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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006



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

Commission file number 000-49928



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TEXAS UNITED BANCSHARES, INC.

(Exact
name of registrant as specified in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Texas                                                         |  | 75-2768656                         
|(State or other jurisdiction ofIncorporation or organization) |  | (I.R.S. EmployerIdentification No.)

109 N. Main Street

LA GRANGE, TEXAS 78945

(Address of principal executive offices including zip
code)

(979) 968-8451

(Registrants telephone number, including area code)



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

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

Large accelerated
filer: ̈Accelerated
filer:  x                Non-accelerated filer: ̈.

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

As of October 27, 2006, the number of outstanding shares of Common Stock, par value $1.00 per share, was 10,741,340.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                             |  |                                                                                       |  |   
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I Financial Information |  |                                                                                      
|Item 1.                      |  | Condensed Consolidated Financial Statements                                           |  | 3 
|                             |  | CONDENSED CONSOLIDATED BALANCE SHEETS                                                 |  | 3 
|                             |  | CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS                                         |  | 4 
|                             |  | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                       |  | 5 
|                             |  | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY                            |  | 6 
|                             |  | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                       |  | 7 
|                             |  | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                  |  | 8 
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 37
|Item 4.                      |  | Controls and Procedures                                                               |  | 37
|                             | 
|PART II Other Information    |  |                                                                                      
|Item 1.                      |  | Legal Proceedings                                                                     |  | 37
|Item 1A.                     |  | Risk Factors                                                                          |  | 37
|Item 2.                      |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 37
|Item 3.                      |  | Defaults Upon Senior Securities                                                       |  | 37
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                   |  | 37
|Item 5.                      |  | Other Information                                                                     |  | 37
|Item 6.                      |  | Exhibits                                                                              |  | 38
|Signatures                   |  | 39                                                                                   



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##### Table of Contents

PART I

FINANCIAL INFORMATION



|Item 1. | Condensed Consolidated Financial Statements.
|------- | --------------------------------------------

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)



|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                               |  | September 30,2006 |           |   | December 31,2005 |  
|                                                                                                                                                                                                                               |  | (Unaudited)       |           |   |                  |  
|ASSETS                                                                                                                                                                                                                         |  |                   |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                                                                        |  | $                 | 57,030    |   |                  | $ | 61,766    |  
|Federal funds sold                                                                                                                                                                                                             |  |                   | 45,710    |   |                  |   | 33,620    |  
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total cash and cash equivalents                                                                                                                                                                                                |  |                   | 102,740   |   |                  |   | 95,386    |  
|Securities available for sale, at fair value                                                                                                                                                                                   |  |                   | 252,118   |   |                  |   | 243,011   |  
|Securities held to maturity, at cost                                                                                                                                                                                           |  |                   | 25,580    |   |                  |   | 26,163    |  
|Loans held for investment                                                                                                                                                                                                      |  |                   | 1,236,198 |   |                  |   | 1,014,301 |  
|Mortgage and SBA loans held for sale                                                                                                                                                                                           |  |                   | 28,780    |   |                  |   | 17,537    |  
|Commercial and other loans held for sale, net                                                                                                                                                                                  |  |                   | 4,266     |   |                  |   |          |  
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total loans, gross                                                                                                                                                                                                             |  |                   | 1,269,244 |   |                  |   | 1,031,838 |  
|Less allowance for loan losses                                                                                                                                                                                                 |  |                   | (10,600   | ) |                  |   | (9,592    | )
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total loans, net of allowance for loan losses                                                                                                                                                                                  |  |                   | 1,258,644 |   |                  |   | 1,022,246 |  
|Premises and equipment, net                                                                                                                                                                                                    |  |                   | 63,299    |   |                  |   | 53,610    |  
|Accrued interest receivable                                                                                                                                                                                                    |  |                   | 10,228    |   |                  |   | 7,433     |  
|Goodwill                                                                                                                                                                                                                       |  |                   | 86,468    |   |                  |   | 63,396    |  
|Core deposit intangibles                                                                                                                                                                                                       |  |                   | 12,042    |   |                  |   | 8,847     |  
|Mortgage servicing rights                                                                                                                                                                                                      |  |                   | 5,647     |   |                  |   | 4,878     |  
|Other assets                                                                                                                                                                                                                   |  |                   | 38,156    |   |                  |   | 27,489    |  
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                                                   |  | $                 | 1,854,922 |   |                  | $ | 1,552,459 |  
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                           |  |                   |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                                                      |  |                   |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                                                                                            |  | $                 | 395,072   |   |                  | $ | 317,723   |  
|Interest-bearing                                                                                                                                                                                                               |  |                   | 955,118   |   |                  |   | 803,699   |  
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                                                                 |  |                   | 1,350,190 |   |                  |   | 1,121,422 |  
|Securities sold under repurchase agreements                                                                                                                                                                                    |  |                   | 12,175    |   |                  |   | 7,120     |  
|Federal funds purchased                                                                                                                                                                                                        |  |                   | 14,294    |   |                  |   | 21,901    |  
|Junior subordinated deferrable interest debentures                                                                                                                                                                             |  |                   | 49,996    |   |                  |   | 37,624    |  
|Borrowings                                                                                                                                                                                                                     |  |                   | 237,758   |   |                  |   | 205,755   |  
|Other liabilities                                                                                                                                                                                                              |  |                   | 15,815    |   |                  |   | 20,724    |  
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                                              |  |                   | 1,680,228 |   |                  |   | 1,414,546 |  
|Commitments and contingencies                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Preferred stock, no par value, 500,000 shares authorized; none issued                                                                                                                                                          |  |                   |          |   |                  |   |          |  
|Common stock, $1.00 par value, 20,000,000 authorized; 10,690,280 shares issued and 10,684,185 shares outstanding as of September 30, 2006
and 9,210,171 shares issued and 9,204,076 shares outstanding as of December 31, 2005 |  |                   | 10,690    |   |                  |   | 9,210     |  
|Additional paid-in-capital                                                                                                                                                                                                     |  |                   | 129,676   |   |                  |   | 102,682   |  
|Retained earnings                                                                                                                                                                                                              |  |                   | 38,986    |   |                  |   | 30,045    |  
|Accumulated other comprehensive loss                                                                                                                                                                                           |  |                   | (4,541    | ) |                  |   | (3,907    | )
|Less common stock held in treasury, at cost                                                                                                                                                                                    |  |                   | (117      | ) |                  |   | (117      | )
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                                                     |  |                   | 174,694   |   |                  |   | 137,913   |  
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                                     |  | $                 | 1,854,922 |   |                  | $ | 1,552,459 |  
|                                                                                                                                                                                                                               |  |                   |           |   |                  |   |           |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)



|                                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | --------------------------------------- | ------ | - | -------------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                    |  | For the Three MonthsEnded September 30, |        |   | For the Nine MonthsEnded September 30, |  
|                                                    |  | 2006                                    |        |   | 2005                                   |   |        | 2006 |  |   | 2005   |  
|Interest income:                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Loans                                               |  | $                                       | 28,145 |   |                                        | $ | 17,079 |      |  | $ | 76,693 |   |  | $ | 45,452 |  
|Investment securities, taxable                      |  |                                         | 2,658  |   |                                        |   | 2,483  |      |  |   | 7,627  |   |  |   | 7,994  |  
|Investment securities, tax-exempt                   |  |                                         | 447    |   |                                        |   | 296    |      |  |   | 1,262  |   |  |   | 529    |  
|Federal funds sold                                  |  |                                         | 369    |   |                                        |   | 17     |      |  |   | 937    |   |  |   | 58     |  
|                                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Total interest income                               |  |                                         | 31,619 |   |                                        |   | 19,875 |      |  |   | 86,519 |   |  |   | 54,033 |  
|Interest expense:                                   |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Deposits                                            |  |                                         | 7,328  |   |                                        |   | 3,499  |      |  |   | 19,474 |   |  |   | 9,927  |  
|Federal funds purchased                             |  |                                         | 343    |   |                                        |   | 378    |      |  |   | 676    |   |  |   | 851    |  
|Borrowings                                          |  |                                         | 3,068  |   |                                        |   | 1,824  |      |  |   | 7,901  |   |  |   | 3,765  |  
|Securities sold under repurchase agreements         |  |                                         | 378    |   |                                        |   | 29     |      |  |   | 476    |   |  |   | 75     |  
|Junior subordinated deferrable interest debentures  |  |                                         | 955    |   |                                        |   | 391    |      |  |   | 2,679  |   |  |   | 1,171  |  
|                                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Total interest expense                              |  |                                         | 12,072 |   |                                        |   | 6,121  |      |  |   | 31,206 |   |  |   | 15,789 |  
|                                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Net interest income                                 |  |                                         | 19,547 |   |                                        |   | 13,754 |      |  |   | 55,313 |   |  |   | 38,244 |  
|Provision for loan losses                           |  |                                         | 1,071  |   |                                        |   | 1,035  |      |  |   | 2,266  |   |  |   | 2,798  |  
|                                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Net interest income after provision for loan losses |  |                                         | 18,476 |   |                                        |   | 12,719 |      |  |   | 53,047 |   |  |   | 35,446 |  
|Noninterest income:                                 |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Service charges on deposit accounts                 |  |                                         | 3,090  |   |                                        |   | 2,398  |      |  |   | 8,708  |   |  |   | 6,696  |  
|Mortgage servicing revenue                          |  |                                         | 682    |   |                                        |   | 358    |      |  |   | 1,359  |   |  |   | 917    |  
|Net loss on sales of securities                     |  |                                         |       |   |                                        |   | (63    | )    |  |   | (132   | ) |  |   | (184   | )
|Net gain on sales of mortgage and SBA loans         |  |                                         | 629    |   |                                        |   | 2,521  |      |  |   | 4,213  |   |  |   | 7,496  |  
|Net loss on sales of commercial and other loans     |  |                                         | (428   | ) |                                        |   |       |      |  |   | (428   | ) |  |   |       |  
|Other noninterest income                            |  |                                         | 1,632  |   |                                        |   | 1,206  |      |  |   | 5,359  |   |  |   | 3,984  |  
|                                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest income                            |  |                                         | 5,605  |   |                                        |   | 6,420  |      |  |   | 19,079 |   |  |   | 18,909 |  
|Noninterest expense:                                |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Employee compensation and benefits                  |  |                                         | 10,566 |   |                                        |   | 9,492  |      |  |   | 31,601 |   |  |   | 24,733 |  
|Net occupancy expense                               |  |                                         | 2,892  |   |                                        |   | 1,986  |      |  |   | 8,126  |   |  |   | 5,786  |  
|Other noninterest expense                           |  |                                         | 5,685  |   |                                        |   | 3,724  |      |  |   | 15,795 |   |  |   | 11,754 |  
|                                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Total noninterest expense                           |  |                                         | 19,143 |   |                                        |   | 15,202 |      |  |   | 55,522 |   |  |   | 42,273 |  
|Earnings before income taxes                        |  |                                         | 4,938  |   |                                        |   | 3,937  |      |  |   | 16,604 |   |  |   | 12,082 |  
|Provision for income taxes                          |  |                                         | 1,472  |   |                                        |   | 1,247  |      |  |   | 5,180  |   |  |   | 3,978  |  
|                                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Net earnings                                        |  | $                                       | 3,466  |   |                                        | $ | 2,690  |      |  | $ | 11,424 |   |  | $ | 8,104  |  
|                                                    |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|                                                    |  |                                         |        |  
|Earnings per common share:                          |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Basic                                               |  | $                                       | 0.32   |   |                                        | $ | 0.34   |      |  | $ | 1.12   |   |  | $ | 1.04   |  
|Diluted                                             |  | $                                       | 0.32   |   |                                        | $ | 0.34   |      |  | $ | 1.10   |   |  | $ | 1.02   |  
|                                                    |  |                                         |        |  
|Weighted average shares outstanding:                |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Basic                                               |  |                                         | 10,666 |   |                                        |   | 7,815  |      |  |   | 10,230 |   |  |   | 7,806  |  
|Diluted                                             |  |                                         | 10,849 |   |                                        |   | 7,979  |      |  |   | 10,369 |   |  |   | 7,965  |  
|                                                    |  |                                         |        |  
|Dividends per common share                          |  | $                                       | 0.08   |   |                                        | $ | 0.08   |      |  | $ | 0.24   |   |  | $ | 0.24   |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)



|                                                                                     |  |                                         |       |      |                                        |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | --------------------------------------- | ----- | ---- | -------------------------------------- | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                     |  | For the Three MonthsEnded September 30, |       |      | For the Nine MonthsEnded September 30, |      
|                                                                                     |  | 2006                                    |       | 2005 |                                        |       | 2006 |  |   | 2005   |  
|                                                                                     |  |                                         |       |     
|Net earnings                                                                         |  | $                                       | 3,466 |      | $                                      | 2,690 |      |  | $ | 11,424 |   |  | $ | 8,104  |  
|Other comprehensive income (loss), net of tax:                                       |  |                                         |       |      |                                        |       |      |  |   |        |   |  |   |        |  
|Unrealized holding gains (losses) on investment securities arising during the period |  |                                         | 1,616 |      |                                        | (711  | )    |  |   | (548   | ) |  |   | (2,218 | )
|Less: reclassification adjustment for losses included in net earnings                |  |                                         |      |      |                                        | (42   | )    |  |   | (86    | ) |  |   | (121   | )
|                                                                                     |  |                                         |       |      |                                        |       |      |  |   |        |   |  |   |        |  
|Other comprehensive income (loss)                                                    |  |                                         | 1,616 |      |                                        | (753  | )    |  |   | (634   | ) |  |   | (2,339 | )
|                                                                                     |  |                                         |       |      |                                        |       |      |  |   |        |   |  |   |        |  
|Total comprehensive income                                                           |  | $                                       | 5,082 |      | $                                      | 1,937 |      |  | $ | 10,790 |   |  | $ | 5,765  |  
|                                                                                     |  |                                         |       |      |                                        |       |      |  |   |        |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders
Equity

Year Ended December 31, 2005 and

Nine Months Ended September 30, 2006

(In thousands, except share and per share amounts)



|                                                                      |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   |         |  
|--------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ------ | ------------------------ | - | ---------------- | --------------------------------- | - | --------------------------------- | -------------------- |  | -------------------- | ------ | - | ----- | - | ---- | - |  | - | ------- | -
|                                                                      |  |              |  | AdditionalPaid-inCapital |        | RetainedEarnings         |   |                  | AccumulatedOtherComprehensiveLoss |   |                                   | TreasuryStock AtCost |  |                      | Total  |  
|                                                                      |  | Common Stock |  |                          |        |                          |  
|                                                                      |  | Shares       |  | At Par                   |        |                          |   |                  |                                  
|                                                                      |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   |         |  
|Balance at January 1, 2005                                            |  | 7,802,467    |  | $                        | 7,802  |                          | $ | 75,935           |                                   | $ | 21,921                            |                      |  | $                    | (729   | ) |       | $ | (117 | ) |  | $ | 104,812 |  
|Net earnings                                                          |  |             |  |                          |       |                          |   |                 |                                   |   | 10,736                            |                      |  |                      |       |   |       |   |     |   |  |   | 10,736  |  
|Net change in unrealized loss on available-for-sale securities        |  |             |  |                          |       |                          |   |                 |                                   |   |                                  |                      |  |                      | (3,178 | ) |       |   |     |   |  |   | (3,178  | )
|                                                                      |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   |         |  
|Total comprehensive income                                            |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   | 7,558   |  
|Issuance of common stock in connection with the Gateway acquisition   |  | 1,357,379    |  |                          | 1,357  |                          |   | 24,297           |                                   |   |                                  |                      |  |                      |       |   |       |   |     |   |  |   | 25,654  |  
|Stock options issued upon conversion of Gateway stock options         |  |             |  |                          |       |                          |   | 2,209            |                                   |   |                                  |                      |  |                      |       |   |       |   |     |   |  |   | 2,209   |  
|Issuance of common stock upon exercise of stock options               |  | 50,325       |  |                          | 51     |                          |   | 241              |                                   |   |                                  |                      |  |                      |       |   |       |   |     |   |  |   | 292     |  
|Dividends ($0.32 per share)                                           |  |             |  |                          |       |                          |   |                 |                                   |   | (2,612                            | )                    |  |                      |       |   |       |   |     |   |  |   | (2,612  | )
|                                                                      |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   |         |  
|Balance at December 31, 2005                                          |  | 9,210,171    |  | $                        | 9,210  |                          | $ | 102,682          |                                   | $ | 30,045                            |                      |  | $                    | (3,907 | ) |       | $ | (117 | ) |  | $ | 137,913 |  
|                                                                      |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   |         |  
|                                                                      |  |              |  |                          |        |                          |  
|                                                                      |  |              |  | (Unaudited)              |        | AdditionalPaid-inCapital |   | RetainedEarnings |                                   |   | AccumulatedOtherComprehensiveLoss |                      |  | TreasuryStock AtCost |        |   | Total |  
|                                                                      |  | Common Stock |  |                          |        |                          |  
|                                                                      |  | Shares       |  | At Par                   |        |                          |   |                  |                                  
|                                                                      |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   |         |  
|Balance at January 1, 2006                                            |  | 9,210,171    |  | $                        | 9,210  |                          | $ | 102,682          |                                   | $ | 30,045                            |                      |  | $                    | (3,907 | ) |       | $ | (117 | ) |  | $ | 137,913 |  
|Net earnings                                                          |  |             |  |                          |       |                          |   |                 |                                   |   | 11,424                            |                      |  |                      |       |   |       |   |     |   |  |   | 11,424  |  
|Net change in unrealized loss on available-for-sale securities        |  |             |  |                          |       |                          |   |                 |                                   |   |                                  |                      |  |                      | (634   | ) |       |   |     |   |  |   | (634    | )
|                                                                      |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   |         |  
|Total comprehensive income                                            |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   | 10,790  |  
|Issuance of common stock in connection with the Express acquisition   |  | 248,317      |  |                          | 248    |                          |   | 4,328            |                                   |   |                                  |                      |  |                      |       |   |       |   |     |   |  |   | 4,576   |  
|Issuance of common stock in connection with the Northwest acquisition |  | 984,906      |  |                          | 985    |                          |   | 19,856           |                                   |   |                                  |                      |  |                      |       |   |       |   |     |   |  |   | 20,841  |  
|Issuance of common stock upon exercise of stock options               |  | 233,512      |  |                          | 234    |                          |   | 2,452            |                                   |   |                                  |                      |  |                      |       |   |       |   |     |   |  |   | 2,686   |  
|Compensation expense related to stock grants                          |  | 13,374       |  |                          | 13     |                          |   | 240              |                                   |   |                                  |                      |  |                      |       |   |       |   |     |   |  |   | 253     |  
|Stock option compensation expense                                     |  |             |  |                          |       |                          |   | 118              |                                   |   |                                  |                      |  |                      |       |   |       |   |     |   |  |   | 118     |  
|Dividends ($0.24 per share)                                           |  |             |  |                          |       |                          |   |                 |                                   |   | (2,483                            | )                    |  |                      |       |   |       |   |     |   |  |   | (2,483  | )
|                                                                      |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   |         |  
|Balance at September 30, 2006                                         |  | 10,690,280   |  | $                        | 10,690 |                          | $ | 129,676          |                                   | $ | 38,986                            |                      |  | $                    | (4,541 | ) |       | $ | (117 | ) |  | $ | 174,694 |  
|                                                                      |  |              |  |                          |        |                          |   |                  |                                   |   |                                   |                      |  |                      |        |   |       |   |      |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                                   |  |                                        |            |   |      |   |          |  
|-------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ---------- | - | ---- | - | -------- | -
|                                                                                                   |  | For the Nine MonthsEnded September 30, |           
|                                                                                                   |  | 2006                                   |            |   | 2005 |  
|Cash flows from operating activities:                                                              |  |                                        |            |   |      |   |          |  
|Net earnings                                                                                       |  | $                                      | 11,424     |   |      | $ | 8,104    |  
|Adjustments to reconcile net earnings to cash provided by (used in) operating activities:          |  |                                        |            |   |      |   |          |  
|Provision for loan losses                                                                          |  |                                        | 2,266      |   |      |   | 2,798    |  
|Depreciation and amortization                                                                      |  |                                        | 4,998      |   |      |   | 3,672    |  
|(Gain) Loss on sale of premises, equipment, and other real estate                                  |  |                                        | (455       | ) |      |   | 92       |  
|Gain on sale of loans                                                                              |  |                                        | (3,785     | ) |      |   | (7,496   | )
|Share-based compensation                                                                           |  |                                        | 371        |   |      |   |         |  
|Realized loss on sales of available-for-sale securities, net                                       |  |                                        | 132        |   |      |   | 184      |  
|Amortization of premium, net of accretion of discounts on securities                               |  |                                        | 280        |   |      |   | 1,008    |  
|Origination of loans held for sale                                                                 |  |                                        | (276,420   | ) |      |   | (106,870 | )
|Sale of loans receivable held for sale                                                             |  |                                        | 264,696    |   |      |   | 123,548  |  
|Changes in assets and liabilities, net of effects resulting from acquisitions:                     |  |                                        |            |   |      |   |          |  
|Other assets                                                                                       |  |                                        | (2,935     | ) |      |   | (4,696   | )
|Other liabilities                                                                                  |  |                                        | (6,779     | ) |      |   | 3,310    |  
|                                                                                                   |  |                                        |            |   |      |   |          |  
|Net cash (used in) provided by operating activities                                                |  |                                        | (6,207     | ) |      |   | 23,654   |  
|Cash flows from investing activities:                                                              |  |                                        |            |   |      |   |          |  
|Purchases of available-for-sale securities, net of effects resulting from acquisitions             |  |                                        | (3,082,291 | ) |      |   | (25,075  | )
|Purchase of held-to-maturity securities                                                            |  |                                        |           |   |      |   | (24,568  | )
|Proceeds from sales, maturities, and principal paydowns of securities held-to-maturity             |  |                                        | 1,628      |   |      |   |         |  
|Proceeds from sales, maturities, and principal paydowns of securities available-for-sale           |  |                                        | 3,076,122  |   |      |   | 98,307   |  
|Net change in loans, net of effects resulting from acquisitions                                    |  |                                        | (99,669    | ) |      |   | (169,874 | )
|Proceeds from sales of premises, equipment, loans, and other real estate                           |  |                                        | 4,193      |   |      |   | 5,061    |  
|Net cash and cash equivalents received from Express acquisition                                    |  |                                        | 12,189     |   |      |   |         |  
|Net cash and cash equivalents received from Northwest acquisition                                  |  |                                        | 4,720      |   |      |   |         |  
|Purchases of premises, equipment and other real estate, net of effects resulting from acquisitions |  |                                        | (2,866     | ) |      |   | (6,676   | )
|Purchases of bank owned life insurance                                                             |  |                                        | (12,500    | ) |      |   |         |  
|                                                                                                   |  |                                        |            |   |      |   |          |  
|Net cash used in investing activities                                                              |  |                                        | (98,474    | ) |      |   | (122,825 | )
|Cash flows from financing activities:                                                              |  |                                        |            |   |      |   |          |  
|Net change in:                                                                                     |  |                                        |            |   |      |   |          |  
|Deposits                                                                                           |  |                                        | 70,009     |   |      |   | 653      |  
|Other borrowings                                                                                   |  |                                        | 32,003     |   |      |   | 121,942  |  
|Federal funds purchased                                                                            |  |                                        | (7,607     | ) |      |   | (15,125  | )
|Securities sold under repurchase agreements                                                        |  |                                        | 5,055      |   |      |   | 407      |  
|Net proceeds from issuance of junior subordinated deferrable interest debentures                   |  |                                        | 12,372     |   |      |   |         |  
|Net proceeds from issuance of common stock upon exercise of employee stock options                 |  |                                        | 1,273      |   |      |   | 285      |  
|Excess tax deductions on the exercise of employee stock options                                    |  |                                        | 1,413      |   |      |   |         |  
|Dividends paid                                                                                     |  |                                        | (2,483     | ) |      |   | (1,876   | )
|                                                                                                   |  |                                        |            |   |      |   |          |  
|Net cash provided by financing activities                                                          |  |                                        | 112,035    |   |      |   | 106,286  |  
|                                                                                                   |  |                                        |            |   |      |   |          |  
|Net increase in cash and cash equivalents                                                          |  |                                        | 7,354      |   |      |   | 7,115    |  
|Cash and cash equivalents at beginning of period                                                   |  |                                        | 95,386     |   |      |   | 40,767   |  
|                                                                                                   |  |                                        |            |   |      |   |          |  
|Cash and cash equivalents at end of period                                                         |  | $                                      | 102,740    |   |      | $ | 47,882   |  
|                                                                                                   |  |                                        |            |   |      |   |          |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(UNAUDITED)

1. BASIS OF PRESENTATION

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

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

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

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

2. STOCK BASED COMPENSATION

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

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

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



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



The Companys pre-tax compensation cost for share-based employee compensation for stock options
was $41,000 ($27,000 after tax effects) for the three months ended September 30, 2006, and $118,000 ($77,000 after tax effects) for the nine months ended September 30, 2006. As a result of the adoption of SFAS 123(R), the Companys
financial results were lower than under its previous accounting method for share-based compensation by the following amounts:



|                                  |  |                                             |    |                                            |   |     
|--------------------------------- |  | ------------------------------------------- | -- | ------------------------------------------ | - | ----
|                                  |  | For the ThreeMonths EndedSeptember 30, 2006 |    | For the NineMonths EndedSeptember 30, 2006
|                                  |  | (In thousands, except per share data)      
|Earnings before income taxes      |  | $                                           | 41 |                                            |   | 118 
|Net earnings                      |  |                                             | 27 |                                            |   | 77  
|Basic earnings per common share   |  | $                                           |   |                                            | $ | 0.01
|Diluted earnings per common share |  |                                             |   |                                            |   | 0.01

Prior to the adoption of SFAS 123(R), to the extent that they would have existed, the Company
would have presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Condensed Consolidated Statements of Cash Flows. SFAS 123(R) requires that cash flows from the exercise of stock options resulting from
tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) be classified as financing cash flows. For the three and nine months ended September 30, 2006, there was a tax benefit of approximately $806,000 and $1.4
million, respectively, as a result of the exercise of stock options.

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



|                                                                                                                                                              |  |                                             |       |                                            |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ----- | ------------------------------------------ | - | -----
|                                                                                                                                                              |  | For the ThreeMonths EndedSeptember 30, 2005 |       | For the NineMonths EndedSeptember 30, 2005
|                                                                                                                                                              |  | (In thousands, except per share data)      
|Net earnings as reported                                                                                                                                      |  | $                                           | 2,690 |                                            | $ | 8,104
|Plus: Stock-based employee compensation expense included in reported net income, net of related tax effects                                                   |  |                                             |      |                                            |   |     
|Less: Stock-based employee compensation expense determined under fair value-based method for awards granted, modified, or settled, net of
related tax effects |  |                                             | 18    |                                            |   | 56   
|                                                                                                                                                              |  |                                             |       |                                            |   |      
|Pro forma net earnings                                                                                                                                        |  | $                                           | 2,672 |                                            | $ | 8,048
|                                                                                                                                                              |  |                                             |       |                                            |   |      
|                                                                                                                                                              |  |                                            
|Earnings per common share:                                                                                                                                    |  |                                             |       |                                            |   |      
|Basic - as reported                                                                                                                                           |  | $                                           | 0.34  |                                            | $ | 1.04 
|Basic - pro forma                                                                                                                                             |  |                                             | 0.34  |                                            |   | 1.04 
|                                                                                                                                                              |  |                                            
|Diluted - as reported                                                                                                                                         |  | $                                           | 0.34  |                                            | $ | 1.02 
|Diluted - pro forma                                                                                                                                           |  |                                             | 0.33  |                                            |   | 1.02 



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



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



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

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

Share-Based Payment Plans and Agreements

As
of July 1, 2006, the Company had nonqualified common stock option agreements (executive agreements) with two executive officers (one of whom is also a director). The options were granted under the executive agreements in 1996 and
1997 and each option has a ten year term and both vested and became exercisable at 20% each year for five years. The exercise price of the options granted under the executive agreements was the market value at the date of grant. During the three and
nine months ended September 30, 2006, under these two agreements, no stock options were granted, 33,750 stock options were exercised, and no stock options were forfeited or expired. At September 30, 2006, there were 16,875 stock options
outstanding under the 1997 executive agreement.

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



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



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

The Company has granted nonvested shares (restricted stock) to certain directors and employees under the 2004 Plan. The person is not
entitled to the shares until they vest, which is over a 3 to 5 year period but the person is entitled to receive dividends on and vote the shares prior to vesting. The shares granted do not have a cost to the person and the only requirement of
vesting is continued service to the Company. Compensation cost related to restricted stock is calculated based on the fair value of the shares at the date of grant. If the person leaves the Company before the shares vest, the unvested shares are
forfeited As of September 30, 2006, there were 57,105 shares of restricted stock outstanding, all of which were granted during the first quarter of 2006, with a weighted average grant date fair value of $18.95.

On December 1, 2005, the Company acquired Gateway Holding Company. The options to purchase shares of Gateway Holding Company common stock
outstanding at the effective time of the transaction were converted into fully vested stock options to purchase a total of 160,867 shares of the Companys common stock at exercise prices ranging from $4.64 to $6.73 per share. The converted
options are governed by the original Gateway Plan under which they were issued. For the three months ended September 30, 2006, 21,098 stock options were exercised under the Gateway Plan. For the nine months ended September 30, 2006,
128,689 stock options were exercised under the Gateway Plan. As of September 30, 2006, 32,178 stock options were outstanding under the Gateway Plan.

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



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

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



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



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



|                                       |  |                                               |   |  |                                       |       |                                                    |      |                                        |   |        |  
|-------------------------------------- |  | --------------------------------------------- | - |  | ------------------------------------- | ----- | -------------------------------------------------- | ---- | -------------------------------------- | - | ------ | -
|                                       |  | For the Three Months Ended September 30, 2006 |  
|                                       |  | Number ofShares                               |   |  | WeightedAverageExercisePricePer Share |       | WeightedAverageRemainingContractualLife (In years) |      | AggregateIntrinsicValue(In thousands)  |  
|                                       |  |                                               |   | 
|Options outstanding at July 1, 2006    |  | 280,360                                       |   |  | $                                     | 11.16 |                                                    | 4.49 |                                        | $ | 6,120  |  
|Granted                                |  |                                              |   |  |                                       |      |                                                    |     |                                        |   |       |  
|Exercised                              |  | (38,356                                       | ) |  |                                       | 6.20  |                                                    | 3.47 |                                        |   | (1,028 | )
|Forfeited                              |  |                                              |   |  |                                       |      |                                                    |     |                                        |   |       |  
|                                       |  |                                               |   |  |                                       |       |                                                    |      |                                        |   |        |  
|Outstanding at September 30, 2006      |  | 242,004                                       |   |  | $                                     | 11.94 |                                                    | 5.26 |                                        | $ | 5,094  |  
|                                       |  |                                               |   |  |                                       |       |                                                    |      |                                        |   |        |  
|                                       |  |                                               |   | 
|Exercisable at September 30, 2006      |  | 144,280                                       |   |  | $                                     | 7.58  |                                                    | 4.89 |                                        | $ | 3,666  |  
|                                       | 
|                                       |  | For the Nine Months Ended September 30, 2006  |  
|                                       |  | Number ofShares                               |   |  | WeightedAverageExercisePrice PerShare |       | WeightedAverageRemainingContractualLife (In years) |      | AggregateIntrinsic Value(In thousands) |  
|                                       |  |                                               |   | 
|Options outstanding at January 1, 2006 |  | 453,540                                       |   |  | $                                     | 8.23  |                                                    | 4.62 |                                        | $ | 11,230 |  
|Granted                                |  | 25,500                                        |   |  |                                       | 18.95 |                                                    | 9.38 |                                        |   | 358    |  
|Exercised                              |  | (233,513                                      | ) |  |                                       | 5.43  |                                                    | 3.26 |                                        |   | (6,436 | )
|Forfeited                              |  | (3,523                                        | ) |  |                                       | 16.07 |                                                    | 6.61 |                                        |   | (60    | )
|                                       |  |                                               |   |  |                                       |       |                                                    |      |                                        |   |        |  
|Outstanding at September 30, 2006      |  | 242,004                                       |   |  | $                                     | 11.94 |                                                    | 5.26 |                                        | $ | 5,094  |  
|                                       |  |                                               |   |  |                                       |       |                                                    |      |                                        |   |        |  
|                                       |  |                                               |   | 
|Exercisable at September 30, 2006      |  | 144,280                                       |   |  | $                                     | 7.58  |                                                    | 4.89 |                                        | $ | 3,666  |  

There were no stock options granted during the three months ended September 30, 2006. The
weighted average grant date fair value of stock options granted during the nine months ended September 30, 2006 was $4.81. The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2006 was
$1.0 million and $6.4 million, respectively.



12



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



Other Information

As of September 30, 2006, the Company had $829,000 of total unrecognized compensation cost related to nonvested awards granted under the Companys share-based plans described above, which is expected to be
recognized over a weighted average remaining period of approximately 2.3 years.

The Company received cash from stock options exercised for
the three and nine months ended September 30, 2006 of approximately $238,000 and $1.3 million, respectively. The impact of the cash receipts for the nine months ended September 30, 2006 is included in financing activities in the
accompanying condensed consolidated statements of cash flows. The tax benefit realized upon the exercise of employee stock options was $806,000 for the three months ended September 30, 2006 and $1.4 million for the nine months ended
September 30, 2006.

Stock Appreciation Rights Agreements

The terms of stock appreciation rights agreements (SAR Agreements) grant certain key employees, directors, and advisors of the Company rights to the appreciation in the fair value (as defined in the SAR
Agreements) of a stated number of shares of common stock of the Company. The rights become fully vested and are exercisable under the terms of the respective SAR Agreements. Although the appreciation of the rights is payable in whole shares of the
Companys Common Stock valued at fair market value on the date of the exercise or in cash at the sole discretion of the Company, it is the intention of the Companys Board of Directors that all stock appreciation rights will be paid in
cash. The SAR Agreements terminate on the earliest of: a) ten years from the date of grant, b) the date the employee terminates employment with the Company, if the Company requests the employees resignation, c) ninety days after the employee
terminates employment with the Company, when termination is the employees decision, or d) the date one year after the employees death or disability. The number of stock appreciation rights outstanding under the SAR Agreements as of
September 30, 2006 was 133,712. Operations are charged or credited for the aggregate appreciation or depreciation of the rights. For the three and nine months ended September 30, 2006, the Company expensed approximately $398,000 and
$953,000, respectively, related to the outstanding stock appreciation rights. The weighted average fair value of stock appreciation rights granted during the three and nine months ended September 30, 2006 was $33.33 per share and $19.37 per
share, respectively.



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



3. EARNINGS PER COMMON SHARE

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



|                                                                                          |  |                                         |        |                                        |   |       |  |      |        |  |   |      
|----------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | -------------------------------------- | - | ----- |  | ---- | ------ |  | - | -----
|                                                                                          |  | For the Three MonthsEnded September 30, |        | For the Nine MonthsEnded September 30,
|                                                                                          |  | 2006                                    |        | 2005                                   |   | 2006  |  | 2005
|                                                                                          |  | (In thousands, except per share data)  
|                                                                                          |  |                                         |        |                                       
|Net earnings available to common shareholders used in basic and diluted EPS               |  | $                                       | 3,466  |                                        | $ | 2,690 |  | $    | 11,424 |  | $ | 8,104
|                                                                                          |  |                                         |        |                                        |   |       |  |      |        |  |   |      
|Weighted average common shares used in basic EPS                                          |  |                                         | 10,666 |                                        |   | 7,815 |  |      | 10,230 |  |   | 7,806
|Effect of dilutive securities:                                                            |  |                                         |        |                                        |   |       |  |      |        |  |   |      
|Stock options                                                                             |  |                                         | 183    |                                        |   | 164   |  |      | 139    |  |   | 159  
|                                                                                          |  |                                         |        |                                        |   |       |  |      |        |  |   |      
|Weighted average common shares and potentially dilutive common shares used in diluted EPS |  |                                         | 10,849 |                                        |   | 7,979 |  |      | 10,369 |  |   | 7,965
|                                                                                          |  |                                         |        |                                        |   |       |  |      |        |  |   |      
|                                                                                          |  |                                         |        |                                       
|Basic EPS                                                                                 |  | $                                       | 0.32   |                                        | $ | 0.34  |  | $    | 1.12   |  | $ | 1.04 
|Diluted EPS                                                                               |  | $                                       | 0.32   |                                        | $ | 0.34  |  | $    | 1.10   |  | $ | 1.02 

4. INTANGIBLE ASSETS

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



|                             |  |                     |        |                                       |   |      
|---------------------------- |  | ------------------- | ------ | ------------------------------------- | - | -----
|                             |  | GrossCarryingAmount |        | AccumulatedAmortizationand Impairment
|                             |  | (In thousands)     
|Amortized intangible assets: |  |                     |        |                                       |   |      
|Mortgage servicing rights    |  | $                   | 9,650  |                                       | $ | 4,003
|Core deposit intangibles     |  | $                   | 14,383 |                                       | $ | 2,341

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 September 30, 2006. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and
market conditions.



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



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



|                                                |  |                         |     |                        |   |       |  |   |      
|----------------------------------------------- |  | ----------------------- | --- | ---------------------- | - | ----- |  | - | -----
|                                                |  | MortgageServicingRights |     | CoreDepositIntangibles |   | Total
|                                                |  |                         |    
|Nine months ended September 30, 2006 (actual)   |  | $                       | 591 |                        | $ | 1,104 |  | $ | 1,695
|Three months ended December 31, 2006 (estimate) |  |                         | 232 |                        |   | 400   |  |   | 632  
|                                                |  |                         |    
|Estimate for the years ended December 31,       |  |                         |     |                        |   |       |  |   |      
|2007                                            |  | $                       | 868 |                        | $ | 1,601 |  | $ | 2,469
|2008                                            |  |                         | 691 |                        |   | 1,539 |  |   | 2,230
|2009                                            |  |                         | 524 |                        |   | 1,513 |  |   | 2,037
|2010                                            |  |                         | 436 |                        |   | 1,513 |  |   | 1,949
|2011                                            |  |                         | 390 |                        |   | 1,513 |  |   | 1,903

5. NEW ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and 132R (SFAS 158). SFAS 158 requires companies to (1) fully recognize, as an asset or liability, the overfunded or
underfunded status of defined pension and other postretirement benefit plans; (2) recognize changes in the funded status through other comprehensive income in the year in which the changes occur; (3) measure the funded status of defined
pension and other postretirement benefit plans as of the date of the Companys fiscal year-end; and (4) provide enhanced disclosures. The provisions of SFAS 158 are effective beginning with the fiscal year-ended December 31, 2006,
except for the requirement to measure the funded status of retirement benefit plans as of the Companys fiscal year-end, which is effective for the year-ended December 31, 2008. The Company is in the process of evaluating the impact that
SFAS 158 will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157
is effective January 1, 2008. The Company is in the process of evaluating the impact that SFAS 157 will have on its consolidated financial statements.

In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) Topic 1N (SAB 108), Financial Statements - Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements, which is effective for calendar year companies as of December 31, 2006. SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in
current year financial statements for purposes of determining whether the financial statements are materially misstated. Under this guidance, companies should take into account both the effect of a misstatement on the current year balance sheet as
well as the impact upon the current year income statement in assessing the materiality of a current year misstatement. Once a current year misstatement has been quantified, the guidance in SAB Topic 1M, Financial Statements -
Materiality, (SAB 99) should be applied to determine whether the misstatement is material. The implementation of SAB 108 is not expected to have a material impact on the Companys consolidated financial statements.



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure.
FIN 48 is effective January 1, 2007. The Company is in the process of evaluating the impact that FIN 48 will have on its consolidated financial statements.

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

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

6. OFF BALANCE SHEET CREDIT COMMITMENTS

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

The Company enters into contractual commitments to extend credit, normally with fixed expiration dates
or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and
conditions. Substantially all of the Companys commitments to extend credit are contingent upon customers maintaining 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 $272.0 million at September 30, 2006 and $222.6 million at December 31, 2005.

Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The
Companys policies generally require that standby letters of credit arrangements contain collateral and debt covenants similar to those contained in loan agreements. In the event the customer does not perform in



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future
payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. Standby letters of credit totaled $6.7 million
at September 30, 2006 and $4.6 million at December 31, 2005. As of September 30, 2006 and December 31, 2005, no liability for the fair value of the Companys potential obligations under these guarantees was recorded since
the amount was deemed immaterial.

7. SEGMENT INFORMATION

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

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



|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|---------------------------- |  | -------------------------------------------- | --------- | --------------- | - | -------------------------------------------- |  | - | --------- | ----------------- |  | --------------- | - | ------------ |  | - | ------- |  | - | ---------
|                             |  | For the Three Months EndedSeptember 30, 2006 |           |                 |   | For the Three Months EndedSeptember 30, 2005
|                             |  | CommercialBanking                            |           | MortgageBanking |   | Consolidated                                 |  |   |           | CommercialBanking |  | MortgageBanking |   | Consolidated
|                             |  | (In thousands)                              
|Net interest income          |  | $                                            | 15,874    |                 | $ | 3,673                                        |  | $ | 19,547    |                   |  |                 | $ | 10,815       |  | $ | 2,939   |  | $ | 13,754   
|Noninterest income           |  |                                              | 4,437     |                 |   | 1,168                                        |  |   | 5,605     |                   |  |                 |   | 2,476        |  |   | 3,944   |  |   | 6,420    
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Total income                 |  |                                              | 20,311    |                 |   | 4,841                                        |  |   | 25,152    |                   |  |                 |   | 13,291       |  |   | 6,883   |  |   | 20,174   
|Provision for loan losses    |  |                                              | 1,071     |                 |   |                                             |  |   | 1,071     |                   |  |                 |   | 1,035        |  |   |        |  |   | 1,035    
|Noninterest expense          |  |                                              | 16,735    |                 |   | 2,408                                        |  |   | 19,143    |                   |  |                 |   | 10,099       |  |   | 5,103   |  |   | 15,202   
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Earnings before income taxes |  |                                              | 2,505     |                 |   | 2,433                                        |  |   | 4,938     |                   |  |                 |   | 2,157        |  |   | 1,780   |  |   | 3,937    
|Provision for income taxes   |  |                                              | 778       |                 |   | 694                                          |  |   | 1,472     |                   |  |                 |   | 642          |  |   | 605     |  |   | 1,247    
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Net earnings                 |  | $                                            | 1,727     |                 | $ | 1,739                                        |  | $ | 3,466     |                   |  |                 | $ | 1,515        |  | $ | 1,175   |  | $ | 2,690    
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Total assets                 |  | $                                            | 1,677,803 |                 | $ | 177,119                                      |  | $ | 1,854,922 |                   |  |                 | $ | 1,111,841    |  | $ | 143,681 |  | $ | 1,255,522
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|                             |  |                                              |          
|                             |  | For the Nine Months EndedSeptember 30, 2006  |           |                 |   | For the Nine Months EndedSeptember 30, 2005 
|                             |  | CommercialBanking                            |           | MortgageBanking |   | Consolidated                                 |  |   |           | CommercialBanking |  | MortgageBanking |   | Consolidated
|                             |  | (In thousands)                              
|Net interest income          |  | $                                            | 44,787    |                 | $ | 10,526                                       |  | $ | 55,313    |                   |  |                 | $ | 30,874       |  | $ | 7,370   |  | $ | 38,244   
|Noninterest income           |  |                                              | 14,367    |                 |   | 4,712                                        |  |   | 19,079    |                   |  |                 |   | 9,259        |  |   | 9,650   |  |   | 18,909   
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Total income                 |  |                                              | 59,154    |                 |   | 15,238                                       |  |   | 74,392    |                   |  |                 |   | 40,133       |  |   | 17,020  |  |   | 57,153   
|Provision for loan losses    |  |                                              | 2,266     |                 |   |                                             |  |   | 2,266     |                   |  |                 |   | 2,798        |  |   |        |  |   | 2,798    
|Noninterest expense          |  |                                              | 47,833    |                 |   | 7,689                                        |  |   | 55,522    |                   |  |                 |   | 30,188       |  |   | 12,085  |  |   | 42,273   
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Earnings before income taxes |  |                                              | 9,055     |                 |   | 7,549                                        |  |   | 16,604    |                   |  |                 |   | 7,147        |  |   | 4,935   |  |   | 12,082   
|Provision for income taxes   |  |                                              | 2,825     |                 |   | 2,355                                        |  |   | 5,180     |                   |  |                 |   | 2,300        |  |   | 1,678   |  |   | 3,978    
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Net earnings                 |  | $                                            | 6,230     |                 | $ | 5,194                                        |  | $ | 11,424    |                   |  |                 | $ | 4,847        |  | $ | 3,257   |  | $ | 8,104    
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          
|Total assets                 |  | $                                            | 1,677,803 |                 | $ | 177,119                                      |  | $ | 1,854,922 |                   |  |                 | $ | 1,111,841    |  | $ | 143,681 |  | $ | 1,255,522
|                             |  |                                              |           |                 |   |                                              |  |   |           |                   |  |                 |   |              |  |   |         |  |   |          



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

SEPTEMBER 30, 2006

(UNAUDITED)



8. PENDING MERGER

On July 18, 2006, the Company and Prosperity Bancshares, Inc., a Texas corporation (Prosperity), entered into an Agreement and Plan of Reorganization (the Agreement) pursuant to which the
Company will merge with and into Prosperity (the Merger). Under the terms of the Agreement, shareholders of the Company will receive one share of Prosperity common stock in exchange for each of their shares of the Companys common
stock, subject to adjustment based upon the average closing sales price of Prosperitys common stock for the 20 trading days ending on and including the tenth trading day prior to the closing date of the merger. Additionally, all options to
acquire shares of Company common stock outstanding immediately prior to the completion of the merger will become vested and will be converted into, at the election of the holder, either an option to purchase shares of Prosperity common stock or a
cash payment. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the shareholders of the Company and Prosperity. The merger is currently expected to be completed in the first
quarter of 2007, although delays could occur.

9. RECENT DEVELOPMENTS

During the third quarter of 2006, the Company repositioned approximately $5.4 million in loans as held-for-sale pending a future sale of these loans into the secondary wholesale market. In
connection with this repositioning, the Company recognized a lower of cost or estimated fair value adjustment on these loans of approximately $1.1 million, which was originally reported in the Companys third quarter 2006 earnings release
(dated October 20, 2006) as a reduction to noninterest income, categorized as net loss on sales of commercial and other loans. After further examination of these loans on an individual basis, it was determined by management that
approximately $711,000 of the $1.1 million adjustment should have been recognized as charge-offs through the allowance for loan losses, with an addition to the provision for loan losses in the same amount. This reporting reclassification is
reflected in the Companys condensed consolidated financial statements contained in this quarterly report on Form 10-Q and did not cause any change in the Companys previously announced net earnings or earnings per share for the three and
nine months ended September 30, 2006.



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##### Table of Contents

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

Special Cautionary Notice Regarding Forward-looking Statements

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



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



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



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



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



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



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



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



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



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



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



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



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

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

Pending Merger. On July 18, 2006, the Company and Prosperity
Bancshares, Inc., a Texas corporation (Prosperity), entered into an Agreement and Plan of Reorganization (the Agreement) pursuant to which the Company will merge with and into Prosperity (the Merger). Under the
terms of the Agreement, shareholders of the Company will receive one share of Prosperity common stock in exchange for each of their shares of the Companys common stock, subject to adjustment based upon the average closing sales price of
Prosperitys common stock for the 20 trading days ending on and including the tenth trading day prior to the closing date of the merger. Additionally, all options to acquire shares of Company common stock outstanding immediately prior to the
completion of the merger will become vested and will be converted into, at the election of the holder, either an option to purchase shares of Prosperity common stock or a cash payment. The transaction is subject to customary closing conditions,
including the receipt of regulatory approvals and approval of the shareholders of the Company and Prosperity. The merger is currently expected to be completed in the first quarter of 2007, although delays could occur.

Recent Developments.During the third quarter of 2006, the Company repositioned approximately $5.4 million in loans as held-for-sale
pending a future sale of these loans into the secondary wholesale market. In connection with this repositioning, the Company recognized a lower of cost or estimated fair value adjustment on these loans of approximately $1.1 million, which was
originally reported in the Companys third quarter 2006 earnings release (dated October 20, 2006) as a reduction to noninterest income, categorized as net loss on sales of commercial and other loans. After further examination
of these loans on an individual basis, it was determined by management that approximately $711,000 of the $1.1 million adjustment should have been recognized as charge-offs through the allowance for loan losses, with an addition to the provision for
loan losses in the same amount. This reporting reclassification is reflected in the Companys condensed consolidated financial statements contained in this quarterly report on Form 10-Q and did not cause any change in the



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##### Table of Contents

Companys previously announced net earnings or earnings per share for the three and nine months ended September 30, 2006.

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

Net earnings for the three months ended September 30, 2006 were $3.5 million, an
increase of $776,000 or 28.8% compared with $2.7 million for the same three months of 2005. Basic and diluted EPS for the three months ended September 30, 2006 were both $0.32, a decrease of $0.02 per share or 5.9%, compared with both basic and
diluted EPS of $0.34 for the same three months of 2005. The higher net earnings for the three months ended September 30, 2006, compared with the same three months of 2005, was primarily the combined result of the acquisitions of Gateway on
December 1, 2005, The Express Bank of Texas (Express) on February 14, 2006, and Northwest on April 1, 2006, and organic growth, partially offset by the $1.1 million lower of cost or estimated fair value adjustment
($428,000 as a reduction to noninterest income and $711,000 as an addition to the provision for loan losses) mentioned above under Recent Developments, in addition to lower gains on sales of mortgage and SBA loans as a result of
reductions in mortgage loan origination volumes. Weighted average basic shares outstanding for the three months ended September 30, 2006 were approximately 10,666,000 compared with 7,815,000 for the same three months of 2005. Weighted average
diluted shares outstanding for the three months ended September 30, 2006 were approximately 10,849,000 compared with 7,979,000 for the same three months of 2005.

Net earnings for the nine months ended September 30, 2006 were $11.4 million, an increase of $3.3 million or 41.0% compared with $8.1 million for the same nine months of 2005. Basic and diluted EPS for the nine
months ended September 30, 2006 were $1.12 and $1.10, respectively, both increases of $0.08 per share or 7.7% and 7.8%, respectively, compared with basic and diluted EPS of $1.04 and $1.02, respectively, for the same nine months of 2005. The
higher net earnings for the nine months ended September 30, 2006, compared with the same nine months of 2005, were primarily due to growth associated with the acquisitions of Gateway, Express, and Northwest and organic growth, partially offset
by the $1.1 million lower of cost or estimated fair value adjustment and lower gains on sales of mortgage and SBA loans discussed in the preceding paragraph. Additionally, there have been four increases in the prime lending rate, totaling 100 basis
points, since December 31, 2005, which has positively impacted earnings on variable rate earning assets for the nine months ended September 30, 2006. Weighted average basic shares outstanding for the nine months ended September 30,
2006 were approximately 10,230,000 compared with 7,806,000 for the same nine months of 2005. Weighted average diluted shares outstanding for the nine months ended September 30, 2006 were approximately 10,369,000 compared with 7,965,000 for the
same nine months of 2005.

Total assets at September 30, 2006 were $1.855 billion, an increase of $302.5 million or 19.5% compared
with $1.552 billion at December 31, 2005. The return on average assets for the three months ended September 30, 2006 was 0.74%, a decrease of 10 basis points compared with 0.84% for the same three months of 2005. The return on average
assets for the nine months ended September 30, 2006 was 0.88%, a decrease of 1 basis point compared with 0.89% for the same nine months of 2005. Total investments (investment securities and Federal Funds sold) at September 30, 2006 were
$323.4 million, an increase of $20.6 million or 6.8% compared with total investments of $302.8 million at December 31, 2005. Total loans (including loans held for sale) at September 30, 2006 were $1.269 billion, an increase of $237.4
million or 23.0% compared with total loans (including loans held for sale) of $1.032 billion at December 31, 2005. Total deposits at September 30, 2006 were $1.350 billion, an increase of $228.8 million or 20.4% compared with total
deposits of $1.121 billion at December 31, 2005. Total borrowed funds (Federal Funds purchased, junior subordinated deferrable interest debentures, securities sold under repurchase agreements and other borrowings) at September 30, 2006
were $314.2 million, an increase of $41.8 million or 15.4% compared with total borrowed funds of $272.4 million at December 31, 2005.

Shareholders equity at September 30, 2006 was $174.7 million, an increase of $36.8 million or 26.7% compared with shareholders equity of $137.9 million at December 31, 2005. The increase was primarily the result of the
acquisitions of Express and Northwest, net earnings for the nine months ended September 30, 2006 and the issuance of common stock upon exercise of employee stock options. The return on average equity for the three months ended September 30, 2006 was



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7.94%, a decrease of 207 basis points compared with 10.01% for the same three months of 2005. The return on average tangible equity for the three months
ended September 30, 2006 was 20.56%, an increase of 212 basis points compared with 18.44% for the same three months of 2005. The return on average equity for the nine months ended September 30, 2006 was 9.44%, a decrease of 79 basis points
compared with 10.23% for the same nine months of 2005. The return on average tangible equity for the nine months ended September 30, 2006 was 23.30%, an increase of 421 basis points compared with 19.09% for the same nine months of 2005.

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

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

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

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

Net Interest Income. Net interest income, before the
provision for loan losses, for the three months ended September 30, 2006 was $19.5 million, an increase of $5.8 million or 42.1% compared with $13.8 million for the same three months of 2005. The net interest margin for the three months ended
September 30, 2006 was 4.91%, an improvement of 6 basis points compared with 4.85% for the same three months of 2005. Net interest income, before the provision for loan losses, for the nine months ended September 30, 2006 was $55.3
million, an increase of $17.1 million or 44.6% compared with $38.2 million for the same nine months of 2005. The net interest margin for the nine months ended September 30, 2006 was 4.95%, an improvement of 14 basis points compared with 4.81%
for the same nine months of 2005.

The increases in net interest income and the improvements in the net interest margin for the three and
nine months ended September 30, 2006, compared with the three and nine months ended September 30, 2005, were primarily due to larger earning asset volumes as a result of the acquisitions of Gateway, Express and Northwest and continued internal
growth. In



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addition, increased market interest rates contributed to higher yields on existing and newly established earning assets. This was partially offset by
increased pricing pressures on interest-bearing liabilities, higher market interest rates and increased interest-bearing liability volumes. As long as market interest rates remain at current levels or increase, the Companys net interest margin
is anticipated to remain consistent, but may experience pressure should market interest rates decline.

Interest Income. Interest
income from average earning assets for the three months ended September 30, 2006 was $31.6 million, an increase of $11.7 million or 59.1% compared with $19.9 million for the same three months of 2005. Interest income from average earning assets
for the nine months ended September 30, 2006 was $86.5 million, an increase of $32.5 million or 60.1% compared with $54.0 million for the same nine months of 2005. The increases in both periods of 2006 compared with the same periods of 2005
were primarily due to larger earning asset volumes (principally loans) as a result of acquisitions and internal growth, in addition to increased yields on earning assets as a result of higher market interest rates.

Average earning assets for the three months ended September 30, 2006 were $1.579 billion, an increase of $455.4 million or 40.5% compared with
average earning assets of $1.124 billion for the same three months of 2005. Average earning assets for the nine months ended September 30, 2006 were $1.493 billion, an increase of $429.0 million or 40.3% compared with average earning assets of
$1.064 billion for the same nine months of 2005.

The yield on average earning assets for the three months ended September 30, 2006
was 7.94%, an increase of 93 basis points compared with the yield on average earning assets of 7.01% for the same three months of 2005. The yield on average earning assets for the nine months ended September 30, 2006 was 7.75%, an increase of
96 basis points compared with the yield on average earning assets of 6.79% for the same nine months of 2005.

Interest income from average
total loans for the three months ended September 30, 2006 was $28.1 million, an increase of $11.1 million or 64.8% compared with $17.1 million for the same three months of 2005. Interest income from average total loans for the nine months ended
September 30, 2006 was $76.7 million, an increase of $31.2 million or 68.7% compared with $45.5 million for the same nine months of 2005. The increases in both periods of 2006 compared with the same periods of 2005 were primarily due to higher
loan volumes as a result of acquisitions and internal growth. In addition to the increased loan volumes, higher market interest rates were also a contributing factor towards higher loan yields.

Average total loans for the three months ended September 30, 2006 were $1.253 billion, an increase of $430.0 million or 52.2% compared with average
total loans of $822.9 million for the same three months of 2005. Average total loans for the nine months ended September 30, 2006 were $1.179 billion, an increase of $419.6 million or 55.3% compared with average total loans of $759.2 million
for the same nine months of 2005.

The yield on average total loans for the three months ended September 30, 2006 was 8.91%, an
increase of 68 basis points compared with the yield on average total loans of 8.23% for the same three months of 2005. The yield on average total loans for the nine months ended September 30, 2006 was 8.70%, an increase of 70 basis points
compared with the yield on average total loans of 8.00% for the same nine months of 2005.

Interest income from average total investments
(total investment securities and Federal Funds sold) for the three months ended September 30, 2006 was $3.5 million, an increase of $678,000 or 24.2% compared with $2.8 million for the same three months of 2005. Interest income from average
total investments for the nine months ended September 30, 2006 was $9.8 million, an increase of $1.2 million or 14.5% compared with $8.6 million for the same nine months of 2005. The increases in both periods of 2006 compared with the same
periods of 2005 were primarily due to increased market interest rates on the overall investment portfolio. The increase in interest income from investments was also the result of portfolio repositioning in order to maximize yield, as individual
investments matured, were sold, and/or became due for repricing.

Average total investments for the three months ended September 30,
2006 were $326.6 million, an increase of $25.4 million or 8.4% compared with average total investments of $301.2 million for the same three months of 2005. Average total investments for the nine months ended September 30, 2006 were $314.0
million, an increase of $9.5 million or 3.1% compared with average total investments of $304.5 million for the same nine months of 2005.

The yield on average total investments for the three months ended September 30, 2006 was 4.22%, an increase of 54 basis points compared with the yield on average total investments of 3.68% for the same three months of 2005. The yield
on average total investments for the nine months ended September 30, 2006 was 4.18%, an increase of 41 basis points compared with the yield on average total investments of 3.77% for the same nine months of 2005.

Interest Expense. Interest expense from average interest-bearing liabilities for the three months ended September 30, 2006 was $12.1 million, an
increase of $6.0 million or 97.2% compared with $6.1 million for the same three months of 2005. Interest expense from average interest-bearing liabilities for the nine months ended September 30, 2006 was $31.2 million, an increase of $15.4 million
or 97.6% compared with $15.8 million for the same nine months of 2005. The increases in both



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periods of 2006 compared with the same periods of 2005 were primarily due to increased pricing pressures on interest-bearing liabilities as a result of
higher market interest rates in addition to increased interest-bearing liability volumes as a result of acquisitions, internal growth, and additional funding requirements to support earning asset growth.

Average interest-bearing liabilities for the three months ended September 30, 2006 were $1.283 billion, an increase of $344.9 million or 36.8%
compared with average interest-bearing liabilities of $938.0 million for the same three months of 2005. Average interest-bearing liabilities for the nine months ended September 30, 2006 were $1.210 billion, an increase of $321.9 million or
36.3% compared with average interest-bearing liabilities of $888.0 million for the same nine months of 2005.

The cost of average
interest-bearing liabilities for the three months ended September 30, 2006 was 3.73%, an increase of 114 basis points compared with the cost of average interest-bearing liabilities of 2.59% for the same three months of 2005. The cost of average
interest-bearing liabilities for the nine months ended September 30, 2006 was 3.45%, an increase of 107 basis points compared with the cost of average interest-bearing liabilities of 2.38% for the same nine months of 2005.

Interest expense from average interest-bearing deposits for the three months ended September 30, 2006 was $7.3 million, an increase of $3.8 million
or 109.4% compared with $3.5 million for the same three months of 2005. Interest expense from average interest-bearing deposits for the nine months ended September 30, 2006 was $19.5 million, an increase of $9.5 million or 96.2% compared with
$9.9 million for the same nine months of 2005. The increases in both periods of 2006 compared with the same periods of 2005 were primarily due to increased competitive pricing pressures on the interest rates paid for interest-bearing deposits as a
result of higher market interest rates. Additionally, increased interest-bearing deposit volumes, as a result of acquisitions and internal growth, contributed to the higher interest expense paid for interest-bearing deposits.

Average interest-bearing deposits for the three months ended September 30, 2006 were $946.0 million, an increase of $271.2 million or 40.2% compared
with average interest-bearing deposits of $674.9 million for the same three months of 2005. Average interest-bearing deposits for the nine months ended September 30, 2006 were $915.9 million, an increase of $227.9 million or 33.1% compared with
average interest-bearing deposits of $688.0 million for the same nine months of 2005.

The average interest rate paid for average
interest-bearing deposits for the three months ended September 30, 2006 was 3.07%, an increase of 101 basis points compared with the average interest rate paid for average interest-bearing deposits of 2.06% for the same three months of 2005.
The average interest rate paid for average interest-bearing deposits for the nine months ended September 30, 2006 was 2.84%, an increase of 91 basis points compared with the average interest rate paid for average interest-bearing deposits of
1.93% for the same nine months of 2005.

Interest expense from average total borrowed funds (Federal Funds purchased, junior subordinated
deferrable interest debentures, securities sold under repurchase agreements and other borrowings) for the three months ended September 30, 2006 was $4.7 million, an increase of $2.1 million or 80.9% compared with $2.6 million for the same three
months of 2005. Interest expense from average total borrowed funds for the nine months ended September 30, 2006 was $11.7 million, an increase of $5.9 million or 100.1% compared with $5.9 million for the same nine months of 2005. The increases
in both periods of 2006 compared with the same periods of 2005 were primarily due to higher market interest rates paid for borrowed funds and higher borrowing volumes, as a result of increased funding requirements to support earning asset growth.

Average total borrowed funds for the three months ended September 30, 2006 were $336.8 million, an increase of $73.7 million or 28.0%
compared with average total borrowed funds of $263.1 million for the same three months of 2005. Average total borrowed funds for the nine months ended September 30, 2006 were $294.0 million, an increase of $94.0 million or 47.0% compared with
average total borrowed funds of $200.0 million for the same nine months of 2005.

The average interest rate paid for average total borrowed
funds for the three months ended September 30, 2006 was 5.59%, an increase of 164 basis points compared with the average interest rate paid for average total borrowed funds of 3.95% for the same three months of 2005. The average interest rate
paid for average total borrowed funds for the nine months ended September 30, 2006 was 5.33%, an increase of 141 basis points compared with the average interest rate paid for average total borrowed funds of 3.92% for the same nine months of
2005.



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



|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|--------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | -------------------- | - | ---------------------- |  | ---- | ------------------------- |  | - | -------------------- | - | ---------------------- | - | ------ |  | ---- | -
|                                                                |  | For the Three Months Ended September 30, |          
|                                                                |  | 2006                                     |           |   | 2005                 |  
|                                                                |  | AverageOutstandingBalance                |           |   | InterestEarned /Paid |   | AverageYield /Rate (1) |  |      | AverageOutstandingBalance |  |   | InterestEarned /Paid |   | AverageYield /Rate (1) |  
|                                                                |  | (Dollars in thousands)                   |          
|ASSETS                                                          |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-earning assets:                                        |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total loans                                                     |  | $                                        | 1,252,898 |   |                      | $ | 28,145                 |  | 8.91 | %                         |  | $ | 822,938              |   |                        | $ | 17,079 |  | 8.23 | %
|Taxable securities                                              |  |                                          | 251,915   |   |                      |   | 2,658                  |  | 4.19 |                           |  |   | 271,008              |   |                        |   | 2,483  |  | 3.63 |  
|Tax-exempt securities                                           |  |                                          | 48,910    |   |                      |   | 447                    |  | 3.63 |                           |  |   | 28,419               |   |                        |   | 296    |  | 4.13 |  
|Federal funds sold                                              |  |                                          | 25,748    |   |                      |   | 369                    |  | 5.69 |                           |  |   | 1,730                |   |                        |   | 17     |  | 3.90 |  
|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-earning assets                                   |  |                                          | 1,579,471 |   |                      |   | 31,619                 |  | 7.94 |                           |  |   | 1,124,095            |   |                        |   | 19,875 |  | 7.01 |  
|Less: allowance for loan losses                                 |  |                                          | (10,970   | ) |                      |   |                        |  |      |                           |  |   | (7,391               | ) |                        |   |        |  |      |  
|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-earning assets, net of allowance for loan losses |  |                                          | 1,568,501 |   |                      |   |                        |  |      |                           |  |   | 1,116,704            |   |                        |   |        |  |      |  
|Noninterest-earning assets                                      |  |                                          | 280,574   |   |                      |   |                        |  |      |                           |  |   | 150,583              |   |                        |   |        |  |      |  
|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total assets                                                    |  | $                                        | 1,849,075 |   |                      |   |                        |  |      |                           |  | $ | 1,267,287            |   |                        |   |        |  |      |  
|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY                            |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-bearing liabilities:                                   |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-bearing demand deposits                                |  | $                                        | 223,098   |   |                      | $ | 942                    |  | 1.68 | %                         |  | $ | 204,378              |   |                        | $ | 646    |  | 1.25 | %
|Saving and money market accounts                                |  |                                          | 278,039   |   |                      |   | 1,560                  |  | 2.23 |                           |  |   | 153,559              |   |                        |   | 507    |  | 1.31 |  
|Time deposits                                                   |  |                                          | 444,893   |   |                      |   | 4,826                  |  | 4.30 |                           |  |   | 316,919              |   |                        |   | 2,346  |  | 2.94 |  
|Federal funds purchased                                         |  |                                          | 23,043    |   |                      |   | 343                    |  | 5.91 |                           |  |   | 36,502               |   |                        |   | 378    |  | 4.11 |  
|Junior subordinated deferrable interest debentures              |  |                                          | 49,996    |   |                      |   | 955                    |  | 7.58 |                           |  |   | 17,520               |   |                        |   | 391    |  | 8.85 |  
|Securities sold under repurchase agreements                     |  |                                          | 31,135    |   |                      |   | 378                    |  | 4.82 |                           |  |   | 6,309                |   |                        |   | 29     |  | 1.82 |  
|Other borrowings                                                |  |                                          | 232,638   |   |                      |   | 3,068                  |  | 5.23 |                           |  |   | 202,802              |   |                        |   | 1,824  |  | 3.57 |  
|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-bearing liabilities                              |  |                                          | 1,282,842 |   |                      |   | 12,072                 |  | 3.73 |                           |  |   | 937,989              |   |                        |   | 6,121  |  | 2.59 |  
|Noninterest-bearing liabilities:                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Noninterest-bearing demand deposits                             |  |                                          | 376,213   |   |                      |   |                        |  |      |                           |  |   | 209,065              |   |                        |   |        |  |      |  
|Other liabilities                                               |  |                                          | 16,725    |   |                      |   |                        |  |      |                           |  |   | 13,635               |   |                        |   |        |  |      |  
|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total liabilities                                               |  |                                          | 1,675,780 |   |                      |   |                        |  |      |                           |  |   | 1,160,689            |   |                        |   |        |  |      |  
|Shareholders equity                                            |  |                                          | 173,295   |   |                      |   |                        |  |      |                           |  |   | 106,598              |   |                        |   |        |  |      |  
|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total liabilities and shareholders equity                      |  | $                                        | 1,849,075 |   |                      |   |                        |  |      |                           |  | $ | 1,267,287            |   |                        |   |        |  |      |  
|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Net interest income                                             |  |                                          |           |   |                      | $ | 19,547                 |  |      |                           |  |   |                      |   |                        | $ | 13,754 |  |      |  
|                                                                |  |                                          |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|                                                                |  |                                          |           |   |                      |  
|Net interest spread                                             |  |                                          |           |   |                      |   |                        |  | 4.21 | %                         |  |   |                      |   |                        |   |        |  | 4.42 | %
|Net interest margin                                             |  |                                          |           |   |                      |   |                        |  | 4.91 | %                         |  |   |                      |   |                        |   |        |  | 4.85 | %

---

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



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|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|-------------------------------------------------- |  | --------------------------------------- | --------- | - | -------------------- | - | ---------------------- |  | ---- | ------------------------- |  | - | -------------------- | - | ---------------------- | - | ------ |  | ---- | -
|                                                   |  | For the Nine Months Ended September 30, |          
|                                                   |  | 2006                                    |           |   | 2005                 |  
|                                                   |  | AverageOutstandingBalance               |           |   | InterestEarned /Paid |   | AverageYield /Rate (1) |  |      | AverageOutstandingBalance |  |   | InterestEarned /Paid |   | AverageYield /Rate (1) |  
|                                                   |  | (Dollars in thousands)                  |          
|ASSETS                                             |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-earning assets:                           |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total loans                                        |  | $                                       | 1,178,793 |   |                      | $ | 76,693                 |  | 8.70 | %                         |  | $ | 759,217              |   |                        | $ | 45,452 |  | 8.00 | %
|Taxable securities                                 |  |                                         | 247,761   |   |                      |   | 7,627                  |  | 4.12 |                           |  |   | 285,426              |   |                        |   | 7,994  |  | 3.74 |  
|Tax-exempt securities                              |  |                                         | 41,539    |   |                      |   | 1,262                  |  | 4.06 |                           |  |   | 16,604               |   |                        |   | 529    |  | 4.26 |  
|Federal funds sold                                 |  |                                         | 24,665    |   |                      |   | 937                    |  | 5.08 |                           |  |   | 2,468                |   |                        |   | 58     |  | 3.14 |  
|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-earning assets                      |  |                                         | 1,492,758 |   |                      |   | 86,519                 |  | 7.75 |                           |  |   | 1,063,715            |   |                        |   | 54,033 |  | 6.79 |  
|Less: allowance for loan losses                    |  |                                         | (10,664   | ) |                      |   |                        |  |      |                           |  |   | (7,079               | ) |                        |   |        |  |      |  
|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-earning assets, net of allowance    |  |                                         | 1,482,094 |   |                      |   |                        |  |      |                           |  |   | 1,056,636            |   |                        |   |        |  |      |  
|Noninterest-earning assets                         |  |                                         | 258,698   |   |                      |   |                        |  |      |                           |  |   | 155,765              |   |                        |   |        |  |      |  
|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total assets                                       |  | $                                       | 1,740,792 |   |                      |   |                        |  |      |                           |  | $ | 1,212,401            |   |                        |   |        |  |      |  
|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY               |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-bearing liabilities:                      |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Interest-bearing demand deposits                   |  | $                                       | 229,165   |   |                      | $ | 2,814                  |  | 1.64 | %                         |  | $ | 220,908              |   |                        | $ | 2,134  |  | 1.29 | %
|Saving and money market accounts                   |  |                                         | 278,406   |   |                      |   | 4,547                  |  | 2.18 |                           |  |   | 156,829              |   |                        |   | 1,468  |  | 1.25 |  
|Time deposits                                      |  |                                         | 408,319   |   |                      |   | 12,113                 |  | 3.97 |                           |  |   | 310,286              |   |                        |   | 6,325  |  | 2.73 |  
|Federal funds purchased                            |  |                                         | 16,493    |   |                      |   | 676                    |  | 5.48 |                           |  |   | 30,410               |   |                        |   | 851    |  | 3.74 |  
|Junior subordinated deferrable interest debentures |  |                                         | 47,247    |   |                      |   | 2,679                  |  | 7.58 |                           |  |   | 17,520               |   |                        |   | 1,171  |  | 8.94 |  
|Securities sold under repurchase agreements        |  |                                         | 17,017    |   |                      |   | 476                    |  | 3.74 |                           |  |   | 6,022                |   |                        |   | 75     |  | 1.67 |  
|Other borrowings                                   |  |                                         | 213,286   |   |                      |   | 7,901                  |  | 4.95 |                           |  |   | 146,045              |   |                        |   | 3,765  |  | 3.45 |  
|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total interest-bearing liabilities                 |  |                                         | 1,209,933 |   |                      |   | 31,206                 |  | 3.45 |                           |  |   | 888,020              |   |                        |   | 15,789 |  | 2.38 |  
|Noninterest-bearing liabilities:                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Noninterest-bearing demand deposits                |  |                                         | 351,257   |   |                      |   |                        |  |      |                           |  |   | 200,351              |   |                        |   |        |  |      |  
|Other liabilities                                  |  |                                         | 17,755    |   |                      |   |                        |  |      |                           |  |   | 18,079               |   |                        |   |        |  |      |  
|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total liabilities                                  |  |                                         | 1,578,945 |   |                      |   |                        |  |      |                           |  |   | 1,106,450            |   |                        |   |        |  |      |  
|Shareholders equity                               |  |                                         | 161,847   |   |                      |   |                        |  |      |                           |  |   | 105,951              |   |                        |   |        |  |      |  
|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Total liabilities and shareholders' equity         |  | $                                       | 1,740,792 |   |                      |   |                        |  |      |                           |  | $ | 1,212,401            |   |                        |   |        |  |      |  
|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|Net interest income                                |  |                                         |           |   |                      | $ | 55,313                 |  |      |                           |  |   |                      |   |                        | $ | 38,244 |  |      |  
|                                                   |  |                                         |           |   |                      |   |                        |  |      |                           |  |   |                      |   |                        |   |        |  |      |  
|                                                   |  |                                         |           |   |                      |  
|Net interest spread                                |  |                                         |           |   |                      |   |                        |  | 4.30 | %                         |  |   |                      |   |                        |   |        |  | 4.41 | %
|Net interest margin                                |  |                                         |           |   |                      |   |                        |  | 4.95 | %                         |  |   |                      |   |                        |   |        |  | 4.81 | %

---

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



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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 nine months ended
September 30, 2006 compared with the three and nine months ended September 30, 2005. For purposes of this table, changes attributable to both volume and rate have been allocated proportionately to the change due to volume and rate.



|                                                   |  |                                         |        |   |      |   |        |       |  |   |        |  
|-------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ------ | ----- |  | - | ------ | -
|                                                   |  | For the Three Months EndedSeptember 30, |       
|                                                   |  | 2006 vs. 2005                           |       
|                                                   |  | Increase (Decrease)Due to               |        |   |      |  
|                                                   |  | Volume                                  |        |   | Rate |   |        | Total | 
|                                                   |  | (In thousands)                          |       
|Interest-earning assets:                           |  |                                         |        |   |      |   |        |       |  |   |        |  
|Loans                                              |  | $                                       | 8,923  |   |      | $ | 2,143  |       |  | $ | 11,066 |  
|Taxable securities                                 |  |                                         | (175   | ) |      |   | 350    |       |  |   | 175    |  
|Tax-exempt securities                              |  |                                         | 213    |   |      |   | (62    | )     |  |   | 151    |  
|Federal funds sold                                 |  |                                         | 236    |   |      |   | 116    |       |  |   | 352    |  
|                                                   |  |                                         |        |   |      |   |        |       |  |   |        |  
|Total increase in interest income                  |  |                                         | 9,197  |   |      |   | 2,547  |       |  |   | 11,744 |  
|Interest-bearing liabilities:                      |  |                                         |        |   |      |   |        |       |  |   |        |  
|Interest-bearing demand deposits                   |  | $                                       | 59     |   |      | $ | 237    |       |  | $ | 296    |  
|Savings and money market accounts                  |  |                                         | 411    |   |      |   | 642    |       |  |   | 1,053  |  
|Time deposits                                      |  |                                         | 947    |   |      |   | 1,533  |       |  |   | 2,480  |  
|Federal funds purchased                            |  |                                         | (139   | ) |      |   | 104    |       |  |   | (35    | )
|Junior subordinated deferrable interest debentures |  |                                         | 725    |   |      |   | (161   | )     |  |   | 564    |  
|Repurchase agreements                              |  |                                         | 114    |   |      |   | 235    |       |  |   | 349    |  
|Other borrowings                                   |  |                                         | 268    |   |      |   | 976    |       |  |   | 1,244  |  
|                                                   |  |                                         |        |   |      |   |        |       |  |   |        |  
|Total increase in interest expense                 |  |                                         | 2,385  |   |      |   | 3,566  |       |  |   | 5,951  |  
|                                                   |  |                                         |        |   |      |   |        |       |  |   |        |  
|Increase (decrease) in net interest income         |  | $                                       | 6,812  |   |      | $ | (1,019 | )     |  | $ | 5,793  |  
|                                                   |  |                                         |        |   |      |   |        |       |  |   |        |  
|                                                   | 
|                                                   |  | For the Nine Months EndedSeptember 30,  |       
|                                                   |  | 2006 vs. 2005                           |       
|                                                   |  | Increase (Decrease)Due to               |        |   |      |  
|                                                   |  | Volume                                  |        |   | Rate |   |        | Total | 
|                                                   |  | (In thousands)                          |       
|Interest-earning assets:                           |  |                                         |        |   |      |   |        |       |  |   |        |  
|Loans                                              |  | $                                       | 25,119 |   |      | $ | 6,122  |       |  | $ | 31,241 |  
|Taxable securities                                 |  |                                         | (1,055 | ) |      |   | 688    |       |  |   | (367   | )
|Tax-exempt securities                              |  |                                         | 794    |   |      |   | (61    | )     |  |   | 733    |  
|Federal funds sold                                 |  |                                         | 522    |   |      |   | 357    |       |  |   | 879    |  
|                                                   |  |                                         |        |   |      |   |        |       |  |   |        |  
|Total increase in interest income                  |  |                                         | 25,380 |   |      |   | 7,106  |       |  |   | 32,486 |  
|Interest-bearing liabilities:                      |  |                                         |        |   |      |   |        |       |  |   |        |  
|Interest-bearing demand deposits                   |  | $                                       | 80     |   |      | $ | 600    |       |  | $ | 680    |  
|Savings and money market accounts                  |  |                                         | 1,138  |   |      |   | 1,941  |       |  |   | 3,079  |  
|Time deposits                                      |  |                                         | 1,998  |   |      |   | 3,790  |       |  |   | 5,788  |  
|Federal funds purchased                            |  |                                         | (389   | ) |      |   | 214    |       |  |   | (175   | )
|Junior subordinated deferrable interest debentures |  |                                         | 1,987  |   |      |   | (479   | )     |  |   | 1,508  |  
|Repurchase agreements                              |  |                                         | 137    |   |      |   | 264    |       |  |   | 401    |  
|Other borrowings                                   |  |                                         | 1,733  |   |      |   | 2,403  |       |  |   | 4,136  |  
|                                                   |  |                                         |        |   |      |   |        |       |  |   |        |  
|Total increase in interest expense                 |  |                                         | 6,684  |   |      |   | 8,733  |       |  |   | 15,417 |  
|                                                   |  |                                         |        |   |      |   |        |       |  |   |        |  
|Increase (decrease) in net interest income         |  | $                                       | 18,696 |   |      | $ | (1,627 | )     |  | $ | 17,069 |  
|                                                   |  |                                         |        |   |      |   |        |       |  |   |        |  



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Provision for Loan Losses.Provisions for loan losses are charged to income to bring the
Companys allowance for loan losses to a level deemed appropriate by management. The provision for loan losses for the three months ended September 30, 2006 was $1.1 million, an increase of $36,000 or 3.5% compared with $1.0 million for
the same three months of 2005. The provision for loan losses for the nine months ended September 30, 2006 was $2.3 million, a decrease of $532,000 or 19.0% compared with $2.8 million for the same nine months of 2005. During the three months
ended September 30, 2006, the Company made an additional provision of approximately $711,000 related to the previously mentioned $1.1 million lower of cost or estimated fair value adjustment on the loans reclassified as held for sale during the
third quarter of 2006.

The allowance for loan losses at September 30, 2006 was approximately $10.6 million, an increase of $1.0
million or 10.5% compared with the allowance for loan losses of $9.6 million at December 31, 2005, and an increase of $2.8 million or 35.3% compared with the allowance for loan losses of $7.8 million at September 30, 2005. At
September 30, 2006, the ratio of the allowance for loan losses to total loans was 0.84% compared with 0.93% at December 31, 2005 and 0.92% at September 30, 2005.

Noninterest Income. Total noninterest income for the three months ended September 30, 2006 was $5.6 million, a decrease of $815,000 or 12.7%
compared with $6.4 million for the same three months of 2005 and was primarily due to a $428,000 net loss on sales of commercial and other loans in connection with the loans reclassified as held-for-sale, in addition to lower gains on
sales of mortgage and SBA loans. During the third quarter of 2006, the Company repositioned approximately $5.4 million in loans as held-for-sale pending a future sale of these loans into the secondary wholesale market. In connection with
this repositioning, the Company recognized a lower of cost or estimated fair value adjustment on these loans of approximately $1.1 million, which was recorded as a $428,000 reduction to noninterest income, categorized as net loss on sales of
commercial and other loans, and a $711,000 addition to the provision for loan losses.

Service charges on deposit accounts for the
three months ended September 30, 2006 were $3.1 million, an increase of $692,000 or 28.9% compared with $2.4 million for the same three months of 2005. Mortgage servicing revenue for the three months ended September 30, 2006 was $682,000,
an increase of $324,000 or 90.5% compared with $358,000 for the same three months of 2005 and was primarily the result of increased volumes in the mortgage servicing portfolio in 2006. Other noninterest income for the three months ended
September 30, 2006 was $1.6 million, an increase of $426,000 or 35.3% compared with $1.2 million for the same three months of 2005. The increases in service charges on deposit accounts and other banking-services related revenue (other
noninterest income) for the three months ended September 30, 2006, compared with the same three months of 2005, was primarily the result of an expanded customer base as a result of the recent acquisitions and internal growth.

Net gains on sales of mortgage and SBA loans for the three months ended September 30, 2006 were $629,000, a decrease of $1.9 million or 75.0%
compared with net gains on sales of mortgage loans of $2.5 million for the same three months of 2005. This was primarily due to decreased mortgage and SBA loan origination volumes during the third quarter of 2006, compared with the same quarter of
2005, which contributed to reductions in the volume of sales of such loans. In addition, changes between original loan pricing expectations and actual market results have been influenced by increasing market interest rates, further contributing to
the overall reductions in net gains on sales of mortgage loans.

Total noninterest income for the nine months ended September 30, 2006
was $19.1 million, an increase of $170,000 or 0.9% compared with $18.9 million for the same nine months of 2005. This was primarily due to increased service charges on deposit accounts and other banking-services related revenue (other noninterest
income) that was partially offset by lower gains on sales of mortgage and SBA loans and the $428,000 loss on sale of commercial and other loans recognized in connection with the loans reclassified as held-for-sale, both of which are discussed above.

Service charges on deposit accounts for the nine months ended September 30, 2006 were $8.7 million, an increase of $2.0 million or
30.0% compared with $6.7 million for the same nine months of 2005. Mortgage servicing revenue for the nine months ended September 30, 2006 was $1.4 million, an increase of $442,000 or 48.2% compared with $917,000 for the same nine months of
2005. Other noninterest income for the nine months ended September 30, 2006 was $5.4 million, an increase of $1.4 million or 34.5% compared with $4.0 million for the same nine months of 2005. The increases in service charges on deposit accounts
and other banking-services related revenue (other noninterest income) for the nine months ended September 30, 2006, compared with the same nine months of 2005, was primarily the result of the same reasons explained above and is evidenced by the
higher volumes and the increased number of loan and deposit accounts in 2006 compared with 2005. Additionally, during the first quarter of 2006, there was a $433,000 gain on sale of other real estate (previously acquired in connection with the
Gateway acquisition).



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##### Table of Contents

Net gains on sales of mortgage and SBA loans for the nine months ended September 30, 2006 were $4.2
million, a decrease of $3.3 million or 43.8% compared with net gains on sales of mortgage and SBA loans of $7.5 million for the same nine months of 2005. This was primarily due to decreased mortgage and SBA loan origination volumes.

Net losses on sales of securities for the nine months ended September 30, 2006 were $132,000, an increase of $52,000 or 28.3% compared with net
losses of $184,000 for the same nine months of 2005. The increase for the nine months ended September 30, 2006 compared with the same period in 2005 was primarily the result of individual investment repositioning within the investment portfolio
in an effort to maximize overall yields on earning assets.

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



|                                                |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  
|----------------------------------------------- |  | --------------------------------------- | ----- | - | -------------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                |  | For the Three MonthsEnded September 30, |       |   | For the Nine MonthsEnded September 30, |  
|                                                |  | 2006                                    |       |   | 2005                                   |   |       | 2006 |  |   | 2005   |  
|                                                |  | (In thousands)                          |      
|                                                |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  
|Service charges on deposit accounts             |  | $                                       | 3,090 |   |                                        | $ | 2,398 |      |  | $ | 8,708  |   |  | $ | 6,696  |  
|Mortgage servicing revenue                      |  |                                         | 682   |   |                                        |   | 358   |      |  |   | 1,359  |   |  |   | 917    |  
|Net gain (loss) on sales of securities          |  |                                         |      |   |                                        |   | (63   | )    |  |   | (132   | ) |  |   | (184   | )
|Net gain on sales of mortgage and SBA loans     |  |                                         | 629   |   |                                        |   | 2,521 |      |  |   | 4,213  |   |  |   | 7,496  |  
|Net loss on sales of commercial and other loans |  |                                         | (428  | ) |                                        |   |      |      |  |   | (428   | ) |  |   |       |  
|Other noninterest income                        |  |                                         | 1,632 |   |                                        |   | 1,206 |      |  |   | 5,359  |   |  |   | 3,984  |  
|                                                |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  
|Total noninterest income                        |  | $                                       | 5,605 |   |                                        | $ | 6,420 |      |  | $ | 19,079 |   |  | $ | 18,909 |  
|                                                |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  

Noninterest Expense. Total noninterest expense for the three months ended
September 30, 2006 was $19.1 million, an increase of $3.9 million or 25.9% compared with $15.2 million for the same three months of 2005 primarily due to the impact of the Companys recent acquisitions of Gateway, Express, and Northwest.
The net efficiency ratio for the three months ended September 30, 2006 was 73.56% compared with 74.03% for the same three months of 2005. The Companys net efficiency ratios include interest income on a fully tax-equivalent basis and
exclude intangible amortization and any gains or losses incurred on sales of securities.

Employee compensation and benefits expense for
the three months ended September 30, 2006 represented 55.2% of total noninterest expense and was $10.6 million, an increase of $1.1 million or 11.3% compared with $9.5 million for the same three months of 2005 primarily due to additional staff
acquired with the acquisitions of Gateway, Express, and Northwest and customary annual employee salary increases. At September 30, 2006 there were 648 full-time equivalent employees compared with 573 full-time equivalent employees at
September 30, 2005, an increase of 75 or 13.1%.

Non-staff expense for the three months ended September 30, 2006 was $8.6
million, an increase of $2.9 million or 50.2% compared with $5.7 million for the same three months of 2005, primarily the result of added operating expense with the acquisitions of Gateway, Express, and Northwest, mainly within the categories of net
occupancy, depreciation and amortization, legal and professional fees and other noninterest expense. The increase in net occupancy, depreciation and amortization was primarily the result of added premises, equipment, and maintenance costs associated
with the recent acquisitions. The increase in legal and professional fees was primarily associated with the recent acquisitions and related compliance costs thereof. The increase in other noninterest expense was also primarily the result of added
operating costs of doing business associated with the recent acquisitions. Also included in other noninterest expense for the three months ended September 30, 2006 was $398,000 of stock appreciation rights expense as a result of the recent
appreciation in the Companys stock price, $89,000 of restricted stock compensation expense, and $41,000 of stock option compensation expense.

Total noninterest expense for the nine months ended September 30, 2006 was $55.5 million, an increase of $13.2 million or 31.3% compared with $42.3 million for the same nine months of 2005, primarily due to the Companys
acquisitions of Gateway, Express, and Northwest. The net efficiency ratio for the nine months ended September 30, 2006 was 72.14% compared with 72.13% for the same nine months of 2005.

Employee compensation and benefits expense for the nine months ended September 30, 2006 represented 56.9% of total noninterest expense and was $31.6
million, an increase of $6.9 million or 27.8% compared with $24.7 million for the same nine months of 2005 that reflects additional staff acquired with the acquisitions of Gateway, Express, and Northwest,



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##### Table of Contents

customary annual employee salary increases, and operating staff of State Banks three full-service banking centers opened during the third and fourth
quarters of 2005. Also included in employee compensation and benefits expense for the nine months ended September 30, 2006 was $700,000 of projected 2006 performance related incentive compensation expense.

Non-staff expense for the nine months ended September 30, 2006 was $23.9 million, an increase of $6.4 million or 36.4% compared with $17.5 million
for the same nine months of 2005, primarily due to added operating expense with the acquisitions of Gateway, Express, and Northwest, mainly within the categories of net occupancy, depreciation and amortization, legal and professional fees and other
noninterest expense as discussed above. Also included in other noninterest expense for the nine months ended September 30, 2006 was $953,000 of stock appreciation rights expense as a result of the recent appreciation in the Companys stock
price, $253,000 of restricted stock compensation expense, and $118,000 of stock option compensation expense.

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



|                                   |  |                                         |        |                                        |   |        |  |      |        |  |   |       
|---------------------------------- |  | --------------------------------------- | ------ | -------------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                   |  | For the Three MonthsEnded September 30, |        | For the Nine MonthsEnded September 30,
|                                   |  | 2006                                    |        | 2005                                   |   | 2006   |  | 2005
|                                   |  | (In thousands)                         
|                                   |  |                                         |        |                                        |   |        |  |      |        |  |   |       
|Employee compensation and benefits |  | $                                       | 10,566 |                                        | $ | 9,492  |  | $    | 31,601 |  | $ | 24,733
|Non-staff expenses:                |  |                                         |        |                                        |   |        |  |      |        |  |   |       
|Net occupancy                      |  |                                         | 1,672  |                                        |   | 1,070  |  |      | 4,580  |  |   | 3,388 
|Depreciation and amortization      |  |                                         | 1,610  |                                        |   | 790    |  |      | 4,873  |  |   | 2,619 
|Data processing                    |  |                                         | 397    |                                        |   | 244    |  |      | 1,160  |  |   | 784   
|Legal and professional             |  |                                         | 1,054  |                                        |   | 481    |  |      | 2,520  |  |   | 1,595 
|Advertising                        |  |                                         | 141    |                                        |   | 356    |  |      | 432    |  |   | 932   
|Printing and supplies              |  |                                         | 230    |                                        |   | 252    |  |      | 718    |  |   | 711   
|Telecommunications                 |  |                                         | 371    |                                        |   | 287    |  |      | 1,116  |  |   | 852   
|Mortgage servicing expense         |  |                                         | 170    |                                        |   | 200    |  |      | 537    |  |   | 761   
|Other noninterest expense          |  |                                         | 2,932  |                                        |   | 2,030  |  |      | 7,985  |  |   | 5,898 
|                                   |  |                                         |        |                                        |   |        |  |      |        |  |   |       
|Total non-staff expenses           |  |                                         | 8,577  |                                        |   | 5,710  |  |      | 23,921 |  |   | 17,540
|                                   |  |                                         |        |                                        |   |        |  |      |        |  |   |       
|Total noninterest expense          |  | $                                       | 19,143 |                                        | $ | 15,202 |  | $    | 55,522 |  | $ | 42,273
|                                   |  |                                         |        |                                        |   |        |  |      |        |  |   |       



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##### Table of Contents

Financial Condition

Loan Portfolio.Total loans, including loans held for sale, at September 30, 2006 were $1.269 billion, an increase of $237.4 million or 23.0% compared with total loans of $1.032 billion at
December 31, 2005. On December 1, 2005, the Company acquired approximately $140.0 million of loans in connection with the acquisition of Gateway. On February 14, 2006, the Company acquired approximately $19.0 million of loans in
connection with the acquisition of Express and on April 1, 2006, the Company acquired approximately $107.0 million of loans in connection with the acquisition of Northwest.

During the third quarter of 2006, the Company repositioned approximately $5.4 million in loans as held-for-sale pending a future sale of
these loans into the secondary wholesale market. At September 30, 2006, these loans are categorized on the balance sheet and on the following loan table as commercial and other loans held for sale with a net balance of approximately
$4.3 million.

At September 30, 2006, total loans represented 68.4% of total assets compared with 66.5% of total assets at
December 31, 2005. At September 30, 2006 total loans were 94.0% of total deposits compared with 92.0% of total deposits at December 31, 2005.

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



|                                              |  |                        |           |   |                   |       |   |        |   |           |         |  |       |  
|--------------------------------------------- |  | ---------------------- | --------- | - | ----------------- | ----- | - | ------ | - | --------- | ------- |  | ----- | -
|                                              |  | September 30, 2006     |           |   | December 31, 2005 |      
|                                              |  | Amount                 |           |   | Percent           |       |   | Amount |   |           | Percent | 
|                                              |  | (Dollars in thousands) |          
|Commercial and industrial                     |  | $                      | 259,362   |   |                   | 20.4  | % |        | $ | 243,114   |         |  | 23.6  | %
|Real estate:                                  |  |                        |           |   |                   |       |   |        |   |           |         |  |       |  
|1-4 family residential                        |  |                        | 364,903   |   |                   | 28.7  |   |        |   | 270,951   |         |  | 26.3  |  
|Commercial real estate                        |  |                        | 453,070   |   |                   | 35.7  |   |        |   | 289,607   |         |  | 28.1  |  
|Other real estate                             |  |                        | 80,161    |   |                   | 6.4   |   |        |   | 133,455   |         |  | 12.9  |  
|                                              |  |                        |           |   |                   |       |   |        |   |           |         |  |       |  
|Total real estate                             |  |                        | 898,134   |   |                   | 70.8  |   |        |   | 694,013   |         |  | 67.3  |  
|                                              |  |                        |           |  
|Consumer and other, net                       |  |                        | 78,702    |   |                   | 6.2   |   |        |   | 77,174    |         |  | 7.5   |  
|                                              |  |                        |           |   |                   |       |   |        |   |           |         |  |       |  
|Total loans held for investment               |  |                        | 1,236,198 |   |                   | 97.4  |   |        |   | 1,014,301 |         |  | 98.3  |  
|                                              |  |                        |           |  
|Mortgage and SBA loans held for sale          |  |                        | 28,780    |   |                   | 2.3   |   |        |   | 17,537    |         |  | 1.7   |  
|Commercial and other loans held for sale      |  |                        | 4,266     |   |                   | 0.3   |   |        |   |          |         |  |      |  
|                                              |  |                        |           |   |                   |       |   |        |   |           |         |  |       |  
|Total loans held for sale                     |  |                        | 33,046    |   |                   | 2.6   |   |        |   | 17,537    |         |  | 1.7   |  
|                                              |  |                        |           |   |                   |       |   |        |   |           |         |  |       |  
|                                              |  |                        |           |  
|Total loans, gross                            |  |                        | 1,269,244 |   |                   | 100.0 | % |        |   | 1,031,838 |         |  | 100.0 | %
|                                              |  |                        |           |   |                   |       |   |        |   |           |         |  |       |  
|Allowance for loan losses                     |  |                        | (10,600   | ) |                   |       |   |        |   | (9,592    | )       |  |       |  
|                                              |  |                        |           |   |                   |       |   |        |   |           |         |  |       |  
|Total loans, net of allowance for loan losses |  | $                      | 1,258,644 |   |                   |       |   |        | $ | 1,022,246 |         |  |       |  
|                                              |  |                        |           |   |                   |       |   |        |   |           |         |  |       |  

Nonperforming Assets. The Company generally places a loan on nonaccrual status and ceases
to accrue interest when loan payment performance is deemed unsatisfactory. Loans where the interest payments jeopardize the collection of principal are placed on nonaccrual status, unless the loan is both well-secured and in the process of
collection. Cash payments received while a loan is classified as nonaccrual, are recorded as a reduction of principal as long as doubt exists as to collection. Nonperforming assets consist of nonaccrual loans, accruing loans 90 days or more past
due, and other real estate and repossessed assets. At September 30, 2006, total nonperforming assets were $8.4 million or 0.45% of total assets, an increase of $1.3 million or 18.9% compared with nonperforming assets of $7.1 million or 0.46% of
total assets at December 31, 2005.



30



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##### Table of Contents

Nonperforming loans (nonaccrual loans and accruing loans 90 days or more past due) at September 30,
2006 were $6.5 million or 0.52% of total loans, an increase of $1.8 million or 38.8% compared with nonperforming loans of $4.7 million or 0.46% of total loans at December 31, 2005. Other real estate and repossessed assets at September 30,
2006 were $1.9 million, a decrease of $493,000 or 20.9% compared with other real estate and repossessed assets of $2.4 million at December 31, 2005.

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



|                                                                              |  |                        |       |                  |   |      
|----------------------------------------------------------------------------- |  | ---------------------- | ----- | ---------------- | - | -----
|                                                                              |  | September 30,2006      |       | December 31,2005
|                                                                              |  | (Dollars in thousands)
|Nonaccrual loans                                                              |  | $                      | 4,295 |                  | $ | 2,544
|Accruing loans past due 90 days or more                                       |  |                        | 2,251 |                  |   | 2,172
|Other real estate and other repossessed assets                                |  |                        | 1,867 |                  |   | 2,360
|                                                                              |  |                        |       |                  |   |      
|Total nonperforming assets                                                    |  | $                      | 8,413 |                  | $ | 7,076
|                                                                              |  |                        |       |                  |   |      
|                                                                              |  |                       
|Nonperforming assets to total assets                                          |  |                        | 0.45% |                  |   | 0.46%
|Nonperforming assets to total loans, other real estate and repossessed assets |  |                        | 0.66% |                  |   | 0.68%
|Nonperforming loans to total loans                                            |  |                        | 0.52% |                  |   | 0.46%

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

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.

The allowance for loan losses at September 30, 2006 was $10.6 million or 0.84% of total loans, an increase of $1.0 million or 10.5% compared with $9.6 million or 0.93% of total loans at December 31, 2005.
The ratio of the allowance for loan losses to nonperforming loans at September 30, 2006 was 161.93% compared with 203.39% at December 31, 2005. Net charge-offs for the nine months ended September 30, 2006 were $2.9 million, an
increase of $1.2 million or 73.4% compared with $1.6 million for the same nine months of 2005. Approximately $711,000 of this increase was due to an additional provision for loan losses in connection with the $1.1 million lower of cost or estimated
fair value adjustment on the $5.4 million in loans reclassified as held for sale. Net charge-offs for the year ended December 31, 2005 were $2.7 million. The ratio of net charge-offs to average loans for the nine months ended September 30,
2006 was 0.32%, an increase of 3 basis points compared with 0.29% for the same nine months of 2005, and a decrease of 3 basis points compared with 0.35% for the year ended December 31, 2005.



31



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



|                                                          |  |                                     |           |   |                             |   |           |  
|--------------------------------------------------------- |  | ----------------------------------- | --------- | - | --------------------------- | - | --------- | -
|                                                          |  | Nine Months EndedSeptember 30, 2006 |           |   | Year EndedDecember 31, 2005 |  
|                                                          |  | (Dollars in thousands)              |          
|Average total loans outstanding, gross                    |  | $                                   | 1,178,793 |   |                             | $ | 783,512   |  
|                                                          |  |                                     |           |   |                             |   |           |  
|Total loans outstanding at end of period, gross           |  | $                                   | 1,269,244 |   |                             | $ | 1,031,838 |  
|                                                          |  |                                     |           |   |                             |   |           |  
|                                                          |  |                                    
|Allowance for loan losses at beginning of period          |  | $                                   | 9,592     |   |                             | $ | 6,685     |  
|Provision for loan losses                                 |  |                                     | 2,266     |   |                             |   | 3,838     |  
|Balances from acquisitions                                |  |                                     | 1,600     |   |                             |   | 1,799     |  
|Charge-offs:                                              |  |                                     |           |   |                             |   |           |  
|Commercial and industrial                                 |  |                                     | (1,457    | ) |                             |   | (1,249    | )
|Real estate                                               |  |                                     | (882      | ) |                             |   | (768      | )
|Consumer                                                  |  |                                     | (450      | ) |                             |   | (827      | )
|Other                                                     |  |                                     | (929      | ) |                             |   | (812      | )
|                                                          |  |                                     |           |   |                             |   |           |  
|Total charge-offs                                         |  |                                     | (3,718    | ) |                             |   | (3,656    | )
|Recoveries:                                               |  |                                     |           |   |                             |   |           |  
|Commercial and industrial                                 |  |                                     | 160       |   |                             |   | 359       |  
|Real estate                                               |  |                                     | 153       |   |                             |   | 180       |  
|Consumer                                                  |  |                                     | 137       |   |                             |   | 119       |  
|Other                                                     |  |                                     | 410       |   |                             |   | 268       |  
|                                                          |  |                                     |           |   |                             |   |           |  
|Total recoveries                                          |  |                                     | 860       |   |                             |   | 926       |  
|                                                          |  |                                     |           |   |                             |   |           |  
|Net charge-offs                                           |  |                                     | (2,858    | ) |                             |   | (2,730    | )
|                                                          |  |                                     |           |   |                             |   |           |  
|Allowance for loan losses at end of period                |  | $                                   | 10,600    |   |                             | $ | 9,592     |  
|                                                          |  |                                     |           |   |                             |   |           |  
|                                                          |  |                                    
|Ratio of allowance for loan losses to end of period loans |  |                                     | 0.84      | % |                             |   | 0.93      | %
|Ratio of net charge-offs to average loans (annualized)    |  |                                     | 0.32      | % |                             |   | 0.35      | %
|Ratio of allowance for loan losses to nonperforming loans |  |                                     | 161.93    | % |                             |   | 203.39    | %



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##### Table of Contents

Securities.At September 30, 2006, the investment securities portfolio totaled $277.7
million, an increase of $8.5 million or 3.2% compared with total investment securities of $269.2 million at December 31, 2005. During the nine months ended September 30, 2006, the Company acquired $5.4 million in investment securities and
purchased $3.082 billion in investment securities that was partially offset by sales, maturities and principal pay-downs on investment securities of $3.078 billion, an unrealized net loss on available-for-sale securities of $978,000 and net premium
amortization of $280,000.

The following tables summarize the amortized cost and their approximate fair values of securities classified as
available-for-sale and held-to-maturity as of September 30, 2006 and December 31, 2005 (in thousand):



|                                                                     |  |                    |         |                      |   |                       |  |   |            |   |  |   |               |  |                      |  |                       |         |  |            |     |  |   |        |   |  |   |        
|-------------------------------------------------------------------- |  | ------------------ | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ------------- |  | -------------------- |  | --------------------- | ------- |  | ---------- | --- |  | - | ------ | - |  | - | -------
|                                                                     |  | September 30, 2006 |         |                      |   | December 31, 2005    
|                                                                     |  | AmortizedCost      |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value |   |  |   | AmortizedCost |  | GrossUnrealizedGains |  | GrossUnrealizedLosses |         |  | Fair Value
|Available for Sale Securities:                                       |  |                    |         |                      |   |                       |  |   |            |   |  |   |               |  |                      |  |                       |         |  |            |     |  |   |        |   |  |   |        
|U.S. Treasury securities and obligations of U.S. government agencies |  | $                  | 87,420  |                      | $ | 19                    |  | $ | (1,789     | ) |  | $ | 85,650        |  |                      |  | $                     | 77,193  |  | $          | 7   |  | $ | (2,191 | ) |  | $ | 75,009 
|Mortgage-backed securities                                           |  |                    | 135,285 |                      |   |                      |  |   | (4,985     | ) |  |   | 130,300       |  |                      |  |                       | 143,140 |  |            |    |  |   | (3,756 | ) |  |   | 139,384
|State and municipal securities                                       |  |                    | 18,616  |                      |   |                      |  |   | (213       | ) |  |   | 18,403        |  |                      |  |                       | 11,047  |  |            | 8   |  |   | (80    | ) |  |   | 10,975 
|Other                                                                |  |                    | 17,829  |                      |   |                      |  |   | (64        | ) |  |   | 17,765        |  |                      |  |                       | 17,685  |  |            |    |  |   | (42    | ) |  |   | 17,643 
|                                                                     |  |                    |         |                      |   |                       |  |   |            |   |  |   |               |  |                      |  |                       |         |  |            |     |  |   |        |   |  |   |        
|Total                                                                |  | $                  | 259,150 |                      | $ | 19                    |  | $ | (7,051     | ) |  | $ | 252,118       |  |                      |  | $                     | 249,065 |  | $          | 15  |  | $ | (6,069 | ) |  | $ | 243,011
|                                                                     |  |                    |         |                      |   |                       |  |   |            |   |  |   |               |  |                      |  |                       |         |  |            |     |  |   |        |   |  |   |        
|                                                                     |  |                    |        
|                                                                     |  | September 30, 2006 |         |                      |   | December 31, 2005    
|                                                                     |  | AmortizedCost      |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value |   |  |   | AmortizedCost |  | GrossUnrealizedGains |  | GrossUnrealizedLosses |         |  | Fair Value
|Held to Maturity Securities:                                         |  |                    |         |                      |   |                       |  |   |            |   |  |   |               |  |                      |  |                       |         |  |            |     |  |   |        |   |  |   |        
|U.S. Treasury securities and obligations of U.S. government agencies |  | $                  |        |                      | $ |                      |  | $ |           |   |  | $ |              |  |                      |  | $                     |        |  | $          |    |  | $ |       |   |  | $ |       
|Mortgage-backed securities                                           |  |                    |        |                      |   |                      |  |   |           |   |  |   |              |  |                      |  |                       |        |  |            |    |  |   |       |   |  |   |       
|State and municipal securities                                       |  |                    | 25,580  |                      |   | 57                    |  |   | (177       | ) |  |   | 25,460        |  |                      |  |                       | 25,163  |  |            | 134 |  |   | (78    | ) |  |   | 25,219 
|Other                                                                |  |                    |        |                      |   |                      |  |   |           |   |  |   |              |  |                      |  |                       | 1,000   |  |            |    |  |   |       |   |  |   | 1,000  
|                                                                     |  |                    |         |                      |   |                       |  |   |            |   |  |   |               |  |                      |  |                       |         |  |            |     |  |   |        |   |  |   |        
|Total                                                                |  | $                  | 25,580  |                      | $ | 57                    |  | $ | (177       | ) |  | $ | 25,460        |  |                      |  | $                     | 26,163  |  | $          | 134 |  | $ | (78    | ) |  | $ | 26,219 
|                                                                     |  |                    |         |                      |   |                       |  |   |            |   |  |   |               |  |                      |  |                       |         |  |            |     |  |   |        |   |  |   |        





Deposits. Total deposits at September 30, 2006 were $1.350 billion, an increase of $228.8 million or 20.4% compared with total deposits of
$1.121 billion at December 31, 2005. On December 1, 2005, the Company assumed approximately $205.0 million in deposits in connection with the acquisition of Gateway. On February 14, 2006, the Company assumed approximately $38.0
million in deposits in connection with the acquisition of Express and on April 1, 2006, the Company assumed approximately $121.0 million of deposits in connection with the acquisition of Northwest Bank.

Noninterest-bearing demand deposits at September 30, 2006 were $395.1 million, an increase of $77.3 million or 24.3% compared with
noninterest-bearing demand deposits of $317.7 million at December 31, 2005. The ratios of noninterest-bearing demand deposits to total deposits at September 30, 2006 and December 31, 2005 were 29.3% and 28.3% respectively.
Interest-bearing deposits at September 30, 2006 were $955.1 million, an increase of $151.4 million or 18.8% compared with interest-bearing deposits of $803.7 million at December 31, 2005.



33



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##### Table of Contents

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



|                                |  |                                             |           |              |   |             |                                     |      |   |  |                           |  |              |         |             |   |        |  |      |  
|------------------------------- |  | ------------------------------------------- | --------- | ------------ | - | ----------- | ----------------------------------- | ---- | - |  | ------------------------- |  | ------------ | ------- | ----------- | - | ------ |  | ---- | -
|                                |  | For the Nine Months EndedSeptember 30, 2006 |           |              |   |             | For the Year EndedDecember 31, 2005 |     
|                                |  | AverageOutstandingBalance                   |           | InterestPaid |   | AverageRate |                                     |      |   |  | AverageOutstandingBalance |  | InterestPaid |         | AverageRate |  
|                                |  | (Dollars in thousands)                      |           |              |  
|Noninterest-bearing demand      |  | $                                           | 351,257   |              | $ |            |                                     |     | % |  |                           |  | $            | 205,721 |             | $ |       |  |     | %
|Interest-bearing demand         |  |                                             | 229,165   |              |   | 2,814       |                                     | 1.64 |   |  |                           |  |              | 213,106 |             |   | 2,746  |  | 1.29 |  
|Savings and money market        |  |                                             | 278,406   |              |   | 4,547       |                                     | 2.18 |   |  |                           |  |              | 163,332 |             |   | 2,378  |  | 1.46 |  
|Time                            |  |                                             | 408,319   |              |   | 12,113      |                                     | 3.97 |   |  |                           |  |              | 305,627 |             |   | 8,900  |  | 2.91 |  
|                                |  |                                             |           |              |   |             |                                     |      |   |  |                           |  |              |         |             |   |        |  |      |  
|Total interest-bearing deposits |  |                                             | 915,890   |              |   | 19,474      |                                     | 2.84 |   |  |                           |  |              | 682,065 |             |   | 14,024 |  | 2.06 |  
|                                |  |                                             |           |              |   |             |                                     |      |   |  |                           |  |              |         |             |   |        |  |      |  
|Total deposits                  |  | $                                           | 1,267,147 |              | $ | 19,474      |                                     | 2.05 | % |  |                           |  | $            | 887,786 |             | $ | 14,024 |  | 1.58 | %
|                                |  |                                             |           |              |   |             |                                     |      |   |  |                           |  |              |         |             |   |        |  |      |  

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

At September 30, 2006, total borrowings were $237.8 million, an increase of $32.0 million or 15.6% compared with
borrowings of $205.8 million at December 31, 2005. At September 30, 2006, FHLB advances were $227.3 million, an increase of $24.0 million or 11.8% compared with $203.3 million at December 31, 2005. At September 30, 2006, the FHLB
advances had maturity dates ranging from 2006 to 2025 with interest rates ranging from 2.92% to 6.08%. At September 30, 2006, the credit line with a correspondent bank had a balance of $10.5 million, an increase of $8.0 million compared with
$2.5 million at December 31, 2005. The credit line bears interest at the effective Prime lending rate minus 1.00% and expires, with renewal options, in July 2007. Federal funds purchased at September 30, 2006 were $14.3 million, a decrease
of $7.6 million or 34.7% compared with Federal funds purchased of $21.9 million at December 31, 2005.

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



|                                             |  |                   |         |                  |   |        
|-------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                             |  | September 30,2006 |         | December 31,2005
|                                             |  | (In thousands)   
|FHLB advances                                |  | $                 | 227,258 |                  | $ | 203,255
|Balance on $20.0 million line of credit      |  |                   | 10,500  |                  |   | 2,500  
|                                             |  |                   |         |                  |   |        
|Total borrowings                             |  |                   | 237,758 |                  |   | 205,755
|Federal funds purchased                      |  |                   | 14,294  |                  |   | 21,901 
|                                             |  |                   |         |                  |   |        
|Total borrowings and Federal funds purchased |  | $                 | 252,052 |                  | $ | 227,656
|                                             |  |                   |         |                  |   |        



34



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##### Table of Contents

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



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

---

|(1) | The 3-Month LIBOR in effect as of September 30, 2006 was 5.37%.
|--- | ---------------------------------------------------------------

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

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

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

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

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

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

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

Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near
future. At September 30, 2006, the Company had cash and cash equivalents of $102.7 million, an increase of approximately $7.4 million or 7.7% compared with $95.4 million at December 31, 2005. The Company views time deposits as a stable
means of supporting loan growth. The Company believes, based on its historical experience, that its large time deposits have core-type characteristics. The Company anticipates that this source of funding will continue to sustain a portion of the
Companys asset growth in the future.



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Capital Resources. Shareholders equity at September 30, 2006 was $174.7 million, an
increase of $36.8 million or 26.7% compared with shareholders equity of $137.9 million at December 31, 2005. The increase in shareholders equity between September 30, 2006 and December 31, 2005, was primarily the result of
common stock issued in connection with the acquisitions of Express and Northwest, net earnings for the nine months ended September 30, 2006, and the issuance of common stock to employees upon the exercise of stock options. At September 30,
2006, there were 10,684,185 shares of the Companys common stock outstanding, net of 43,731 shares of unvested shares of restricted stock.

The return on average tangible equity for the nine months ended September 30, 2006 was 23.30%, an increase of 477 basis points compared with 18.53% for the year ended December 31, 2005. The ratio of average equity to average
assets for the nine months ended September 30, 2006 was 9.30%, an increase of 37 basis points compared with 8.93% for the year ended December 31, 2005.

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



|                                |  |                                               |  |                                                                              |  |                                  
|------------------------------- |  | --------------------------------------------- |  | ---------------------------------------------------------------------------- |  | ---------------------------------
|                                |  | Minimum Required For CapitalAdequacy Purposes |  | To Be Categorizedas Well CapitalizedUnder Prompt Corrective ActionProvisions |  | Actual Ratio atSeptember 30, 2006
|Texas United:                   |  |                                               |  |                                                                              |  |                                  
|Leverage ratio                  |  | 4.00%(1)                                      |  | N/A                                                                          |  | 7.38%                            
|Tier 1 risk-based capital ratio |  | 4.00                                          |  | N/A                                                                          |  | 9.43                             
|Risk-based capital ratio        |  | 8.00                                          |  | N/A                                                                          |  | 10.20                            
|State Bank:                     |  |                                               |  |                                                                              |  |                                  
|Leverage ratio                  |  | 4.00%(2)                                      |  | 5.00%                                                                        |  | 7.39%                            
|Tier 1 risk-based capital ratio |  | 4.00                                          |  | 6.00                                                                         |  | 9.57                             
|Risk-based capital ratio        |  | 8.00                                          |  | 10.00                                                                        |  | 10.28                            
|GNB Financial:                  |  |                                               |  |                                                                              |  |                                  
|Leverage ratio                  |  | 4.00%(3)                                      |  | 5.00%                                                                        |  | 9.93%                            
|Tier 1 risk-based capital ratio |  | 4.00                                          |  | 6.00                                                                         |  | 11.58                            
|Risk-based capital ratio        |  | 8.00                                          |  | 10.00                                                                        |  | 12.40                            
|Gateway National Bank:          |  |                                               |  |                                                                              |  |                                  
|Leverage ratio                  |  | 4.00%(3)                                      |  | 5.00%                                                                        |  | 8.07%                            
|Tier 1 risk-based capital ratio |  | 4.00                                          |  | 6.00                                                                         |  | 11.26                            
|Risk-based capital ratio        |  | 8.00                                          |  | 10.00                                                                        |  | 12.27                            
|Northwest Bank:                 |  |                                               |  |                                                                              |  |                                  
|Leverage ratio                  |  | 4.00%(3)                                      |  | 5.00%                                                                        |  | 9.02%                            
|Tier 1 risk-based capital ratio |  | 4.00                                          |  | 6.00                                                                         |  | 10.48                            
|Risk-based capital ratio        |  | 8.00                                          |  | 10.00                                                                        |  | 11.31                            

---

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

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

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



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

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



|Item 4. | Controls and Procedures
|------- | -----------------------

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

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

PART II

OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

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



|Item 1A. | Risk Factors
|-------- | ------------

There have been no
material changes from the risk factors disclosed in the Risk Factors section of the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and in Item 1A of the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006.



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

Not applicable



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not
applicable



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

Not applicable



|Item 5. | Other Information
|------- | -----------------

Not applicable



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|Item 6. | Exhibits
|------- | --------



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

---

|* | This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and
shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



|                       |  |  |  |     |  |                          |  |                                                           
|---------------------- |  |  |  | --- |  | ------------------------ |  | ----------------------------------------------------------
|Date: November 9, 2006 |  |  |  | By: |  | /s/ L. Don Stricklin    
|                       |  |  |  |     |  |                          |  | L. Don Stricklin                                          
|                       |  |  |  |     |  |                          |  | President and Chief Executive Officer                     
|                       |  |  |  |     |  |                          |  | (principal executive officer)                             
|                       |  |  |  |    
|                       |  |  | 
|Date: November 9, 2006 |  |  |  | By: |  | /s/ Jeffrey A. Wilkinson
|                       |  |  |  |     |  |                          |  | Jeffrey A. Wilkinson                                      
|                       |  |  |  |     |  |                          |  | Executive Vice President and Chief Financial Officer      
|                       |  |  |  |     |  |                          |  | (principal financial officer/principal accounting officer)



39