---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q/A

Amendment No. 1



---



(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



---



TEXAS UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



---



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.



---



---

EXPLANATORY NOTE



The purpose of
this Amendment No. 1 to the Quarterly Report on Form 10-Q of Texas United Bancshares, Inc. (the Company) for the quarter ended June 30, 2005 (the Original Form 10-Q) is to restate the Companys condensed consolidated
financial statements as of June 30, 2005 and for the three and six months ended June 30, 2005 and 2004 and to revise related disclosures in the Original Form 10-Q. This restatement is described in detail in Note 2 to the accompanying condensed
consolidated financial statements.



The Company restated its
condensed consolidated financial statements as of June 30, 2005 and for the three and six months ended June 30, 2005 and 2004 to correct the classification of mortgage loan origination fees on loans held for sale. The restatement decreased total
interest income by $1.3 million and $268,000 for the three months ended June 30, 2005 and 2004, respectively, and increased total noninterest income by these same amounts for the same periods. The restatement decreased total interest income by $1.8
million and $518,000 for the six months ended June 30, 2005 and 2004, respectively, and increased total noninterest income by these same amounts for the same periods. The correction had no impact on net earnings or earnings per share.



The restatement resulted from a review and assessment by the Company of the
classification and recording of mortgage loan origination fees on loans held for sale. Historically, State Bank recorded mortgage loan origination fees as interest income for all mortgage loans originated. Since the Companys acquisition of
Community Home Loan (CHL) in 2004, CHL recorded mortgage loan origination fees as noninterest income for all mortgage loans originated. In the second quarter of 2005, CHL was restructured and became a part of the mortgage division of
State Bank. After that occurred, to be consistent with the way the Company has historically recorded mortgage loan origination fees for loans originated by State Bank, the Company reclassified the mortgage loan origination fees for loans generated
by CHL (operating as a division of State Bank) as interest income. The Company has since determined that mortgage loan origination fees on all mortgage loans originated by State Bank and CHL with the intent to sell should be recorded as a component
of gains on sale of loans (in noninterest income) when the loans are sold and has restated its condensed consolidated financial statements to reflect this change.



As a result of the restatement, the Company has determined it to be necessary to amend the Original Form 10-Q to reflect
mortgage loan origination fees on loans held for sale as a component of gains on sale of loans (in noninterest income) when the loans were sold rather than interest income. This Amendment No. 1 amends and restates in its entirety Part I, Items 1, 2
and 4 and Part II, Item 6 of the Original Form 10-Q. This Amendment No. 1 continues to reflect circumstances as of the date of the filing of the Original Form 10-Q and does not reflect events occurring after the filing of the Original Form 10-Q, or
modify or update those disclosures in any way, except as required to reflect the effects of the restatement as described in Note 2 to the accompanying condensed consolidated financial statements.



2



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



TABLE OF CONTENTS



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I                                                                                        |  |   
|Explanatory Note                                                                              |  | 2 
|Item 1. Condensed Consolidated Financial Statements                                           |  | 4 
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                         |  | 4 
|CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (RESTATED)                                      |  | 5 
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                               |  | 6 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY                                    |  | 7 
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)                                    |  | 8 
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          |  | 9 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16
|Item 4. Controls and Procedures                                                               |  | 28
|                                                                                              | 
|PART II                                                                                       |  |   
|Item 6. Exhibits                                                                              |  | 29
|Signatures                                                                                    |  | 29





3



---

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.



4



---

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  
|                                                    |  | Restated  See Note 2              |        | Restated  See Note 2           
|Interest income:                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Loans                                               |  | $                                  | 14,840 |                                  |      | $ | 7,723 |  | $ | 28,499 |   |  | $ | 14,990
|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                               |  |                                    | 17,778 |                                  |      |   | 9,648 |  |   | 34,309 |   |  |   | 18,604
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|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                                 |  |                                    | 12,942 |                                  |      |   | 6,880 |  |   | 25,001 |   |  |   | 13,294
|Provision for loan losses                           |  |                                    | 1,041  |                                  |      |   | 300   |  |   | 1,763  |   |  |   | 450   
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Net interest income after provision for loan losses |  |                                    | 11,901 |                                  |      |   | 6,580 |  |   | 23,238 |   |  |   | 12,844
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|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                           |  |                                    | 2,385  |                                  |      |   | 1,506 |  |   | 4,975  |   |  |   | 3,660 
|Other noninterest income                            |  |                                    | 704    |                                  |      |   | 840   |  |   | 2,319  |   |  |   | 958   
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|Total noninterest income                            |  |                                    | 5,246  |                                  |      |   | 4,935 |  |   | 11,543 |   |  |   | 9,089 
|                                                    |  |                                    |        |                                  |      |   |       |  |   |        |   |  |   |       
|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.



5



---

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.



6



---

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 Capital |       | Retained Earnings |   |        | Accumulated OtherComprehensive Loss |   |        | Treasury Stock at Cost |  |   | Total |  
|                                                                                 |  | Shares       |  | Amount                    |       |                   |   |        |                                    
|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 Capital |       | Retained Earnings |   |        | Accumulated Other Comprehensive Loss |   |        | Treasury Stock at Cost |  |   | Total  |  
|                                                                          |  | Shares       |  | Amount                    |       |                   |   |        |                                     
|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.



7



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Cash Flows



(In thousands)

(Unaudited)



|                                                                                                                          |  |                                  |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                          |  | For the Six MonthsEnded June 30, |         
|                                                                                                                          |  | 2005                             |          |   | 2004 |  
|                                                                                                                          |  | Restated  See Note 2            |         
|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                                                                                                    |  |                                  | (4,975   | ) |      |   | (3,660   | )
|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                                                                          |  |                                  | 19,079   |   |      |   | (5,615   | )
|                                                                                                                          |  |                                  |          |   |      |   |          |  
|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                                                    |  |                                  | 5,519    |   |      |   | 3,970    |  
|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                                                                                     |  |                                  | (115,465 | ) |      |   | (98,375  | )
|                                                                                                                          |  |                                  |          |   |      |   |          |  
|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.



8



---

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 Amendment No. 1 to the Companys Annual Report on Form 10-K/A.



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.



9



---

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. RESTATEMENT



In the third quarter 2005, management concluded that the Company did not properly classify mortgage loan origination fees on loans held for sale.
Specifically, the Company classified such fees as interest income rather than as a component of gains on sale of loans (in noninterest income) when the loans were sold. This resulted in the restatement of amounts previously reported in the
Companys consolidated statements of earnings for the three and six months ended



10



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





June 30, 2005 and 2004 and the consolidated statements of cash flows for the six months ended June 30, 2005 and 2004. In addition, certain disclosures in
other notes to the condensed consolidated financial statements were restated to reflect the reclassification adjustments.



This restatement arose from managements determination that the Company had not correctly classified mortgage loan origination fees on loans held for
sale. The Company determined that such fees had been recorded within the consolidated statements of earnings as a component of interest income rather than a component of gains on sale of loans (in noninterest income) when the loans were sold. In
addition, the Company has determined to restate its consolidated statements of cash flows to reclassify the mortgage loan origination fees to operating activities from investing activities. The determination to restate the condensed consolidated
financial statements was approved by the Audit Committee of the Companys board of directors upon the recommendation of the Companys senior management.



The effects of the restatement on the consolidated statements of earnings were as follows:



|                                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|----------------------------------------------------- |  | ----------------------------------- | ------ | - | ---------- | - | ------ | ----------- |  | - | ----------- | - | ---------- | - | ----- | ----------- | - | ---- | - |  | - | -----
|                                                      |  | For the Three Months Ended June 30,
|                                                      |  | 2005                                |        |   | 2004      
|                                                      |  | As Reported                         |        |   | Adjustment |   |        | As Restated |  |   | As Reported |   | Adjustment |   |       | As Restated
|                                                      |  | (Dollars in thousands)             
|Interest income:                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Loans                                                 |  | $                                   | 16,189 |   |            | $ | (1,349 | )           |  | $ | 14,840      |   |            | $ | 7,991 |             | $ | (268 | ) |  | $ | 7,723
|Investment securities                                 |  |                                     | 2,907  |   |            |   |       |             |  |   | 2,907       |   |            |   | 1,922 |             |   |     |   |  |   | 1,922
|Federal funds sold and other temporary investments    |  |                                     | 31     |   |            |   |       |             |  |   | 31          |   |            |   | 3     |             |   |     |   |  |   | 3    
|                                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Total interest income                                 |  |                                     | 19,127 |   |            |   | (1,349 | )           |  |   | 17,778      |   |            |   | 9,916 |             |   | (268 | ) |  |   | 9,648
|Total interest expense                                |  |                                     | 4,836  |   |            |   |       |             |  |   | 4,836       |   |            |   | 2,768 |             |   |     |   |  |   | 2,768
|                                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Net interest income, before provision for loan losses |  |                                     | 14,291 |   |            |   | (1,349 | )           |  |   | 12,942      |   |            |   | 7,148 |             |   | (268 | ) |  |   | 6,880
|Provision for loan losses                             |  |                                     | 1,041  |   |            |   |       |             |  |   | 1,041       |   |            |   | 300   |             |   |     |   |  |   | 300  
|                                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Net interest income, after provision for loan losses  |  |                                     | 13,250 |   |            |   | (1,349 | )           |  |   | 11,901      |   |            |   | 6,848 |             |   | (268 | ) |  |   | 6,580
|                                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Noninterest income:                                   |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Service charges on deposit accounts                   |  |                                     | 1,978  |   |            |   |       |             |  |   | 1,978       |   |            |   | 2,228 |             |   |     |   |  |   | 2,228
|Mortgage servicing revenue                            |  |                                     | 263    |   |            |   |       |             |  |   | 263         |   |            |   | 290   |             |   |     |   |  |   | 290  
|(Loss) gain on sale of investment securities, net     |  |                                     | (84    | ) |            |   |       |             |  |   | (84         | ) |            |   | 71    |             |   |     |   |  |   | 71   
|Net gain on sale of loans                             |  |                                     | 1,036  |   |            |   | 1,349  |             |  |   | 2,385       |   |            |   | 1,238 |             |   | 268  |   |  |   | 1,506
|Other noninterest income                              |  |                                     | 704    |   |            |   |       |             |  |   | 704         |   |            |   | 840   |             |   |     |   |  |   | 840  
|                                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Total noninterest income                              |  |                                     | 3,897  |   |            |   | 1,349  |             |  |   | 5,246       |   |            |   | 4,667 |             |   | 268  |   |  |   | 4,935
|                                                      |  |                                     |        |   |            |  
|Total noninterest expense                             |  |                                     | 13,197 |   |            |   |       |             |  |   | 13,197      |   |            |   | 9,196 |             |   |     |   |  |   | 9,196
|                                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Earnings before provision for income taxes            |  |                                     | 3,950  |   |            |   |       |             |  |   | 3,950       |   |            |   | 2,319 |             |   |     |   |  |   | 2,319
|Provision for income taxes                            |  |                                     | 1,338  |   |            |   |       |             |  |   | 1,338       |   |            |   | 824   |             |   |     |   |  |   | 824  
|                                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Net earnings                                          |  | $                                   | 2,612  |   |            | $ |       |             |  | $ | 2,612       |   |            | $ | 1,495 |             | $ |     |   |  | $ | 1,495
|                                                      |  |                                     |        |   |            |   |        |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      



11



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|                                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|----------------------------------------------------- |  | --------------------------------- | ------ | - | ---------- | - | ------ | ----------- |  | - | ----------- | - | ---------- | - | ------ | ----------- | - | ---- | - |  | - | ------
|                                                      |  | For the Six Months Ended June 30,
|                                                      |  | 2005                              |        |   | 2004      
|                                                      |  | As Reported                       |        |   | Adjustment |   |        | As Restated |  |   | As Reported |   | Adjustment |   |        | As Restated
|                                                      |  | (Dollars in thousands)           
|Interest income:                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|Loans                                                 |  | $                                 | 30,294 |   |            | $ | (1,795 | )           |  | $ | 28,499      |   |            | $ | 15,508 |             | $ | (518 | ) |  | $ | 14,990
|Investment securities                                 |  |                                   | 5,771  |   |            |   |       |             |  |   | 5,771       |   |            |   | 3,607  |             |   |     |   |  |   | 3,607 
|Federal funds sold and other temporary investments    |  |                                   | 39     |   |            |   |       |             |  |   | 39          |   |            |   | 7      |             |   |     |   |  |   | 7     
|                                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|Total interest income                                 |  |                                   | 36,104 |   |            |   | (1,795 | )           |  |   | 34,309      |   |            |   | 19,122 |             |   | (518 | ) |  |   | 18,604
|                                                      |  |                                   |        |   |            |  
|Total interest expense                                |  |                                   | 9,308  |   |            |   |       |             |  |   | 9,308       |   |            |   | 5,310  |             |   |     |   |  |   | 5,310 
|                                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|Net interest income, before provision for loan losses |  |                                   | 26,796 |   |            |   | (1,795 | )           |  |   | 25,001      |   |            |   | 13,812 |             |   | (518 | ) |  |   | 13,294
|                                                      |  |                                   |        |   |            |  
|Provision for loan losses                             |  |                                   | 1,763  |   |            |   |       |             |  |   | 1,763       |   |            |   | 450    |             |   |     |   |  |   | 450   
|                                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|Net interest income, after provision for loan losses  |  |                                   | 25,033 |   |            |   | (1,795 | )           |  |   | 23,238      |   |            |   | 13,362 |             |   | (518 | ) |  |   | 12,844
|                                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|Noninterest income:                                   |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|Service charges on deposit accounts                   |  |                                   | 3,812  |   |            |   |       |             |  |   | 3,812       |   |            |   | 3,825  |             |   |     |   |  |   | 3,825 
|Mortgage servicing revenue                            |  |                                   | 559    |   |            |   |       |             |  |   | 559         |   |            |   | 498    |             |   |     |   |  |   | 498   
|(Loss) gain on sale of investment securities, net     |  |                                   | (122   | ) |            |   |       |             |  |   | (122        | ) |            |   | 148    |             |   |     |   |  |   | 148   
|Net gain on sale of loans                             |  |                                   | 3,180  |   |            |   | 1,795  |             |  |   | 4,975       |   |            |   | 3,142  |             |   | 518  |   |  |   | 3,660 
|Other noninterest income                              |  |                                   | 2,319  |   |            |   |       |             |  |   | 2,319       |   |            |   | 958    |             |   |     |   |  |   | 958   
|                                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|Total noninterest income                              |  |                                   | 9,748  |   |            |   | 1,795  |             |  |   | 11,543      |   |            |   | 8,571  |             |   | 518  |   |  |   | 9,089 
|                                                      |  |                                   |        |   |            |  
|Total noninterest expense                             |  |                                   | 26,636 |   |            |   |       |             |  |   | 26,636      |   |            |   | 17,346 |             |   |     |   |  |   | 17,346
|                                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|Earnings before provision for income taxes            |  |                                   | 8,145  |   |            |   |       |             |  |   | 8,145       |   |            |   | 4,587  |             |   |     |   |  |   | 4,587 
|Provision for income taxes                            |  |                                   | 2,731  |   |            |   |       |             |  |   | 2,731       |   |            |   | 1,527  |             |   |     |   |  |   | 1,527 
|                                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       
|Net earnings                                          |  | $                                 | 5,414  |   |            | $ |       |             |  | $ | 5,414       |   |            | $ | 3,060  |             | $ |     |   |  | $ | 3,060 
|                                                      |  |                                   |        |   |            |   |        |             |  |   |             |   |            |   |        |             |   |      |   |  |   |       



For the six months
ended June 30, 2005 and 2004, the consolidated statements of cash flows were restated to reflect the reclassification of mortgage loan origination fees from interest income to a component of gains on the sale of loans (in noninterest income). For
the six months ended June 30, 2005 and 2004, the restatement decreased net cash provided from operating activities (specifically, an increase in the gain on sale of loans) by approximately $1.8 million and $518,000, respectively. For the six months
ended June 30, 2005 and 2004, the restatement decreased net cash used by investing activities (proceeds from the sale of loans) by the same amounts. There was no impact on net increase in cash and cash equivalents or end of period cash and cash
equivalents.



The restatement had no effect on total assets,
total liabilities, total shareholders equity, net earnings or earnings per share previously reported.



The Company filed a Current Report on Form 8-K on October 5, 2005, announcing that it has determined to restate its consolidated financial statements for
2004, 2003 and 2002 and the first and second quarters of 2005 due to the above errors.



12



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





3. EARNINGS PER COMMON SHARE



Basic earnings per share (EPS) is computed by dividing net earnings available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares and potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares are computed using the treasury stock method. Potentially dilutive shares include 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 8.



4. 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



13



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





5. 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.



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 June 30, 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 June 30, 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.



14



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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 June
30, 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.



6. OFF BALANCE SHEET CREDIT COMMITMENTS



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



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



15



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





7. SEGMENT INFORMATION



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



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



|                                 |  |                                         |           |   |                                        |   |         |              |  |   |                    |   |  |                  |           |   |              |   |         |   |  |   |           |  
|-------------------------------- |  | --------------------------------------- | --------- | - | -------------------------------------- | - | ------- | ------------ |  | - | ------------------ | - |  | ---------------- | --------- | - | ------------ | - | ------- | - |  | - | --------- | -
|                                 |  | For the Three Months EndedJune 30, 2005 |           |   | For the Six Months Ended June 30, 2005 |  
|                                 |  | Commercial Banking                      |           |   | Mortgage Banking                       |   |         | Consolidated |  |   | Commercial Banking |   |  | Mortgage Banking |           |   | Consolidated |  
|                                 |  | (Dollars In thousands)                  |          
|                                 |  | Restated  See Note 2                   |          
|                                 |  |                                         |          
|Net interest income              |  | $                                       | 10,509    |   |                                        | $ | 2,433   |              |  | $ | 12,942             |   |  | $                | 20,570    |   |              | $ | 4,431   |   |  | $ | 25,001    |  
|Noninterest income               |  |                                         | 1,813     |   |                                        |   | 3,433   |              |  |   | 5,246              |   |  |                  | 5,837     |   |              |   | 5,706   |   |  |   | 11,543    |  
|                                 |  |                                         |           |   |                                        |   |         |              |  |   |                    |   |  |                  |           |   |              |   |         |   |  |   |           |  
|Total income                     |  |                                         | 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 taxes     |  |                                         | 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 |  
|                                 |  |                                         |           |   |                                        |   |         |              |  |   |                    |   |  |                  |           |   |              |   |         |   |  |   |           |  



8. 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------



16



---

| |  |  | 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;
| | - |  | ---------------------------------------------------------



| |  |  | 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.



Restatement of Financial Statements.The Company restated its condensed consolidated financial statements as of June 30, 2005 and for the
three and six months ended June 30, 2005 and 2004 to correct the classification of mortgage loan origination fees on loans held for sale. For the three months ended June 30, 2005 and 2004, the restatement decreased total interest income by $1.3
million or 8.3% and by $268,000 or 3.4%, respectively, and increased total noninterest income by these same amounts for the same periods. For the three months ended June 30, 2005 and 2004, the restatement lowered the weighted average yield on
earning assets by 51 basis points to 6.71% from 7.22% and by 17 basis points to 6.01% from 6.18%, respectively. For the three months ended June 30, 2005 and 2004, the restatement lowered the net interest margin by 51 basis points to 4.88% from 5.39%
and by 17 basis points to 4.29% from 4.46%, respectively.



For
the six months ended June 30, 2005 and 2004, the restatement decreased total interest income by $1.8 million or 5.9% and by $518,000 or 3.3%, respectively, and increased total noninterest income by these same amounts for the same periods. For the
six months ended June 30, 2005 and 2004, the restatement lowered the weighted average yield on earning assets by 35 basis points to 6.69% from 7.04% and by 17 basis points to 6.16% from 6.33%, respectively. For the six months ended June 30, 2005 and
2004, the restatement lowered the net interest margin by 35 basis points to 4.88% from 5.23% and by 17 basis points to 4.40% from 4.57%, respectively. The correction had no impact on net earnings or earnings per share.



The restatement resulted from a review and assessment by the Company of the
classification and recording of mortgage loan origination fees on loans held for sale. Historically, State Bank recorded mortgage loan origination fees as interest income for all mortgage loans originated. Since the Companys acquisition of CHL
in February 2004, CHL recorded mortgage loan origination fees as noninterest income for all mortgage loans originated. In the second quarter of 2005, CHL was restructured and became a part of the mortgage division of State Bank. After that occurred,
to be consistent with the way the Company has historically recorded mortgage loan origination fees for loans originated by State Bank, the Company reclassified mortgage loan origination fees for loans generated by CHL (operating as a division of
State Bank) as interest income. The Company has since determined that mortgage loan origination fees on all mortgage loans originated by State Bank and CHL with the intent to sell should be recorded as a component of gains on sale of loans (in
noninterest income) when the loans are sold and has restated its condensed consolidated financial statements to reflect this change. See Note 2 to the accompanying condensed consolidated financial statements.



As a result, all amounts disclosed herein impacted by the reclassification
have been restated accordingly.



17



---

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 Bank. 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



18



---

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 4 to the condensed consolidated financial statements above and discussion of
Noninterest Income included in Managements Discussion and Analysis of Financial Condition and Results of Operations for additional insight into managements approach in estimating transfers and servicing of
financial assets.



Net Interest Income.For the three
months ended June 30, 2005, net interest income, before the provision for loan losses, increased 88.1% to $12.9 million from $6.9 million for the same period in 2004. The increase was primarily due to increased earning-asset volumes that were
partially offset by higher interest-bearing liabilities 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 59 basis points to 4.88% from 4.29% and the net interest spread increased 48 basis points to 4.05% from 4.53%, respectively.



For the six months ended June 30, 2005, net interest income, before the provision for loan losses, increased 88.1% to $25.0 million compared with $13.3
million for the same period in 2004. For the six months ended June 30, 2005 and 2004, the net interest margins and spreads increased 48 basis points to 4.88% from 4.40% and 35 basis points to 4.52% from 4.17%, respectively. The higher net interest
margin was primarily due to the increased earning-assets acquired in connection with the 2004 acquisitions, with a 53 basis point increase in earning-asset yield that was partially offset by higher interest-bearing liabilities with an 18 basis point
increase in the cost of funds.



Interest Income.Interest income for the three months ended June 30, 2005 was $17.8 million compared with $9.6 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 58 basis points to 7.89%. 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 70 basis
points to 6.71%.



Interest income for the six months ended June
30, 2005 was $34.3 million compared with $18.6 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 52 basis points to 7.90%. 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 53 basis points to 6.69%.



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%.



19



---

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 |                        
|                                                                |  | Average Outstanding Balance         |                       | Interest Earned/ Paid |      | Average Yield/ Rate (1) |  |      | Average Outstanding Balance |  | Interest Earned/ Paid |         | Average Yield/ Rate (1) |  
|                                                                |  | (Dollars in thousands)              |                      
|Assets                                                          |  |                                     | Restated  See Note 2 |                      
|Interest-earning assets:                                        |  |                                     |                       |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Total loans                                                     |  | $                                   | 754,879               |                       | $    | 14,840                  |  | 7.89 | %                           |  | $                     | 424,805 |                         | $ | 7,723 |  | 7.31 | %
|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             |                       |      | 17,778                  |  | 6.71 |                             |  |                       | 645,214 |                         |   | 9,648 |  | 6.01 |  
|                                                                |  |                                     |                       |                       |      |                        
|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                                             |  |                                     |                       |                       | $    | 12,942                  |  |      |                             |  |                       |         |                         | $ | 6,880 |  |      |  
|                                                                |  |                                     |                       |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Net interest spread                                             |  |                                     |                       |                       |      |                         |  | 4.53 | %                           |  |                       |         |                         |   |       |  | 4.05 | %
|Net interest margin                                             |  |                                     |                       |                       |      |                         |  | 4.88 | %                           |  |                       |         |                         |   |       |  | 4.29 | %

---

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





20



---

|                                                                |  |                                   |                       |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|--------------------------------------------------------------- |  | --------------------------------- | --------------------- | --------------------- | ---- | ----------------------- |  | ---- | --------------------------- |  | --------------------- | ------- | ----------------------- | - | ------ |  | ---- | -
|                                                                |  | For the Six Months Ended June 30, |                      
|                                                                |  | 2005                              |                       |                       | 2004 |                        
|                                                                |  | Average Outstanding Balance       |                       | Interest Earned/ Paid |      | Average Yield/ Rate (1) |  |      | Average Outstanding Balance |  | Interest Earned/ Paid |         | Average Yield/ Rate (1) |  
|                                                                |  | (Dollars in thousands)            |                      
|Assets                                                          |  |                                   | Restated  See Note 2 |                      
|Interest-earning assets:                                        |  |                                   |                       |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total loans                                                     |  | $                                 | 727,491               |                       | $    | 28,499                  |  | 7.90 | %                           |  | $                     | 408,329 |                         | $ | 14,990 |  | 7.38 | %
|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             |                       |      | 34,309                  |  | 6.69 |                             |  |                       | 607,582 |                         |   | 18,604 |  | 6.16 |  
|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                                             |  |                                   |                       |                       | $    | 25,001                  |  |      |                             |  |                       |         |                         | $ | 13,294 |  |      |  
|                                                                |  |                                   |                       |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Net interest spread                                             |  |                                   |                       |                       |      |                         |  | 4.52 | %                           |  |                       |         |                         |   |        |  | 4.17 | %
|Net interest margin                                             |  |                                   |                       |                       |      |                         |  | 4.88 | %                           |  |                       |         |                         |   |        |  | 4.40 | %

---

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



21



---

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)              
|                                                   |  | Restated  See Note 2               
|Interest-earning assets:                           |  |                                      |        |      |   |       |  |   |       
|Total loans                                        |  | $                                    | 6,001  |      | $ | 1,116 |  | $ | 7,117 
|Securities                                         |  |                                      | 747    |      |   | 238   |  |   | 985   
|Federal funds sold and other temporary investments |  |                                      | 7      |      |   | 21    |  |   | 28    
|                                                   |  |                                      |        |      |   |       |  |   |       
|Total increase in interest income                  |  |                                      | 6,755  |      |   | 1,375 |  |   | 8,130 
|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                    |  | $                                    | 5,193  |      | $ | 869   |  | $ | 6,062 
|                                                   |  |                                      |        |      |   |       |  |   |       
|                                                   | 
|                                                   |  | Six Months Ended June 30,           
|                                                   |  | 2005 vs. 2004                       
|                                                   |  | Increase (Decrease) Due to Change in |        |     
|                                                   |  | Volume                               |        | Rate |   | Total
|                                                   |  | (Dollars in thousands)              
|                                                   |  | Restated  See Note 2               
|Interest-earning assets:                           |  |                                      |        |      |   |       |  |   |       
|Total loans                                        |  | $                                    | 11,717 |      | $ | 1,792 |  | $ | 13,509
|Securities                                         |  |                                      | 1,917  |      |   | 247   |  |   | 2,164 
|Federal funds sold and other temporary investments |  |                                      | 7      |      |   | 25    |  |   | 32    
|                                                   |  |                                      |        |      |   |       |  |   |       
|Total increase in interest income                  |  |                                      | 13,641 |      |   | 2,064 |  |   | 15,705
|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                    |  | $                                    | 10,502 |      | $ | 1,205 |  | $ | 11,707
|                                                   |  |                                      |        |      |   |       |  |   |       



22



---

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 $5.2 million and $4.9
million, respectively, an increase of $311,000 or 6.3%. The increase in noninterest income was primarily the result of higher net gains on sale of loans that were partially offset by lower service charges on deposit accounts, reduced mortgage
servicing revenue, a net loss on sales of securities, and lower other noninterest income.



For the six months ended June 30, 2005 and 2004, noninterest income was $11.5 million and $9.1 million, respectively, an increase of $2.4 million or 27.0%. 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, increased net gains on sale of loans, and slightly higher mortgage servicing revenue that was partially
offset by net losses on the sale of securities.



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)             
|                                      |  | Restated  See Note 2              
|                                      |  |                                     |       |                                   |      |   |       |  |   |        |   |  |   |      
|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             |  |                                     | 2,385 |                                   |      |   | 1,506 |  |   | 4,975  |   |  |   | 3,660
|Other noninterest income              |  |                                     | 704   |                                   |      |   | 840   |  |   | 2,319  |   |  |   | 958  
|                                      |  |                                     |       |                                   |      |   |       |  |   |        |   |  |   |      
|Total noninterest income              |  | $                                   | 5,246 |                                   |      | $ | 4,935 |  | $ | 11,543 |   |  | $ | 9,089
|                                      |  |                                     |       |                                   |      |   |       |  |   |        |   |  |   |      



23



---

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 Months Ended June 30, |        |      | For the Six Months Ended 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.



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.



24



---

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.



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.



25



---

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



|                                                        |  |                                |         |   |                              |   |         |  
|------------------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | -
|                                                        |  | Six Months Ended June 30, 2005 |         |   | Year Ended December 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.



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.



26



---

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 |           | Interest Rate |       |      | 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 had cash and cash equivalents of $41.0 million, up from $40.8 million at December 31, 2004.
The increase was 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.



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.



27



---

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 for Capital Adequacy Purposes |      |  | To be Well Capitalized Under Prompt Corrective Action Provisions |   |  | 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 4.Controls and Procedures



Disclosure Controls and Procedures



On October 5, 2005, the Company announced that it was required to restate its audited consolidated financial statements as of December 31, 2003 and 2004 and for each of the years in the three year period ended
December 31, 2004, and its condensed consolidated financial statements as of March 31, 2005 and for the three months ended March 31, 2004 and 2005 to correct the classification of mortgage loan origination fees on loans held for sale originated by
State Bank and to restate the condensed consolidated financial statements as of June 30, 2005 and for the six months ended June 30, 2005 and 2004 to correct the classification of mortgage loan origination fees on loans held for sale originated by
State Bank and CHL. This restatement is described in Note 2 to the condensed consolidated financial statements. According to the Public Company Accounting Oversight Boards Auditing Standard No. 2, a restatement of previously issued financial
statements to reflect the correction of a misstatement should be regarded as at least a significant deficiency and a strong indicator that a material weakness in internal control over financial reporting exists. The Company and its independent
registered public accounting firm, BKD, LLP, have both determined that the failure to properly classify mortgage loan origination fees on loans held for sale indicates a material weakness in the Companys internal control over financial
reporting.



In connection with the Companys determination
to restate the items in Note 2 to the condensed consolidated financial statements, management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness
of the design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report and as of September 29, 2005. Based on the most recent evaluation, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that as of June 30, 2005, the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) were not effective
solely because of the material weakness related to controls over the preparation and review of its consolidated statements of earnings and consolidated statements of cash flows. Specifically, the Company did not maintain effective controls to
appropriately classify mortgage loan origination fees on loans held for sale originated by State Bank and CHL. The Company classified such mortgage loan origination fees as interest income rather than as a component of gains on sale of loans (in
noninterest income) when the loans were sold. This change in classification resulted in a decrease in interest income, net interest income and net interest margin and a corresponding increase in noninterest income. The change also resulted in a
decrease in cash flows from operating activities and a corresponding increase in cash flows from investing activities. There was no change in net earnings or earnings per share. Further, these changes had no effect on the Companys consolidated
balance sheets, consolidated statements of comprehensive income or consolidated statements of changes in shareholders equity.



Changes in Internal Control Over Financial Reporting



There were no changes in the Companys internal control over financial reporting in the quarter ended June 30, 2005
that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. However, during the third quarter of 2005, in an effort to remediate the material weakness in the Companys
internal control over the preparation and review of its consolidated statements of earnings and consolidated statements of cash flows described above, management has implemented procedures and controls to aid in correctly classifying mortgage loan
origination fees on loans held for sale originated by State Bank and CHL, including (a) enhancing the method of preparation of the consolidated financial statements and (b) adding staff to the accounting and finance group. Accordingly, management
believes these changes will remediate the material weakness discussed above.



28



---

PART II



OTHER INFORMATION



Item 6.Exhibits



|               |  |                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | 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.



29



---

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: October 11, 2005 |  | By: |  | /s/ L. Don Stricklin                 
|                       |  |     |  | L. Don Stricklin                     
|                       |  |     |  | President and Chief Executive Officer
|                       |  |     |  | (principal executive officer)        
|                       |  |    
|Date: October 11, 2005 |  | By: |  | /s/ Jeffrey A. Wilkinson             
|                       |  |     |  | Jeffrey A. Wilkinson                 
|                       |  |     |  | Executive Vice President and         
|                       |  |     |  | Chief Financial Officer              
|                       |  |     |  | (principal financial officer/        
|                       |  |     |  | principal accounting officer)        





30