results of operations.



8



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The trust preferred securities issued by the Companys subsidiary trusts are currently included
in the Companys Tier 1 capital for regulatory purposes. On March 1, 2005, the Federal Reserve Board adopted final rules that continue to allow trust preferred securities to be included in Tier 1 capital, subject to more strict quantitative and
qualitative limits. Currently, trust preferred securities and qualifying perpetual preferred stock are limited in the aggregate to no more than 25% of a bank holding companys core capital elements. The new rule amends the existing limit by
providing that restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) can be no more than 25% of core capital, net of goodwill less any associated deferred tax liability. The amount of such
excess trust preferred securities are includable in Tier 2 capital. Assuming these final rules were effective at June 30, 2005, the Companys Tier 1 risk-based capital ratio, its total risk-based capital ratio and its Tier 1 leverage ratio
would remain unchanged. The new quantitative limits will be fully effective March 31, 2007.



Each of the trusts issuing the trust preferred securities holds junior subordinated debentures the Company issued, or assumed, with a 30-year maturity. The final rules provide that in the last five years before the
junior subordinated debentures mature, the associated trust preferred securities will be excluded from Tier 1 capital and included in Tier 2 capital. In addition, the trust preferred securities during this five-year period would be amortized out of
Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the debentures.



Accounting for Stock Based Compensation



In December 2004, the FASB issued a revision to FASB Statement No. 123, Accounting for Stock Based Compensation (SFAS 123). FASB Statement No.
123(R), Share Based Payment (SFAS 123(R)), supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and its related implementation guidance. SFAS 123(R) established standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods or services, including transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity
instruments or that may be settled by the issuance of the equity instruments. The impact to the Company of SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions
in this case primarily stock options. The Company currently accounts for its stock-based compensation using the intrinsic method as defined in APB 25 and, accordingly, has not recognized any expense for stock option plans in the consolidated
financial statements. Implementation of SFAS 123(R) is required for the Company beginning in the interim period ending March 31, 2006. The Company is currently analyzing this new pronouncement to determine the impact on its consolidated financial
statements. As a result of SFAS 123(R), the Company may adopt different models than are currently utilized to calculate the expense effect associated with the Companys stock options. Note 1 of the condensed consolidated financial statements
illustrates the effect on net earnings and earnings per share if the Company had applied the fair value provisions of SFAS 123.



Mortgage Loan Interest Rate Lock Commitments



The Securities and Exchange Commission staff released Staff Accounting Bulletin (SAB) 105, Loan Commitments Accounted for as Derivative
Instruments. SAB 105 requires that a lender should not consider the expected future cash flows related to loan servicing or include any internally developed intangible assets, such as customer-related intangible assets, in determining the
fair value of loan commitments accounted for as derivatives. Companies were required to adopt SAB 105 effective no later than for commitments entered into after March 31, 2004. The requirements of SAB 105 apply to the Companys mortgage loan
interest rate lock commitments related to loans held for sale. At June 30, 2005, such commitments with a notional amount of approximately $33.6 million were outstanding. The Companys current accounting policy is to not record the fair value of
these commitments as management has deemed such amounts immaterial. The Company adopted SAB 105 at the beginning of its second quarter of 2004, and the application of this guidance did not have a significant impact on the Companys consolidated
financial statements.



9



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



5. 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 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 $198.9 million at June 30, 2005 and $158.5 million at December 31, 2004.



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 $4.5 million at June 30, 2005 and December 31, 2004, respectively. As of June 30, 2005 and December 31,
2004, no liability for the fair value of the Companys potential obligations under these guarantees has been recorded since the amount is deemed immaterial.



10



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



6. 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, 2005:



|                                 |  |                                          |           |   |                                        |   |         |              |  |   |                   |   |  |                 |           |   |              |   |         |   |  |   |           |  
|-------------------------------- |  | ---------------------------------------- | --------- | - | -------------------------------------- | - | ------- | ------------ |  | - | ----------------- | - |  | --------------- | --------- | - | ------------ | - | ------- | - |  | - | --------- | -
|                                 |  | For the Three Months Ended June 30, 2005 |           |   | For the Six Months Ended June 30, 2005 |  
|                                 |  | CommercialBanking                        |           |   | MortgageBanking                        |   |         | Consolidated |  |   | CommercialBanking |   |  | MortgageBanking |           |   | Consolidated |  
|                                 |  | (In thousands)                           |          
|Net interest income              |  | $                                        | 10,509    |   |                                        | $ | 3,782   |              |  | $ | 14,291            |   |  | $               | 20,570    |   |              | $ | 6,226   |   |  | $ | 26,796    |  
|Noninterest income               |  |                                          | 1,813     |   |                                        |   | 2,084   |              |  |   | 3,897             |   |  |                 | 5,837     |   |              |   | 3,911   |   |  |   | 9,748     |  
|                                 |  |                                          |           |   |                                        |   |         |              |  |   |                   |   |  |                 |           |   |              |   |         |   |  |   |           |  
|Revenue                          |  |                                          | 12,322    |   |                                        |   | 5,866   |              |  |   | 18,188            |   |  |                 | 26,407    |   |              |   | 10,137  |   |  |   | 36,544    |  
|                                 |  |                                          |           |   |                                        |  
|Provision for loan losses        |  |                                          | (1,041    | ) |                                        |   |        |              |  |   | (1,041            | ) |  |                 | (1,763    | ) |              |   |        |   |  |   | (1,763    | )
|                                 |  |                                          |           |   |                                        |   |         |              |  |   |                   |   |  |                 |           |   |              |   |         |   |  |   |           |  
|Noninterest expense              |  |                                          | (9,235    | ) |                                        |   | (3,962  | )            |  |   | (13,197           | ) |  |                 | (19,654   | ) |              |   | (6,982  | ) |  |   | (26,636   | )
|                                 |  |                                          |           |   |                                        |   |         |              |  |   |                   |   |  |                 |           |   |              |   |         |   |  |   |           |  
|Earnings before income tax       |  |                                          | 2,046     |   |                                        |   | 1,904   |              |  |   | 3,950             |   |  |                 | 4,990     |   |              |   | 3,155   |   |  |   | 8,145     |  
|                                 |  |                                          |           |   |                                        |  
|Provision for income taxes       |  |                                          | (691      | ) |                                        |   | (647    | )            |  |   | (1,338            | ) |  |                 | (1,658    | ) |              |   | (1,073  | ) |  |   | (2,731    | )
|                                 |  |                                          |           |   |                                        |   |         |              |  |   |                   |   |  |                 |           |   |              |   |         |   |  |   |           |  
|Net earnings                     |  | $                                        | 1,355     |   |                                        | $ | 1,257   |              |  | $ | 2,612             |   |  | $               | 3,332     |   |              | $ | 2,082   |   |  | $ | 5,414     |  
|                                 |  |                                          |           |   |                                        |   |         |              |  |   |                   |   |  |                 |           |   |              |   |         |   |  |   |           |  
|Total assets as of June 30, 2005 |  | $                                        | 1,114,398 |   |                                        | $ | 127,605 |              |  | $ | 1,242,003         |   |  | $               | 1,114,398 |   |              | $ | 127,605 |   |  | $ | 1,242,003 |  
|                                 |  |                                          |           |   |                                        |   |         |              |  |   |                   |   |  |                 |           |   |              |   |         |   |  |   |           |  



11



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



7. PENDING ACQUISITION



On May 2, 2005, the Company entered into a definitive agreement to acquire Gateway Holding Company, Inc., Dallas, Texas.
Under the terms of the merger agreement, shareholders of Gateway will receive, for each share of Gateway common stock they own, a number of shares of Texas United common stock with an aggregate market value equal to $35.48, plus $15.20 in cash. The
market value of the Texas United common stock will be based on the average closing sales price of the Texas United common stock for the 20 consecutive trading days ending on and including the tenth trading day immediately preceding the closing date
of the merger. Following the merger, the Company intends to operate Gateways wholly-owned subsidiary bank, Gateway National Bank, as a separate subsidiary. Gateway National Bank currently has six Dallas area locations  Dallas, Frisco,
Frisco West, Mesquite, Balch Springs and Carrolton. As of June 30, 2005, on a consolidated basis, Gateway had total assets of $221.4 million, total loans of $138.4 million, total deposits of $193.2 million and shareholders equity of $12.5
million. The Company anticipates completing the acquisition, subject to shareholder and regulatory approval, during the fourth quarter of 2005.



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, identifies these 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 our 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 our 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;
| | - |  | ---------------------------------------------------------



12



---

| |  |  | 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 that 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.



Recent Developments. On May 2, 2005, the Company entered into a definitive agreement to acquire Gateway Holding Company, Inc., Dallas, Texas. Under
the terms of the merger agreement, shareholders of Gateway will receive, for each share of Gateway common stock they own, a number of shares of Texas United common stock with an aggregate market value equal to $35.48, plus $15.20 in cash. The market
value of the Texas United common stock will be based on the average closing sales price of the Texas United common stock for the 20 consecutive trading days ending on and including the tenth trading day immediately preceding the closing date of the
merger. Following the merger, the Company intends to operate Gateways wholly-owned subsidiary bank, Gateway National Bank, as a separate subsidiary. Gateway National Bank currently has six Dallas area locations  Dallas, Frisco, Frisco
West, Mesquite, Balch Springs and Carrolton. As of June 30, 2005, on a consolidated basis, Gateway had total assets of $221.4 million, total loans of $138.4 million, total deposits of $193.2 million and shareholders equity of $12.5 million.
The Company anticipates completing the acquisition, subject to shareholder and regulatory approval, during the fourth quarter of 2005.



General.The Company is the bank holding company for State Bank, a commercial bank headquartered in La Grange, Texas, and GNB Financial, n.a., a
commercial bank headquartered in Gainesville, Texas. State Bank has twenty full service banking locations serving twelve counties within central and south central Texas and GNB Financial has seven full service banking centers located in Cooke,
Denton and Ellis counties surrounding the Dallas-Ft. Worth metroplex. In addition, State Bank has four loan production offices and thirteen limited services branches located in Houston, San Antonio and Austin, Texas. In May 2005, the thirteen loan
production offices of CHL became limited service branches of State. These limited service branches 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, 2005 were $2.6 million, an increase of 74.7% compared with $1.5 million for
the same period in 2004. The increase in net earnings was primarily due to higher volumes and interest rates on earning assets as a result of the 2004 acquisitions and internal growth. Net earnings for the six months ended June 30, 2005 were $5.4
million, an increase of 76.9% compared with $3.1 million for the same period in 2004. Basic and diluted earnings per share (EPS) for the three months ended June 30, 2005 were $0.33 and $0.33, respectively, compared with $0.37 and $0.36,
respectively, for the same period in 2004. Basic and diluted EPS for the six months ended June 30, 2005 were $0.69 and $0.68, respectively, compared with $0.76 and $0.73, respectively, for the same period in 2004.



Total assets at June 30, 2005 were $1.2 billion compared with $1.1 billion at
December 31, 2004. The $100.6 million or 8.8% increase in total assets over December 31, 2004 was primarily attributable to the increase in total loans. At June 30, 2005, total loans, including loans held for sale, were $786.7 million compared with
$693.5 million at December 31, 2004. Total deposits at June 30, 2005 were $902.4 million compared to $880.1 million at December 31, 2004. The $22.3 million or 2.5% increase in deposits over December 31, 2004 was attributed to internal growth.
Shareholders equity at June 30, 2005 was $107.4 million compared to $104.8 million at December 31, 2004. The $2.6 million or 2.5% increase in shareholders equity was primarily attributed to earnings retention of $5.4 million, partially
offset by the deterioration in the fair market value on available-for-sale securities included in accumulated other comprehensive loss of $1.6 million, and dividends paid to shareholders of $1.2 million.



The Companys return on average assets for the six months ended June 30,
2005 was 0.92%, up from 0.90% for the same period in 2004. The Companys return on average shareholders equity for the six months ended June 30, 2005 was 10.3%, down from 15.8% for the same period in 2004.



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 allowance for loan losses and mortgage servicing rights assets may involve a higher degree of judgment and complexity.



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 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 attempts to offset some of the mortgage servicing rights interest rate risk exposure by designating certain interest rate derivatives as fair value hedges. 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 3 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.





13



---

Net Interest Income.For the three months ended June 30, 2005, net interest income, before the
provision for loan losses, increased 99.9% to $14.3 million from $7.1 million for the same period in 2004. The increase was primarily due to increased volumes in loans and investment securities acquired in connection with the acquisitions in 2004
and internal growth resulting in an improved net interest margin. For the three months ended June 30, 2005 and 2004, the net interest margin increased 93 basis points to 5.39% from 4.46% and the net interest spread increased 82 basis points to 5.04%
from 4.22%, respectively.



For the six months ended June
30, 2005, net interest income, before the provision for loan losses, increased 94.0% to $26.8 million compared with $13.8 million for the same period in 2004. For the six months ended June 30, 2005 and 2004, the net interest margins and spreads
increased 66 basis points to 5.23% from 4.57% and 53 basis points to 4.87% from 4.34%, respectively. The higher net interest margin was attributed to the higher rate loans acquired in the 2004 acquisitions, with a 71 basis point increase in
earning-asset interest rates coupled with increased earning-asset volumes that were partially offset by interest-bearing liabilities volumes and an 18 basis point increase in the cost of funds.



A portion of the improvement in the net interest margin for the three and six
month periods ended June 30, 2005 was the result of the operations of CHL being restructured into the mortgage division of State as of April 30, 2005. Prior to this restructuring, gains on the sale of loans originated by CHL were recorded as
noninterest income. As a result of the restructuring, these amounts for the second quarter of 2005 were recorded as loan fee income, which is a component of loan interest income, and will continue to be recorded in this manner going forward. The
impact of this change was approximately $864,000, which resulted in a 32 basis point increase in the net interest margin for the three months ended June 30, 2005 and a 17 basis point increase in the net interest margin for the six months ended June
30, 2005.



Interest Income.Interest income for the
three months ended June 30, 2005 was $19.1 million compared with $9.9 million for the same period in 2004. As compared to the three months ended June 30, 2004, the average total loan volumes for the three months ended June 30, 2005 increased $330.1
million or 77.7%, while the average yields on average total loan volumes increased 103 basis points to 8.60%. Average total investment volumes for the three months ended June 30, 2005 increased $84.9 million or 38.8% compared with the same period in
2004, while the average yields on average investments increased 34 basis points. For the three months ended June 30, 2005, compared to the same period in 2004, the yield on average earning assets increased 104 basis points to 7.22%.



Interest income for the six months ended June 30, 2005 was $36.1 million
compared with $19.1 million for the same period in 2004. As compared to the six months ended June 30, 2004, average total loan volumes for the six months ended June 30, 2005 increased $319.2 million or 78.2%, while the average yields on average
total loans increased 76 basis points to 8.40%. As compared with the six months ended June 30, 2004, average total investment volumes for the six months ended June 30, 2004 increased $105.9 million or 53.5%, while the average yields on average
investments increased 13 basis points. For the six months ended June 30, 2005 compared to the same period in 2004, the yield on average earning assets increased 71 basis points to 7.04%.



Interest Expense.Interest expense for the three months ended June 30, 2005 increased $2.1 million or 74.7% to $4.8
million, compared with $2.8 million for the same period in 2004. The increase was primarily attributed to the deposits obtained with the 2004 acquisitions and internal growth. As compared to the three month period ended June 30, 2004, average
interest-bearing deposit volumes increased $238.5 million or 52.4% while the average interest rates paid on interest-bearing deposits increased 16 basis points to 1.96%.



Interest expense for the six months ended June 30, 2005 increased $4.0 million or 75.3% to $9.3 million compared with $5.3
million for the same period in 2004. The increase was primarily attributed to the deposits obtained with the 2004 acquisitions and internal growth. As compared to the six months ended June 30, 2004, average interest-bearing deposit volumes increased
$255.6 million or 58.2% while the average interest rates paid on interest-bearing deposits increased 12 basis points to 1.87%.



14



---

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 balance 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, |          
|                                                                |  | 2005                                |           |                     | 2004 |                      
|                                                                |  | AverageOutstandingBalance           |           | InterestEarned/Paid |      | AverageYield/Rate (1) |  |      | AverageOutstandingBalance |  | InterestEarned/Paid |         | AverageYield/Rate (1) |  
|                                                                |  | (Dollars in thousands)              |          
|Assets                                                          |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Interest-earning assets:                                        |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Total loans                                                     |  | $                                   | 754,879   |                     | $    | 16,189                |  | 8.60 | %                         |  | $                   | 424,805 |                       | $ | 7,991 |  | 7.57 | %
|Taxable securities                                              |  |                                     | 291,541   |                     |      | 2,810                 |  | 3.87 |                           |  |                     | 210,413 |                       |   | 1,825 |  | 3.49 |  
|Tax-exempt securities                                           |  |                                     | 12,488    |                     |      | 97                    |  | 3.12 |                           |  |                     | 8,674   |                       |   | 97    |  | 4.50 |  
|Federal funds sold and other temporary investments              |  |                                     | 4,313     |                     |      | 31                    |  | 2.88 |                           |  |                     | 1,322   |                       |   | 3     |  | 0.91 |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Total interest earning assets                                   |  |                                     | 1,063,221 |                     |      | 19,127                |  | 7.22 |                           |  |                     | 645,214 |                       |   | 9,916 |  | 6.18 |  
|                                                                |  |                                     |           |                     |      |                      
|Less allowance for loan losses                                  |  |                                     | 7,014     |                     |      |                       |  |      |                           |  |                     | 3,989   |                       |   |       |  |      |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Total interest-earning assets, net of allowance for loan losses |  |                                     | 1,056,207 |                     |      |                       |  |      |                           |  |                     | 641,225 |                       |   |       |  |      |  
|Noninterest-earning assets                                      |  |                                     | 155,838   |                     |      |                       |  |      |                           |  |                     | 74,943  |                       |   |       |  |      |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Total assets                                                    |  | $                                   | 1,212,045 |                     |      |                       |  |      |                           |  | $                   | 716,168 |                       |   |       |  |      |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Liabilities and shareholders equity                            |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Interest-bearing liabilities:                                   |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Interest-bearing demand deposits                                |  | $                                   | 218,768   |                     | $    | 715                   |  | 1.31 | %                         |  | $                   | 161,756 |                       | $ | 503   |  | 1.25 | %
|Savings and money market accounts                               |  |                                     | 157,162   |                     |      | 504                   |  | 1.29 |                           |  |                     | 94,253  |                       |   | 249   |  | 1.06 |  
|Time deposits                                                   |  |                                     | 317,519   |                     |      | 2,131                 |  | 2.69 |                           |  |                     | 198,938 |                       |   | 1,283 |  | 2.59 |  
|Federal funds purchased                                         |  |                                     | 37,038    |                     |      | 331                   |  | 3.58 |                           |  |                     | 18,167  |                       |   | 48    |  | 1.06 |  
|Securities sold under agreement to repurchase                   |  |                                     | 6,256     |                     |      | 26                    |  | 1.67 |                           |  |                     |        |                       |   |      |  |     |  
|Junior subordinated deferrable interest debentures              |  |                                     | 17,520    |                     |      | 391                   |  | 8.95 |                           |  |                     | 12,365  |                       |   | 266   |  | 8.65 |  
|Other borrowings                                                |  |                                     | 134,168   |                     |      | 738                   |  | 2.21 |                           |  |                     | 81,972  |                       |   | 419   |  | 2.06 |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Total interest-bearing liabilities                              |  |                                     | 888,431   |                     |      | 4,836                 |  | 2.18 |                           |  |                     | 567,451 |                       |   | 2,768 |  | 1.96 |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Noninterest-bearing liabilities:                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Noninterest-bearing demand deposits                             |  |                                     | 202,440   |                     |      |                       |  |      |                           |  |                     | 106,507 |                       |   |       |  |      |  
|Other liabilities                                               |  |                                     | 15,109    |                     |      |                       |  |      |                           |  |                     | 4,250   |                       |   |       |  |      |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Total liabilities                                               |  |                                     | 1,105,980 |                     |      |                       |  |      |                           |  |                     | 678,208 |                       |   |       |  |      |  
|Shareholders equity                                            |  |                                     | 106,065   |                     |      |                       |  |      |                           |  |                     | 37,960  |                       |   |       |  |      |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Total liabilities and shareholders equity                      |  | $                                   | 1,212,045 |                     |      |                       |  |      |                           |  | $                   | 716,168 |                       |   |       |  |      |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Net interest income                                             |  |                                     |           |                     | $    | 14,291                |  |      |                           |  |                     |         |                       | $ | 7,148 |  |      |  
|                                                                |  |                                     |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |       |  |      |  
|Net interest spread                                             |  |                                     |           |                     |      |                       |  | 5.04 | %                         |  |                     |         |                       |   |       |  | 4.22 | %
|Net interest margin                                             |  |                                     |           |                     |      |                       |  | 5.39 | %                         |  |                     |         |                       |   |       |  | 4.46 | %

---

|(1) | Annualized
|--- | ----------



15



---

|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|--------------------------------------------------------------- |  | --------------------------------- | --------- | ------------------- | ---- | --------------------- |  | ---- | ------------------------- |  | ------------------- | ------- | --------------------- | - | ------ |  | ---- | -
|                                                                |  | For the Six Months Ended June 30, |          
|                                                                |  | 2005                              |           |                     | 2004 |                      
|                                                                |  | AverageOutstandingBalance         |           | InterestEarned/Paid |      | AverageYield/Rate (1) |  |      | AverageOutstandingBalance |  | InterestEarned/Paid |         | AverageYield/Rate (1) |  
|                                                                |  | (Dollars in thousands)            |          
|Assets                                                          |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Interest-earning assets:                                        |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Total loans                                                     |  | $                                 | 727,491   |                     | $    | 30,294                |  | 8.40 | %                         |  | $                   | 408,329 |                       | $ | 15,508 |  | 7.64 | %
|Taxable securities                                              |  |                                   | 293,104   |                     |      | 5,577                 |  | 3.84 |                           |  |                     | 189,099 |                       |   | 3,412  |  | 3.63 |  
|Tax-exempt securities                                           |  |                                   | 10,599    |                     |      | 194                   |  | 3.69 |                           |  |                     | 8,744   |                       |   | 195    |  | 4.48 |  
|Federal funds sold and other temporary investments              |  |                                   | 2,848     |                     |      | 39                    |  | 2.76 |                           |  |                     | 1,410   |                       |   | 7      |  | 1.00 |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Total interest earning assets                                   |  |                                   | 1,034,042 |                     |      | 36,104                |  | 7.04 |                           |  |                     | 607,582 |                       |   | 19,122 |  | 6.33 |  
|Less allowance for loan losses                                  |  |                                   | 6,921     |                     |      |                       |  |      |                           |  |                     | 3,964   |                       |   |        |  |      |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Total interest-earning assets, net of allowance for loan losses |  |                                   | 1,027,121 |                     |      |                       |  |      |                           |  |                     | 603,618 |                       |   |        |  |      |  
|Noninterest-earning assets                                      |  |                                   | 157,838   |                     |      |                       |  |      |                           |  |                     | 78,640  |                       |   |        |  |      |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Total assets                                                    |  | $                                 | 1,184,959 |                     |      |                       |  |      |                           |  | $                   | 682,258 |                       |   |        |  |      |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Liabilities and shareholders equity                            |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Interest-bearing liabilities:                                   |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Interest-bearing demand deposits                                |  | $                                 | 229,304   |                     | $    | 1,488                 |  | 1.31 | %                         |  | $                   | 155,818 |                       | $ | 952    |  | 1.23 | %
|Savings and money market accounts                               |  |                                   | 158,494   |                     |      | 977                   |  | 1.24 |                           |  |                     | 92,588  |                       |   | 487    |  | 1.06 |  
|Time deposits                                                   |  |                                   | 306,858   |                     |      | 3,962                 |  | 2.60 |                           |  |                     | 190,680 |                       |   | 2,385  |  | 2.52 |  
|Federal funds purchased                                         |  |                                   | 27,521    |                     |      | 507                   |  | 3.71 |                           |  |                     | 11,075  |                       |   | 62     |  | 1.13 |  
|Securities sold under agreement to repurchase                   |  |                                   | 5,874     |                     |      | 46                    |  | 1.58 |                           |  |                     |        |                       |   |       |  |     |  
|Junior subordinated deferrable interest debentures              |  |                                   | 17,520    |                     |      | 781                   |  | 8.99 |                           |  |                     | 12,365  |                       |   | 532    |  | 8.65 |  
|Other borrowings                                                |  |                                   | 119,722   |                     |      | 1,547                 |  | 2.61 |                           |  |                     | 75,023  |                       |   | 892    |  | 2.39 |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Total interest-bearing liabilities                              |  |                                   | 865,293   |                     |      | 9,308                 |  | 2.17 |                           |  |                     | 537,549 |                       |   | 5,310  |  | 1.99 |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Noninterest-bearing liabilities:                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Noninterest-bearing demand deposits                             |  |                                   | 195,364   |                     |      |                       |  |      |                           |  |                     | 101,321 |                       |   |        |  |      |  
|Other liabilities                                               |  |                                   | 18,467    |                     |      |                       |  |      |                           |  |                     | 4,491   |                       |   |        |  |      |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Total liabilities                                               |  |                                   | 1,079,124 |                     |      |                       |  |      |                           |  |                     | 643,361 |                       |   |        |  |      |  
|Shareholders equity                                            |  |                                   | 105,835   |                     |      |                       |  |      |                           |  |                     | 38,897  |                       |   |        |  |      |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Total liabilities and shareholders equity                      |  | $                                 | 1,184,959 |                     |      |                       |  |      |                           |  | $                   | 682,258 |                       |   |        |  |      |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Net interest income                                             |  |                                   |           |                     | $    | 26,796                |  |      |                           |  |                     |         |                       | $ | 13,812 |  |      |  
|                                                                |  |                                   |           |                     |      |                       |  |      |                           |  |                     |         |                       |   |        |  |      |  
|Net interest spread                                             |  |                                   |           |                     |      |                       |  | 4.87 | %                         |  |                     |         |                       |   |        |  | 4.34 | %
|Net interest margin                                             |  |                                   |           |                     |      |                       |  | 5.23 | %                         |  |                     |         |                       |   |        |  | 4.57 | %

---

|(1) | Annualized
|--- | ----------



16



---

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 month periods ended
June 30, 2005 compared with the same periods in 2004. For purposes of these tables, changes attributable to both volume and rate have been allocated proportionately to the change due to volume and rate.



|                                                   |  |                                      |        |      |   |       |  |   |       
|-------------------------------------------------- |  | ------------------------------------ | ------ | ---- | - | ----- |  | - | ------
|                                                   |  | Three Months Ended June 30,         
|                                                   |  | 2005 vs. 2004                       
|                                                   |  | Increase (Decrease) Due to Change in |        |     
|                                                   |  | Volume                               |        | Rate |   | Total
|                                                   |  | (Dollars in thousands)              
|Interest-earning assets:                           |  |                                      |        |      |   |       |  |   |       
|Total loans                                        |  | $                                    | 6,209  |      | $ | 1,989 |  | $ | 8,198 
|Securities                                         |  |                                      | 747    |      |   | 238   |  |   | 985   
|Federal funds sold and other temporary investments |  |                                      | 7      |      |   | 21    |  |   | 28    
|                                                   |  |                                      |        |      |   |       |  |   |       
|Total increase in interest income                  |  |                                      | 6,963  |      |   | 2,248 |  |   | 9,211 
|Interest-bearing liabilities:                      |  |                                      |        |      |   |       |  |   |       
|Interest-bearing demand deposits                   |  |                                      | 177    |      |   | 35    |  |   | 212   
|Savings and money market accounts                  |  |                                      | 166    |      |   | 89    |  |   | 255   
|Time deposits                                      |  |                                      | 765    |      |   | 83    |  |   | 848   
|Federal funds purchased                            |  |                                      | 50     |      |   | 233   |  |   | 283   
|Junior subordinated deferrable interest debentures |  |                                      | 111    |      |   | 14    |  |   | 125   
|Securities sold under agreements to repurchase     |  |                                      | 26     |      |   |      |  |   | 26    
|Other borrowings                                   |  |                                      | 267    |      |   | 52    |  |   | 319   
|                                                   |  |                                      |        |      |   |       |  |   |       
|Total increase in interest expense                 |  |                                      | 1,562  |      |   | 506   |  |   | 2,068 
|                                                   |  |                                      |        |      |   |       |  |   |       
|Increase in net interest income                    |  | $                                    | 5,401  |      | $ | 1,742 |  | $ | 7,143 
|                                                   |  |                                      |        |      |   |       |  |   |       
|                                                   | 
|                                                   |  | Six Months Ended June 30,           
|                                                   |  | 2005 vs. 2004                       
|                                                   |  | Increase (Decrease) Due to Change in |        |     
|                                                   |  | Volume                               |        | Rate |   | Total
|                                                   |  | (Dollars in thousands)              
|Interest-earning assets:                           |  |                                      |        |      |   |       |  |   |       
|Total loans                                        |  | $                                    | 12,122 |      | $ | 2,664 |  | $ | 14,786
|Securities                                         |  |                                      | 1,917  |      |   | 247   |  |   | 2,164 
|Federal funds sold and other temporary investments |  |                                      | 7      |      |   | 25    |  |   | 32    
|                                                   |  |                                      |        |      |   |       |  |   |       
|Total increase in interest income                  |  |                                      | 14,046 |      |   | 2,936 |  |   | 16,982
|Interest-bearing liabilities:                      |  |                                      |        |      |   |       |  |   |       
|Interest-bearing demand deposits                   |  |                                      | 449    |      |   | 87    |  |   | 536   
|Savings and money market accounts                  |  |                                      | 347    |      |   | 143   |  |   | 490   
|Time deposits                                      |  |                                      | 1,453  |      |   | 124   |  |   | 1,577 
|Federal funds purchased                            |  |                                      | 91     |      |   | 354   |  |   | 445   
|Junior subordinated deferrable interest debentures |  |                                      | 222    |      |   | 27    |  |   | 249   
|Securities sold under agreements to repurchase     |  |                                      | 46     |      |   |      |  |   | 46    
|Other borrowings                                   |  |                                      | 531    |      |   | 124   |  |   | 655   
|                                                   |  |                                      |        |      |   |       |  |   |       
|Total increase in interest expense                 |  |                                      | 3,139  |      |   | 859   |  |   | 3,998 
|                                                   |  |                                      |        |      |   |       |  |   |       
|Increase in net interest income                    |  | $                                    | 10,907 |      | $ | 2,077 |  | $ | 12,984
|                                                   |  |                                      |        |      |   |       |  |   |       



17



---

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. For the three and six month periods ended June 30, 2005 compared to June 30, 2004, the provision for loan losses increased by $741,000 or 247.0% to $1.0 million,
and increased by $1.3 million or 291.8% to $1.8 million, respectively. The increase in provisions for loan losses for both periods was primarily due to net charge-offs of $1.1 million for the six months ended June 30, 2005 compared with net
charge-offs of $221,000 for the same period in 2004, coupled with an increase in total loans. Total loans at June 30, 2005 were $786.7 million, an increase of $351.5 million or 80.8%, compared with $435.1 million at June 30, 2004.



The allowance for loan losses at June 30, 2005 was $7.4 million compared with
$6.7 million at December 31, 2004. At June 30, 2005, the ratio of the allowance for loan losses to total loans was 0.94% compared with 0.96% at December 31, 2004.



Noninterest Income. Noninterest income for the three months ended June 30, 2005 and 2004 was $3.9 million and $4.7
million, respectively, a decrease of $770,000 or 16.5%. The decrease in noninterest income was primarily the result of lower service charges on deposit accounts, lower net gains on sales of loans and a net loss on sales of securities.



For the six months ended June 30, 2005 and 2004, noninterest income was $9.7
million and $8.6 million, respectively, an increase of $1.2 million or 13.7%. The increase in noninterest income for the six months ended June 30, 2005, compared to the same period in 2004, was primarily due to commissions received on increased
sales of investment service products and net gains on sales of SBA loans, both of which are categorized in other noninterest income.



As a result of the operations of CHL being restructured into the mortgage division of State as of April 30, 2005, gains on the sale of loans originated by
CHL previously included in noninterest income were recorded as loan fee income, and will continue to be recorded in this manner going forward. For the second quarter of 2005, the impact of this change was approximately $864,000.



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



|                                      |  |                                     |       |                                   |      |   |       |  |   |       |   |  |   |      
|------------------------------------- |  | ----------------------------------- | ----- | --------------------------------- | ---- | - | ----- |  | - | ----- | - |  | - | -----
|                                      |  | For the Three Months Ended June 30, |       | For the Six Months Ended June 30,
|                                      |  | 2005                                |       |                                   | 2004 |   | 2005  |  |   | 2004 
|                                      |  | (Dollars in thousands)             
|Service charges on deposit accounts   |  | $                                   | 1,978 |                                   |      | $ | 2,228 |  | $ | 3,812 |   |  | $ | 3,825
|Mortgage servicing revenue            |  |                                     | 263   |                                   |      |   | 290   |  |   | 559   |   |  |   | 498  
|Net (loss) gain on sale of securities |  |                                     | (84   | )                                 |      |   | 71    |  |   | (122  | ) |  |   | 148  
|Net gain on sale of loans             |  |                                     | 1,036 |                                   |      |   | 1,238 |  |   | 3,180 |   |  |   | 3,142
|Other noninterest income              |  |                                     | 704   |                                   |      |   | 840   |  |   | 2,319 |   |  |   | 958  
|                                      |  |                                     |       |                                   |      |   |       |  |   |       |   |  |   |      
|Total noninterest income              |  | $                                   | 3,897 |                                   |      | $ | 4,667 |  | $ | 9,748 |   |  | $ | 8,571
|                                      |  |                                     |       |                                   |      |   |       |  |   |       |   |  |   |      



18



---

Noninterest Expense. For the three months ended June 30, 2005, noninterest expense increased by
$4.0 million or 43.5% to $13.2 million, compared with the same period in 2004. For the six months ended June 30, 2005, noninterest expense increased $9.3 million or 53.6% to $26.6 million, compared with the same period in 2004. The increase in
noninterest expense during both periods was mainly due to additional employee compensation and benefits and other operating expenses related to the GNB Bancshares, Central Bank branches and CHL acquisitions and increased occupancy and depreciation
and amortization costs. The Company reversed $263,000 of its remaining mortgage servicing rights impairment during the second quarter of 2004, which is reflected as a reduction in mortgage servicing 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,
|                                   |  | 2005                               |        | 2004 |                                  |       | 2005 |  | 2004
|                                   |  | (Dollars in thousands)            
|Employee compensation and benefits |  | $                                  | 8,180  |      | $                                | 5,722 |      |  | $    | 15,241 |  | $ | 9,996 
|Non-staff expenses:                |  |                                    |        |      |                                  |       |      |  |      |        |  |   |       
|Occupancy                          |  |                                    | 513    |      |                                  | 604   |      |  |      | 2,318  |  |   | 1,187 
|Depreciation and amortization      |  |                                    | 723    |      |                                  | 539   |      |  |      | 1,829  |  |   | 1,070 
|Data processing                    |  |                                    | 329    |      |                                  | 204   |      |  |      | 540    |  |   | 516   
|Legal and professional fees        |  |                                    | 586    |      |                                  | 262   |      |  |      | 1,114  |  |   | 591   
|Advertising                        |  |                                    | 356    |      |                                  | 103   |      |  |      | 576    |  |   | 189   
|Printing and supplies              |  |                                    | 245    |      |                                  | 135   |      |  |      | 459    |  |   | 251   
|Telecommunications                 |  |                                    | 301    |      |                                  | 93    |      |  |      | 555    |  |   | 221   
|Mortgage servicing expense         |  |                                    | 307    |      |                                  | (38   | )    |  |      | 571    |  |   | 178   
|Other noninterest expense          |  |                                    | 1,657  |      |                                  | 1,572 |      |  |      | 3,433  |  |   | 3,147 
|                                   |  |                                    |        |      |                                  |       |      |  |      |        |  |   |       
|Total non-staff expenses           |  |                                    | 5,017  |      |                                  | 3,474 |      |  |      | 11,395 |  |   | 7,350 
|                                   |  |                                    |        |      |                                  |       |      |  |      |        |  |   |       
|Total noninterest expense          |  | $                                  | 13,197 |      | $                                | 9,196 |      |  | $    | 26,636 |  | $ | 17,346
|                                   |  |                                    |        |      |                                  |       |      |  |      |        |  |   |       



Employee compensation
and benefits expense represents 62.0% and 57.2% of total noninterest expense for the three and six month periods ended June 30, 2005, respectively. Employee compensation and benefits expense for the three months ended June 30, 2005 and 2004 was $8.2
million and $5.7 million, respectively, an increase of $2.5 million or 43.0%. For the six months ended June 30, 2005 and 2004, employee compensation and benefits expenses were $15.2 million and $10.0 million, respectively, reflecting an increase of
$5.2 million or 52.5%. The increases for both periods resulted primarily from the costs associated with the additional staff to meet loan growth and additional staff acquired with the GNB Bancshares, Central Bank branches and the CHL acquisitions.
Total full-time equivalent (FTE) employees at June 30, 2005 and 2004 were 595 and 377, respectively.



For the three months ended June 30, 2005, non-staff expenses increased $1.5 million or 44.4% compared with the same period in 2004. For the six months
ended June 30, 2005, non-staff expenses increased $4.0 million or 55.0% compared with the same period in 2004. The increased non-staff expense was primarily attributed to higher occupancy expense, depreciation and amortization, and legal and
professional fees associated with the 2004 acquisitions.



19



---

Financial Condition



Loan Portfolio.Total loans, including loans held for sale, increased $93.1 million or 13.4%, from $693.5 million at December 31, 2004 to $786.7
million at June 30, 2005. The increase was primarily due to the $23.2 million increase in commercial and industrial loans, the $45.7 million increase in 1-4 family residential loans, the $26.4 million increase in commercial mortgages, partially
offset by a $17.6 million decrease in loans held for sale. The increases are attributed to the addition of four commercial lenders with established portfolios and increased mortgage loan activity. At June 30, 2005 and December 31, 2004, the ratio of
total loans to total deposits was 87.2% and 78.8%, respectively. For the same periods, total loans represented 63.3% and 60.8% of total assets, respectively.



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



|                                |  |                        |         |         |                   |   |        |   |         |  |       |  
|------------------------------- |  | ---------------------- | ------- | ------- | ----------------- | - | ------ | - | ------- |  | ----- | -
|                                |  | June 30, 2005          |         |         | December 31, 2004 |  
|                                |  | Amount                 |         | Percent |                   |   | Amount |   | Percent | 
|                                |  | (Dollars in thousands) |        
|Commercial and industrial       |  | $                      | 159,351 |         | 20.3              | % |        | $ | 136,197 |  | 19.6  | %
|Real estate mortgage            |  |                        |         |         |                   |   |        |   |         |  |       |  
|1-4 family residential          |  |                        | 238,537 |         | 30.3              |   |        |   | 192,791 |  | 27.8  |  
|Commercial mortgages            |  |                        | 250,357 |         | 31.8              |   |        |   | 223,987 |  | 32.3  |  
|Held for sale                   |  |                        | 9,370   |         | 1.2               |   |        |   | 26,979  |  | 3.9   |  
|Other                           |  |                        | 59,506  |         | 7.6               |   |        |   | 44,494  |  | 6.4   |  
|Consumer and other, net         |  |                        | 69,554  |         | 8.8               |   |        |   | 69,100  |  | 10.0  |  
|                                |  |                        |         |         |                   |   |        |   |         |  |       |  
|Total loans                     |  | $                      | 786,675 |         | 100.0             | % |        | $ | 693,548 |  | 100.0 | %
|                                |  |                        |         |         |                   |   |        |   |         |  |       |  
|Less: Allowance for loan losses |  |                        | 7,383   |         |                   |   |        |   | 6,685   |  |       |  
|                                |  |                        |         |         |                   |   |        |   |         |  |       |  
|Net loans                       |  | $                      | 779,292 |         |                   |   |        | $ | 686,863 |  |       |  
|                                |  |                        |         |         |                   |   |        |   |         |  |       |  



Nonperforming
Assets.Nonperforming assets at June 30, 2005 and December 31, 2004 were $5.7 million and $3.9 million, respectively. 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.



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



|                                                          |  |                        |       |   |                   |   |       |  
|--------------------------------------------------------- |  | ---------------------- | ----- | - | ----------------- | - | ----- | -
|                                                          |  | June 30, 2005          |       |   | December 31, 2004 |  
|                                                          |  | (Dollars in thousands) |      
|Nonaccrual loans                                          |  | $                      | 2,272 |   |                   | $ | 1,725 |  
|Accruing loans 90 days or more past due                   |  |                        | 2,493 |   |                   |   | 1,286 |  
|Other real estate                                         |  |                        | 896   |   |                   |   | 906   |  
|                                                          |  |                        |       |   |                   |   |       |  
|Total nonperforming assets                                |  | $                      | 5,661 |   |                   | $ | 3,917 |  
|                                                          |  |                        |       |   |                   |   |       |  
|Nonperforming assets to total assets                      |  |                        | 0.46  | % |                   |   | 0.34  | %
|Nonperforming assets to total loans and other real estate |  |                        | 0.72  | % |                   |   | 0.56  | %



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. The Company also monitors
its delinquency levels for any negative or adverse trends and particularly monitors credits that have a total exposure of $75,000 or more. 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.



20



---

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, 2005, net charge-offs were $1.1 million or
0.15% of average loans outstanding compared with $964,000 or 0.19% of average loans for the year ended December 31, 2004. The allowance for loan losses at June 30, 2005 and December 31, 2004, aggregated $7.4 million and $6.7 million, or 0.94% and
0.96% of total loans, respectively. The allowance for loan losses at June 30, 2005 as a percentage of nonperforming loans was 154.94% compared with 222.02% at December 31, 2004.



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



|                                                        |  |                                |         |   |                             |   |         |  
|------------------------------------------------------- |  | ------------------------------ | ------- | - | --------------------------- | - | ------- | -
|                                                        |  | Six Months Ended June 30, 2005 |         |   | Year EndedDecember 31, 2004 |  
|                                                        |  | (Dollars in thousands)         |        
|Average total loans outstanding                         |  | $                              | 727,491 |   |                             | $ | 493,490 |  
|                                                        |  |                                |         |   |                             |   |         |  
|Total loans outstanding at end of period                |  | $                              | 786,675 |   |                             | $ | 693,548 |  
|                                                        |  |                                |         |   |                             |   |         |  
|Allowance for loan losses at beginning of period        |  |                                | 6,685   |   |                             |   | 3,893   |  
|Balance acquired from GNB Bancshares                    |  |                                |        |   |                             |   | 1,850   |  
|Provision for loan losses                               |  |                                | 1,763   |   |                             |   | 1,906   |  
|Charge-offs:                                            |  |                                |         |   |                             |   |         |  
|Commercial and industrial                               |  |                                | (716    | ) |                             |   | (167    | )
|Real estate                                             |  |                                | (153    | ) |                             |   | (167    | )
|Consumer                                                |  |                                | (672    | ) |                             |   | (1,266  | )
|Other                                                   |  |                                |        |   |                             |   | (106    | )
|                                                        |  |                                |         |   |                             |   |         |  
|Total charge-offs                                       |  |                                | (1,541  | ) |                             |   | (1,706  | )
|                                                        |  |                                |         |   |                             |   |         |  
|Recoveries:                                             |  |                                |         |   |                             |   |         |  
|Commercial and industrial                               |  |                                | 189     |   |                             |   | 222     |  
|Real estate                                             |  |                                | 110     |   |                             |   | 45      |  
|Consumer                                                |  |                                | 177     |   |                             |   | 450     |  
|Other                                                   |  |                                |        |   |                             |   | 25      |  
|                                                        |  |                                |         |   |                             |   |         |  
|Total recoveries                                        |  |                                | 476     |   |                             |   | 742     |  
|                                                        |  |                                |         |   |                             |   |         |  
|Net charge-offs                                         |  |                                | (1,065  | ) |                             |   | (964    | )
|                                                        |  |                                |         |   |                             |   |         |  
|Allowance for loan losses at end of period              |  | $                              | 7,383   |   |                             | $ | 6,685   |  
|                                                        |  |                                |         |   |                             |   |         |  
|Ratio of allowance to end of period total loans         |  |                                | 0.94    | % |                             |   | 0.96    | %
|Ratio of net charge-offs to average total loans         |  |                                | 0.15    | % |                             |   | 0.19    | %
|Ratio of allowance to end of period nonperforming loans |  |                                | 154.94  | % |                             |   | 222.02  | %
|                                                        |  |                                |         |   |                             |   |         |  



Securities.At
June 30, 2005, the securities portfolio totaled $304.5 million, reflecting an increase of $2.8 million or 0.94% from $301.6 million at December 31, 2004. During the six months ended June 30, 2005, the Company purchased $40.8 million in investment
securities. Additionally, the Company sold $8.5 million of securities in an effort to reposition the portfolio for current economic conditions and to provide funding for loan growth. The Company also received $27.1 million in maturities and pay
downs on investment securities.



21



---

Deposits. At June 30, 2005, total deposits were $902.4 million, an increase of $22.3 million or
2.5% from $880.1 million at December 31, 2004. Noninterest-bearing deposits at June 30, 2005 increased by $25.1 million or 13.4% to $212.5 million from $187.5 million at December 31, 2004. Interest-bearing deposits at June 30, 2005 decreased by $2.8
million or 0.4% to $689.8 million from $692.6 million at December 31, 2004. The Companys ratios of noninterest-bearing demand deposits to total deposits for June 30, 2005 and December 31, 2004 were 23.6% and 21.3%, respectively.



Borrowings.The Company utilizes borrowings to supplement deposits in
funding its lending and investing activities. Borrowings consist of short-term and long-term advances from the Federal Home Loan Bank (FHLB) and advances on a revolving credit line with a correspondent bank. Federal funds purchased increased $16.8
million to $31.9 million at June 30, 2005 from $15.1 million at December 31, 2004. Borrowings increased $58.6 million to $164.5 million at June 30, 2005 from $105.9 million at December 31, 2004. The maturity dates for the FHLB borrowings range from
the years 2005 to 2024 and have interest rates from 2.75% to 5.91%.



At June 30, 2005, the Company had $3.5 million borrowed on its $20.0 million revolving credit line with a correspondent bank. The funds were used for a capital injection into State and general corporate operating expenses. The line of
credit bears interest at Federal Funds rate plus 2.25% and expires in July 2006.



At June 30, 2005, the Company had $17.5 million in outstanding junior subordinated deferrable interest debentures issued to its subsidiary trusts as follows:



|                        |  |               |  |            |  |                                        |           |              |       |      |                                         |   |                     |  |           
|----------------------- |  | ------------- |  | ---------- |  | -------------------------------------- | --------- | ------------ | ----- | ---- | --------------------------------------- | - | ------------------- |  | ----------
|Description             |  | Issuance Date |  | Call Date  |  | Trust Preferred Securities Outstanding |           | InterestRate |       |      | Junior Subordinated Debt Owed to Trusts |   | Final Maturity Date
|TXUI Statutory Trust I  |  | 09/07/2000    |  | 09/07/2010 |  | $                                      | 7,000,000 |              | 10.60 | %    |                                         | $ | 7,210,000           |  | 09/07/2030
|TXUI Statutory Trust II |  | 12/19/2003    |  | 12/19/2008 |  |                                        | 5,000,000 |              | 6.45  | %(1) |                                         |   | 5,155,000           |  | 12/19/2033
|GNB Capital Trust I (2) |  | 11/14/2001    |  | 11/14/2006 |  |                                        | 5,000,000 |              | 9.95  | %    |                                         |   | 5,155,000           |  | 11/14/2031

---

|(1) | The debentures bear a fixed interest rate until December 19, 2008, when the rate begins to float on a quarterly basis based on the three-month LIBOR plus 2.85%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Assumed in connection with the acquisition of GNB Bancshares, Inc. on October 1, 2004.
|--- | --------------------------------------------------------------------------------------



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, 2005, the Company has cash and cash equivalents of $41.0 million, up from $40.8 million at December 31, 2004.
The increase is mainly attributed to the increase in borrowings partially offset by the increase in loans.



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.



22



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Capital Resources. Shareholders equity was $107.4 million at June 30, 2005 and $104.8
million at December 31, 2004, respectively. The increase was primarily due to net earnings for the period of $5.4 million, partially offset by a $1.6 million deterioration in unrealized securities losses and by dividends paid of $1.2 million.



The following table provides a comparison of the
Companys, States and GNB Financials leverage and risk-weighted capital ratios as of June 30, 2005 to the minimum and well-capitalized regulatory standards:



|                                |  |                                              |      |  |                                                             |   |  |                              |  
|------------------------------- |  | -------------------------------------------- | ---- |  | ----------------------------------------------------------- | - |  | ---------------------------- | -
|                                |  | Minimum Required forCapitalAdequacy Purposes |      |  | To be WellCapitalizedUnder PromptCorrectiveActionProvisions |   |  | Actual Ratio atJune 30, 2005 |  
|Texas United                    |  |                                              |      |  |                                                             |   |  |                              |  
|Leverage ratio                  |  | 4.00                                         | %(1) |  | N/A                                                         |   |  | 6.97                         | %
|Tier 1 risk-based capital ratio |  | 4.00                                         |      |  | N/A                                                         |   |  | 9.61                         |  
|Risk-based capital ratio        |  | 8.00                                         |      |  | N/A                                                         |   |  | 10.48                        |  
|State Bank                      |  |                                              |      |  |                                                             |   |  |                              |  
|Leverage ratio                  |  | 4.00                                         | %(2) |  | 5.00                                                        | % |  | 6.45                         | %
|Tier 1 risk-based capital ratio |  | 4.00                                         |      |  | 6.00                                                        |   |  | 9.27                         |  
|Risk-based capital ratio        |  | 8.00                                         |      |  | 10.00                                                       |   |  | 10.12                        |  
|GNB Financial                   |  |                                              |      |  |                                                             |   |  |                              |  
|Leverage ratio                  |  | 4.00                                         | %(3) |  | 5.00                                                        | % |  | 10.01                        | %
|Tier 1 risk-based capital ratio |  | 4.00                                         |      |  | 6.00                                                        |   |  | 11.72                        |  
|Risk-based capital ratio        |  | 8.00                                         |      |  | 10.00                                                       |   |  | 12.67                        |  

---

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

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

|(3) | The OCC may require GNB Financial to maintain a leverage ratio above the required minimum.
|--- | ------------------------------------------------------------------------------------------



Item 3.Quantitative and Qualitative Disclosures About Market Risk.



There have been no material changes since December 31, 2004. 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, 2004, 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.



Evaluation of 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. 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 controls over financial reporting. There were no changes in the Companys internal control over financial reporting that
occurred during the Companys most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



23



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PART II



OTHER INFORMATION



Item 1.Legal Proceedings



Not applicable



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 26, 2005. At the meeting, the shareholders of the Company considered and acted upon the
following proposals:



1. Jimmy Jack Biffle was elected as
Class II director to serve on the Companys Board of Directors until the Companys 2006 Annual Meeting of Shareholders and until his successor is duly elected and qualified. A total of 6,329,901 shares were voted in favor of Mr. Biffle and
110,123 shares were withheld from voting.



2. Bruce Frenzel was
elected as Class I director to serve on the Companys Board of Directors until the Companys 2008 Annual Meeting of Shareholders and until his successor is duly elected and qualified. A total of 6,271,212 shares were voted in favor of Mr.
Frenzel and 168,812 shares were withheld from voting.



3. Hank
Novak was elected as Class I director to serve on the Companys Board of Directors until the Companys 2008 Annual Meeting of Shareholders and until his successor is duly elected and qualified. A total of 6,333,282 shares were voted in
favor of Mr. Novak and 106,742 shares were withheld from voting.



4. Riley Peveto was elected as a Class I director to serve on the Companys Board of Directors until the Companys 2008 Annual Meeting of Shareholders and until his successor is duly elected and qualified. A total of 6,326,703
shares were voted in favor of Mr. Peveto and 113,321 shares were withheld from voting.



5. The appointment of BKD, LLP as the independent registered public accounting firm of the Company for the fiscal year ending December 31, 2005 was ratified. A total of 6,400,596 shares voted in favor of the
appointment, 3,822 voted against and 35,606 shares abstained from voting on the proposal.



The following Class II and Class III directors continued in office after the Companys Annual Meeting of Shareholders: Michael Kulhanek, Lee D. Mueller, Jr., Michael Steinhauser, L. Don Stricklin and Ervan
Zouzalik.



24



---

|                         |  |               
|------------------------ |  | --------------
|Item 5.Other Information
|                         |  | Not applicable



Item 6.Exhibits



|              |  |                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Identification of Exhibit                                                                                                                          
|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.



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 12, 2005 |  | By: |  | /s/ L. Don Stricklin                 
|                      |  |     |  | L. Don Stricklin                     
|                      |  |     |  | President and Chief Executive Officer
|                      |  |     |  | (principal executive officer)        



|                      |  |     |  |                              
|--------------------- |  | --- |  | -----------------------------
|                      |  |     |  |                              
|Date: August 12, 2005 |  | By: |  | /s/ Jeffrey A. Wilkinson     
|                      |  |     |  | Jeffrey A. Wilkinson         
|                      |  |     |  | Executive Vice President and 
|                      |  |     |  | Chief Financial Officer      
|                      |  |     |  | (principal financial officer/
|                      |  |     |  | principal accounting officer)



25