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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

Amendment No. 1



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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 MARCH 31, 2005



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



Commission file number 000-49928



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TEXAS UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



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



202 W. COLORADO

LA GRANGE, TEXAS 78945

(Address of principal executive offices, including zip code)



(979) 968-8451

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the Act:

None



Securities registered pursuant to Section 12(g) of the
Act:

Common Stock, par value $1.00 per share

(Title of class)



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



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x.



As of May 6, 2005, the number
of outstanding shares of Common Stock, par value $1.00 per share, was 7,805,122.



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EXPLANATORY NOTE



The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q of Texas United Bancshares, Inc. (the
Company) for the quarter ended March 31, 2005 (the Original Form 10-Q) is to restate the Companys condensed consolidated financial statements as of March 31, 2005 and for the three months ended March 31, 2005 and 2004
and to revise related disclosures in the Original Form 10-Q. This restatement is described in detail in Note 2 to the accompanying condensed consolidated financial statements.



The Company restated its condensed consolidated financial statements as of March 31, 2005 and for the three months ended
March 31, 2005 and 2004 to correct the classification of mortgage loan origination fees on loans held for sale originated by State Bank, a subsidiary of the Company. The restatement decreased total interest income by $446,000 and $250,000 for the
three months ended March 31, 2005 and 2004, respectively, and increased total noninterest income by these same amounts for the same periods. The correction had no impact on net earnings or earnings per share.



The restatement resulted from a review and assessment by the Company of the
classification and recording of mortgage loan origination fees on loans held for sale. Historically, State Bank recorded mortgage loan origination fees as interest income for all mortgage loans originated. For the periods presented since the
Companys acquisition of Community Home Loan (CHL) in February 2004, CHL recorded mortgage loan origination fees as noninterest income for all mortgage loans originated. The Company has since determined that mortgage loan
origination fees on all mortgage loans originated by State Bank and CHL with the intent to sell should be recorded as a component of gains on sale of loans (in noninterest income) when the loans are sold and has restated its condensed consolidated
financial statements to reflect this change.



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



2



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



TABLE OF CONTENTS



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I                                                                                        |  |   
|Item 1. Condensed Consolidated Financial Statements                                           |  | 4 
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                         |  | 4 
|CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (RESTATED)                                      |  | 5 
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                               |  | 6 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY                                    |  | 7 
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)                                    |  | 8 
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          |  | 9 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15
|Item 4. Controls and Procedures                                                               |  | 24
|                                                                                              | 
|PART II                                                                                       |  |   
|Item 6. Exhibits                                                                              |  | 25
|Signatures                                                                                    |  | 26



3



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PART I



FINANCIAL INFORMATION



Item 1.Condensed Consolidated Financial Statements.



TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Balance Sheets

(In thousands, except share data)



|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                                |  | March 31,2005 |           |   | December 31,2004 |  
|                                                                                                                                                                                                                                |  | (Unaudited)   |           |   |                  |  
|ASSETS                                                                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Cash and cash equivalents:                                                                                                                                                                                                      |  |               |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                                                                         |  | $             | 34,334    |   |                  | $ | 36,752    |  
|Federal funds sold and other temporary investments                                                                                                                                                                              |  |               | 5,235     |   |                  |   | 4,015     |  
|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|Total cash and cash equivalents                                                                                                                                                                                                 |  |               | 39,569    |   |                  |   | 40,767    |  
|Investment securities available-for-sale, at fair value                                                                                                                                                                         |  |               | 304,988   |   |                  |   | 301,631   |  
|Loans, net                                                                                                                                                                                                                      |  |               | 692,440   |   |                  |   | 659,884   |  
|Loans held for sale                                                                                                                                                                                                             |  |               | 26,353    |   |                  |   | 26,979    |  
|Premises and equipment, net                                                                                                                                                                                                     |  |               | 40,983    |   |                  |   | 39,730    |  
|Accrued interest receivable                                                                                                                                                                                                     |  |               | 5,311     |   |                  |   | 5,214     |  
|Goodwill                                                                                                                                                                                                                        |  |               | 40,117    |   |                  |   | 40,117    |  
|Core deposit intangibles                                                                                                                                                                                                        |  |               | 5,155     |   |                  |   | 5,341     |  
|Mortgage servicing rights                                                                                                                                                                                                       |  |               | 4,740     |   |                  |   | 4,698     |  
|Other assets                                                                                                                                                                                                                    |  |               | 20,510    |   |                  |   | 17,005    |  
|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                                                    |  | $             | 1,180,166 |   |                  | $ | 1,141,366 |  
|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                                                       |  |               |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                                                                                             |  | $             | 192,727   |   |                  | $ | 187,454   |  
|Interest-bearing                                                                                                                                                                                                                |  |               | 687,579   |   |                  |   | 692,621   |  
|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                                                                  |  |               | 880,306   |   |                  |   | 880,075   |  
|Federal funds purchased                                                                                                                                                                                                         |  |               | 53,825    |   |                  |   | 15,125    |  
|Other liabilities                                                                                                                                                                                                               |  |               | 11,502    |   |                  |   | 11,603    |  
|Borrowings                                                                                                                                                                                                                      |  |               | 107,593   |   |                  |   | 105,940   |  
|Securities sold under repurchase agreements                                                                                                                                                                                     |  |               | 5,243     |   |                  |   | 6,291     |  
|Junior subordinated deferrable interest debentures                                                                                                                                                                              |  |               | 17,520    |   |                  |   | 17,520    |  
|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                                               |  |               | 1,075,989 |   |                  |   | 1,036,554 |  
|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|Commitments and contingencies                                                                                                                                                                                                   |  |               |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Preferred stock, no par value, 500,000 shares authorized, none of which are issued and outstanding                                                                                                                              |  |               |          |   |                  |   |          |  
|Common stock, $1.00 par value, 20,000,000 shares authorized; 7,811,217 shares issued and 7,805,122 shares outstanding as of March 31, 2005 and
7,802,467 shares issued and 7,796,372 shares outstanding as of December 31, 2004 |  |               | 7,811     |   |                  |   | 7,802     |  
|Additional paid-in capital                                                                                                                                                                                                      |  |               | 75,976    |   |                  |   | 75,935    |  
|Retained earnings                                                                                                                                                                                                               |  |               | 24,099    |   |                  |   | 21,921    |  
|Accumulated other comprehensive loss                                                                                                                                                                                            |  |               | (3,592    | ) |                  |   | (729      | )
|Less treasury stock, at cost                                                                                                                                                                                                    |  |               | (117      | ) |                  |   | (117      | )
|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                                                      |  |               | 104,177   |   |                  |   | 104,812   |  
|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                                      |  | $             | 1,180,166 |   |                  | $ | 1,141,366 |  
|                                                                                                                                                                                                                                |  |               |           |   |                  |   |           |  



See accompanying notes
to condensed consolidated financial statements



4



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)



|                                                    |  |                                     |        |   |      |   |      
|--------------------------------------------------- |  | ----------------------------------- | ------ | - | ---- | - | -----
|                                                    |  | For the three monthsended March 31,
|                                                    |  | 2005                                |        |   | 2004
|                                                    |  | Restated  See Note 2              
|Interest income:                                    |  |                                     |        |   |      |   |      
|Loans                                               |  | $                                   | 13,659 |   |      | $ | 7,267
|Investment securities:                              |  |                                     |        |   |      |   |      
|Taxable                                             |  |                                     | 2,767  |   |      |   | 1,587
|Tax-exempt                                          |  |                                     | 97     |   |      |   | 98   
|Federal funds sold and other temporary investments  |  |                                     | 8      |   |      |   | 4    
|                                                    |  |                                     |        |   |      |   |      
|Total interest income                               |  |                                     | 16,531 |   |      |   | 8,956
|                                                    |  |                                     |        |   |      |   |      
|Interest expense:                                   |  |                                     |        |   |      |   |      
|Deposits                                            |  |                                     | 3,077  |   |      |   | 1,789
|Federal funds purchased                             |  |                                     | 176    |   |      |   | 14   
|Borrowings                                          |  |                                     | 809    |   |      |   | 464  
|Securities sold under agreements to repurchase      |  |                                     | 20     |   |      |   | 9    
|Junior subordinated deferrable interest debentures  |  |                                     | 390    |   |      |   | 266  
|                                                    |  |                                     |        |   |      |   |      
|Total interest expense                              |  |                                     | 4,472  |   |      |   | 2,542
|                                                    |  |                                     |        |   |      |   |      
|Net interest income                                 |  |                                     | 12,059 |   |      |   | 6,414
|Provision for loan losses                           |  |                                     | 722    |   |      |   | 150  
|                                                    |  |                                     |        |   |      |   |      
|Net interest income after provision for loan losses |  |                                     | 11,337 |   |      |   | 6,264
|                                                    |  |                                     |        |   |      |   |      
|Noninterest income:                                 |  |                                     |        |   |      |   |      
|Service charges on deposit accounts                 |  |                                     | 1,834  |   |      |   | 1,597
|Mortgage servicing revenue                          |  |                                     | 296    |   |      |   | 208  
|(Loss) gain on sale of investment securities, net   |  |                                     | (38    | ) |      |   | 77   
|Net gain on sale of loans                           |  |                                     | 2,590  |   |      |   | 1,781
|Other noninterest income                            |  |                                     | 1,615  |   |      |   | 491  
|                                                    |  |                                     |        |   |      |   |      
|Total noninterest income                            |  |                                     | 6,297  |   |      |   | 4,154
|                                                    |  |                                     |        |   |      |   |      
|Noninterest expense:                                |  |                                     |        |   |      |   |      
|Employee compensation and benefits                  |  |                                     | 7,061  |   |      |   | 4,274
|Net occupancy expense                               |  |                                     | 1,805  |   |      |   | 1,088
|Other noninterest expense                           |  |                                     | 4,573  |   |      |   | 2,788
|                                                    |  |                                     |        |   |      |   |      
|Total noninterest expense                           |  |                                     | 13,439 |   |      |   | 8,150
|                                                    |  |                                     |        |   |      |   |      
|Earnings before provision for income taxes          |  |                                     | 4,195  |   |      |   | 2,268
|Provision for income taxes                          |  |                                     | 1,393  |   |      |   | 703  
|                                                    |  |                                     |        |   |      |   |      
|Net earnings                                        |  | $                                   | 2,802  |   |      | $ | 1,565
|                                                    |  |                                     |        |   |      |   |      
|Earnings per common share:                          |  |                                     |        |   |      |   |      
|Basic                                               |  | $                                   | 0.36   |   |      | $ | 0.39 
|Diluted                                             |  | $                                   | 0.35   |   |      | $ | 0.37 
|Weighted average shares outstanding:                |  |                                     |        |   |      |   |      
|Basic                                               |  |                                     | 7,798  |   |      |   | 4,010
|Diluted                                             |  |                                     | 7,968  |   |      |   | 4,193



See accompanying notes
to condensed consolidated financial statements



5



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)



|                                                                                     |  |                                      |        |   |      |   |      
|------------------------------------------------------------------------------------ |  | ------------------------------------ | ------ | - | ---- | - | -----
|                                                                                     |  | For the three months ended March 31,
|                                                                                     |  | 2005                                 |        |   | 2004
|Net earnings                                                                         |  | $                                    | 2,802  |   |      | $ | 1,565
|                                                                                     |  |                                     
|Other comprehensive (loss) income, net of tax:                                       |  |                                      |        |   |      |   |      
|Unrealized holding (losses) gains on investment securities arising during the period |  |                                      | (2,888 | ) |      |   | 1,404
|Less: reclassification adjustment for (losses) gains included in net income          |  |                                      | (25    | ) |      |   | 51   
|                                                                                     |  |                                      |        |   |      |   |      
|Other comprehensive (loss) income                                                    |  |                                      | (2,863 | ) |      |   | 1,353
|                                                                                     |  |                                      |        |   |      |   |      
|Total comprehensive (loss) income                                                    |  | $                                    | (61    | ) |      | $ | 2,918
|                                                                                     |  |                                      |        |   |      |   |      



See accompanying notes
to condensed consolidated financial statements



6



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Changes in Shareholders Equity



Year Ended December 31, 2004 and

Three Months Ended March 31, 2005

(In thousands, except share amounts)



|                                                                                 |        |              |        |                          |       |                  |   |        |                                     |   |        |                       |  |   |        |   |  |   |      |   |  |   |         |  
|-------------------------------------------------------------------------------- | ------ | ------------ | ------ | ------------------------ | ----- | ---------------- | - | ------ | ----------------------------------- | - | ------ | --------------------- |  | - | ------ | - |  | - | ---- | - |  | - | ------- | -
|                                                                                 |        | Common Stock |        | AdditionalPaid-inCapital |       | RetainedEarnings |   |        | Accumulated OtherComprehensiveLoss  |   |        | Treasury Stock atCost |  |   | Total  |  
|                                                                                 |        | Shares       |        | Amount                   |       |                  |   |        |                                    
|Balance at January 1, 2004                                                       |        | 4,008,192    |        | $                        | 4,008 |                  | $ | 16,911 |                                     | $ | 17,422 |                       |  | $ | (237   | ) |  | $ | (117 | ) |  | $ | 37,987  |  
|Net earnings                                                                     |        |             |        |                          |      |                  |   |       |                                     |   | 6,050  |                       |  |   |       |   |  |   |     |   |  |   | 6,050   |  
|Unrealized loss on securities, net of tax and reclassification adjustment        |        |             |        |                          |      |                  |   |       |                                     |   |       |                       |  |   | (492   | ) |  |   |     |   |  |   | (492    | )
|                                                                                 |        |              |        |                          |       |                  |   |        |                                     |   |        |                       |  |   |        |   |  |   |      |   |  |   |         |  
|Other comprehensive income                                                       |        |             |        |                          |      |                  |   |       |                                     |   |       |                       |  |   |       |   |  |   |     |   |  |   | 5,558   |  
|Issuance of common stock related to the acquisition of Community Home Loan, Inc. |        | 11,765       |        |                          | 12    |                  |   | 188    |                                     |   |       |                       |  |   |       |   |  |   |     |   |  |   | 200     |  
|Issuance of common stock in public offering                                      |        | 2,300,000    |        |                          | 2,300 |                  |   | 33,729 |                                     |   |       |                       |  |   |       |   |  |   |     |   |  |   | 36,029  |  
|Issuance of common stock related to the acquisition of GNB Bancshares, Inc.      |        | 1,456,819    |        |                          | 1,457 |                  |   | 24,980 |                                     |   |       |                       |  |   |       |   |  |   |     |   |  |   | 26,437  |  
|Issuance of common stock upon exercise of employee stock options                 |        | 25,691       |        |                          | 25    |                  |   | 127    |                                     |   |       |                       |  |   |       |   |  |   |     |   |  |   | 152     |  
|Dividends ($0.28 per share)                                                      |        |             |        |                          |      |                  |   |       |                                     |   | (1,551 | )                     |  |   |       |   |  |   |     |   |  |   | (1,551  | )
|                                                                                 |        |              |        |                          |       |                  |   |        |                                     |   |        |                       |  |   |        |   |  |   |      |   |  |   |         |  
|Balance at December 31, 2004                                                     |        | 7,802,467    |        | $                        | 7,802 |                  | $ | 75,935 |                                     | $ | 21,921 |                       |  | $ | (729   | ) |  | $ | (117 | ) |  | $ | 104,812 |  
|                                                                                 |        |              |        |                          |       |                  |   |        |                                     |   |        |                       |  |   |        |   |  |   |      |   |  |   |         |  
|                                                                                 |        |              |        |                          |       |                 
|Unaudited                                                                        |        | Common Stock |        | AdditionalPaid-inCapital |       | RetainedEarnings |   |        | Accumulated Other ComprehensiveLoss |   |        | Treasury Stock atCost |  |   | Total  |  
|                                                                                 | Shares |              | Amount |                          |       |                  |   |       
|Balance at January 1, 2005                                                       |        | 7,802,467    |        | $                        | 7,802 |                  | $ | 75,935 |                                     | $ | 21,921 |                       |  | $ | (729   | ) |  | $ | (117 | ) |  | $ | 104,812 |  
|Net earnings                                                                     |        |             |        |                          |      |                  |   |       |                                     |   | 2,802  |                       |  |   |       |   |  |   |     |   |  |   | 2,802   |  
|Unrealized loss on securities, net of tax and reclassification adjustment        |        |             |        |                          |      |                  |   |       |                                     |   |       |                       |  |   | (2,863 | ) |  |   |     |   |  |   | (2,863  | )
|                                                                                 |        |              |        |                          |       |                  |   |        |                                     |   |        |                       |  |   |        |   |  |   |      |   |  |   |         |  
|Other comprehensive loss                                                         |        |             |        |                          |      |                  |   |       |                                     |   |       |                       |  |   |       |   |  |   |     |   |  |   | (61     | )
|Issuance of common stock upon exercise of employee stock options                 |        | 8,750        |        |                          | 9     |                  |   | 41     |                                     |   |       |                       |  |   |       |   |  |   |     |   |  |   | 50      |  
|Dividends ($0.08 per share)                                                      |        |             |        |                          |      |                  |   |       |                                     |   | (624   | )                     |  |   |       |   |  |   |     |   |  |   | (624    | )
|                                                                                 |        |              |        |                          |       |                  |   |        |                                     |   |        |                       |  |   |        |   |  |   |      |   |  |   |         |  
|Balance at March 31, 2005                                                        |        | 7,811,217    |        | $                        | 7,811 |                  | $ | 75,976 |                                     | $ | 24,099 |                       |  | $ | (3,592 | ) |  | $ | (117 | ) |  | $ | 104,177 |  
|                                                                                 |        |              |        |                          |       |                  |   |        |                                     |   |        |                       |  |   |        |   |  |   |      |   |  |   |         |  



See accompanying notes
to condensed consolidated financial statements





7



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                         |  |                                     |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | For the three monthsended March 31, |        
|                                                                                         |  | 2005                                |         |   | 2004 |  
|                                                                                         |  | Restated  See Note 2               |        
|Cash flows from operating activities:                                                    |  |                                     |         |   |      |   |         |  
|Net earnings                                                                             |  | $                                   | 2,802   |   |      | $ | 1,565   |  
|Adjustments to reconcile net income to net cash (used) provided by operating activities: |  |                                     |         |   |      |   |         |  
|Depreciation and amortization                                                            |  |                                     | 1,106   |   |      |   | 750     |  
|Provision for loan losses                                                                |  |                                     | 722     |   |      |   | 150     |  
|Loss (gain) on sales of securities, net                                                  |  |                                     | 38      |   |      |   | (77     | )
|(Gain) loss on sale of other real estate and premises and equipment                      |  |                                     | (18     | ) |      |   | 13      |  
|Gain on sale of loans                                                                    |  |                                     | (2,590  | ) |      |   | (1,781  | )
|Amortization of premium, net of discounts on securities                                  |  |                                     | 315     |   |      |   | 303     |  
|Changes in:                                                                              |  |                                     |         |   |      |   |         |  
|Loans held for sale                                                                      |  |                                     | (2,340  | ) |      |   | (3,931  | )
|Other assets                                                                             |  |                                     | (4,601  | ) |      |   | 270     |  
|Other liabilities                                                                        |  |                                     | (188    | ) |      |   | (288    | )
|                                                                                         |  |                                     |         |   |      |   |         |  
|Net cash used by operating activities                                                    |  |                                     | (4,754  | ) |      |   | (3,026  | )
|                                                                                         |  |                                     |         |   |      |   |         |  
|Cash flows from investing activities net of effects of acquisition:                      |  |                                     |         |   |      |   |         |  
|Purchases of securities available-for-sale                                               |  |                                     | (25,157 | ) |      |   | (22,304 | )
|Proceeds from sales, maturities, and principal paydowns of securities available-for-sale |  |                                     | 18,584  |   |      |   | 27,659  |  
|Net change in loans                                                                      |  |                                     | (32,848 | ) |      |   | (7,485  | )
|Proceeds from sale of other real estate, loans and premises and equipment                |  |                                     | 5,144   |   |      |   | 556     |  
|Acquisition of Community Home Loan, Inc. (net of cash acquired of $762)                  |  |                                     |        |   |      |   | (255    | )
|Purchases of premises and equipment                                                      |  |                                     | (1,216  | ) |      |   | (999    | )
|                                                                                         |  |                                     |         |   |      |   |         |  
|Net cash used by investing activities                                                    |  |                                     | (35,493 | ) |      |   | (2,828  | )
|                                                                                         |  |                                     |         |   |      |   |         |  
|Cash flows from financing activities net of effects of acquisition:                      |  |                                     |         |   |      |   |         |  
|Net change in:                                                                           |  |                                     |         |   |      |   |         |  
|Deposits                                                                                 |  |                                     | 231     |   |      |   | 35,613  |  
|Other borrowings                                                                         |  |                                     | 1,653   |   |      |   | (23,402 | )
|Federal funds purchased                                                                  |  |                                     | 38,700  |   |      |   | (6,891  | )
|Securities sold under repurchase agreements                                              |  |                                     | (1,048  | ) |      |   | 3,009   |  
|Net proceeds from issuance of common stock upon exercise of employee stock options       |  |                                     | 50      |   |      |   | 22      |  
|Dividends paid                                                                           |  |                                     | (537    | ) |      |   | (280    | )
|                                                                                         |  |                                     |         |   |      |   |         |  
|Net cash provided by financing activities                                                |  |                                     | 39,049  |   |      |   | 8,071   |  
|                                                                                         |  |                                     |         |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                                     |  |                                     | (1,198  | ) |      |   | 2,217   |  
|Cash and cash equivalents at beginning of period                                         |  |                                     | 40,767  |   |      |   | 17,268  |  
|                                                                                         |  |                                     |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                               |  | $                                   | 39,569  |   |      | $ | 19,485  |  
|                                                                                         |  |                                     |         |   |      |   |         |  



See accompanying notes
to condensed consolidated financial statements



8



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. BASIS OF PRESENTATION AND STOCK BASED COMPENSATION



Basis of Presentation



The unaudited condensed consolidated financial statements include the accounts of Texas United Bancshares, Inc. (the Company) and its wholly-owned subsidiaries Texas United Nevada, Inc. (TUNI), State Bank
(State), GNB Financial, n.a. (GNB) and Community Home Loan, Inc. (CHL). All material intercompany accounts and transactions have been eliminated in the consolidated report of the Company.



The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with generally accepted accounting principles 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 March 31, 2005, the Companys consolidated results of operations for the three months ended
March 31, 2005 and 2004, consolidated cash flows for the three months ended March 31, 2005 and 2004, and consolidated changes in shareholders equity for the three months ended March 31, 2005 and the year ended December 31, 2004. Interim period
results are not necessarily indicative of results of operations or cash flows for a full-year period. The 2004 year-end consolidated balance sheet and statement of changes in shareholders equity data were derived from audited financial
statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.



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



These financial statements and the notes
thereto should be read in conjunction with the Companys audited consolidated financial statements for the year ended December 31, 2004 appearing in Amendment No. 1 to the Companys Annual Report on Form 10-K/A.



Stock Based Compensation



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



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



|                                                                                                               |  |                             |       |      |   |      
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                                                                                               |  | Three Months EndedMarch 31,
|                                                                                                               |  | 2005                        |       | 2004
|                                                                                                               |  | (Dollars in thousands)     
|Net earnings, as reported                                                                                      |  | $                           | 2,802 |      | $ | 1,565
|Less: Total stock-based compensation expense determined under the fair value method for all awards, net of tax |  |                             | 13    |      |   | 7    
|                                                                                                               |  |                             |       |      |   |      
|Pro forma net earnings                                                                                         |  | $                           | 2,789 |      | $ | 1,558
|                                                                                                               |  |                             |       |      |   |      
|Earnings per share:                                                                                            |  |                             |       |      |   |      
|Basic  as reported                                                                                            |  | $                           | 0.36  |      | $ | 0.39 
|Basic  pro forma                                                                                              |  |                             | 0.36  |      |   | 0.39 
|                                                                                                               |  |                            
|Diluted  as reported                                                                                          |  |                             | 0.35  |      |   | 0.37 
|Diluted  pro forma                                                                                            |  |                             | 0.35  |      |   | 0.37 



9



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





During the three months ended March 31, 2005, the Company granted options to acquire 10,300 shares of
its common stock at an exercise price of $18.00 pursuant to the Texas United Bancshares Inc. 2004 Stock Incentive Plan. In addition, the Company granted 7,850 Stock Appreciation Rights with a value of $18.00 per share pursuant to the Texas United
Bancshares, Inc. Stock Appreciation Rights Plan.



2. RESTATEMENT



In the third quarter 2005, management concluded that the
Company did not properly classify mortgage loan origination fees on loans held for sale originated by State Bank. This resulted in the restatement of amounts previously reported in the Companys condensed consolidated statements of earnings and
consolidated statements of cash flows for the three months ended March 31, 2005 and 2004. In addition, certain disclosures in other notes to the condensed consolidated financial statements were restated to reflect the reclassification adjustments.



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



10



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ---------- | - | ---- | ----------- |  | - | ----------- | - | ---------- | - | ----- | ----------- | - | ---- | - |  | - | -----
|                                                      |  | For the Three Months Ended March 31,
|                                                      |  | 2005                                 |        |   | 2004      
|                                                      |  | As Reported                          |        |   | Adjustment |   |      | As Restated |  |   | As Reported |   | Adjustment |   |       | As Restated
|                                                      |  | (Dollars in thousands)              
|Interest income:                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Loans                                                 |  | $                                    | 14,105 |   |            | $ | (446 | )           |  | $ | 13,659      |   |            | $ | 7,517 |             | $ | (250 | ) |  | $ | 7,267
|Investment securities                                 |  |                                      | 2,864  |   |            |   |     |             |  |   | 2,864       |   |            |   | 1,685 |             |   |     |   |  |   | 1,685
|Federal funds sold and other temporary investments    |  |                                      | 8      |   |            |   |     |             |  |   | 8           |   |            |   | 4     |             |   |     |   |  |   | 4    
|                                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Total interest income                                 |  |                                      | 16,977 |   |            |   | (446 | )           |  |   | 16,531      |   |            |   | 9,206 |             |   | (250 | ) |  |   | 8,956
|                                                      |  |                                      |        |   |            |  
|Total interest expense                                |  |                                      | 4,472  |   |            |   |     |             |  |   | 4,472       |   |            |   | 2,542 |             |   |     |   |  |   | 2,542
|                                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Net interest income, before provision for loan losses |  |                                      | 12,505 |   |            |   | (446 | )           |  |   | 12,059      |   |            |   | 6,664 |             |   | (250 | ) |  |   | 6,414
|                                                      |  |                                      |        |   |            |  
|Provision for loan losses                             |  |                                      | 722    |   |            |   |     |             |  |   | 722         |   |            |   | 150   |             |   |     |   |  |   | 150  
|                                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Net interest income, after provision for loan losses  |  |                                      | 11,783 |   |            |   | (446 | )           |  |   | 11,337      |   |            |   | 6,514 |             |   | (250 | ) |  |   | 6,264
|                                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Noninterest income:                                   |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Service charges on deposit accounts                   |  |                                      | 1,834  |   |            |   |     |             |  |   | 1,834       |   |            |   | 1,597 |             |   |     |   |  |   | 1,597
|Mortgage servicing revenue                            |  |                                      | 296    |   |            |   |     |             |  |   | 296         |   |            |   | 208   |             |   |     |   |  |   | 208  
|(Loss) gain on sale of investment securities, net     |  |                                      | (38    | ) |            |   |     |             |  |   | (38         | ) |            |   | 77    |             |   |     |   |  |   | 77   
|Net gain on sale of loans                             |  |                                      | 2,144  |   |            |   | 446  |             |  |   | 2,590       |   |            |   | 1,531 |             |   | 250  |   |  |   | 1,781
|Other noninterest income                              |  |                                      | 1,615  |   |            |   |     |             |  |   | 1,615       |   |            |   | 491   |             |   |     |   |  |   | 491  
|                                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Total noninterest income                              |  |                                      | 5,851  |   |            |   | 446  |             |  |   | 6,297       |   |            |   | 3,904 |             |   | 250  |   |  |   | 4,154
|                                                      |  |                                      |        |   |            |  
|Total noninterest expense                             |  |                                      | 13,439 |   |            |   |     |             |  |   | 13,439      |   |            |   | 8,150 |             |   |     |   |  |   | 8,150
|                                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Earnings before provision for income taxes            |  |                                      | 4,195  |   |            |   |     |             |  |   | 4,195       |   |            |   | 2,268 |             |   |     |   |  |   | 2,268
|Provision for income taxes                            |  |                                      | 1,393  |   |            |   |     |             |  |   | 1,393       |   |            |   | 703   |             |   |     |   |  |   | 703  
|                                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      
|Net earnings                                          |  | $                                    | 2,802  |   |            | $ |     |             |  | $ | 2,802       |   |            | $ | 1,565 |             | $ |     |   |  | $ | 1,565
|                                                      |  |                                      |        |   |            |   |      |             |  |   |             |   |            |   |       |             |   |      |   |  |   |      



For the three months
ended March 31, 2005 and 2004, the consolidated statements of cash flows were restated to reflect the reclassification of mortgage loan origination fees from interest income to a component of gains on the sale of loans (in noninterest income). For
the three months ended March 31, 2005 and 2004, the restatement decreased net cash provided from operating activities (specifically, an increase in the gains on sale of loans) by approximately $446,000 and $250,000, respectively. For the three
months ended March 31, 2005 and 2004, the restatement decreased net cash used by investing activities (proceeds from the sale of loans) by the same amounts. There was no impact on net (decrease) increase in cash and cash equivalents or end of period
cash and cash equivalents.



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



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



11



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





3. EARNINGS PER COMMON SHARE



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



|                                                                                          |  |                                       |       |      |   |      
|----------------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | ---- | - | -----
|                                                                                          |  | For the Three Months Ended March 31, 
|                                                                                          |  | 2005                                  |       | 2004
|                                                                                          |  | (In thousands, except per share data)
|                                                                                          |  |                                      
|Net earnings available to common shareholders used in basic and diluted EPS               |  | $                                     | 2,802 |      | $ | 1,565
|                                                                                          |  |                                       |       |      |   |      
|Weighted-average common shares outstanding                                                |  |                                       | 7,798 |      |   | 4,010
|Effect of dilutive securities:                                                            |  |                                       |       |      |   |      
|Stock options                                                                             |  |                                       | 170   |      |   | 183  
|                                                                                          |  |                                       |       |      |   |      
|Weighted-average common shares and potentially dilutive common shares used in diluted EPS |  |                                       | 7,968 |      |   | 4,193
|                                                                                          |  |                                       |       |      |   |      
|Basic EPS                                                                                 |  | $                                     | 0.36  |      | $ | 0.39 
|Diluted EPS                                                                               |  | $                                     | 0.35  |      | $ | 0.37 



4. INTANGIBLE ASSETS



The gross carrying amount of intangible assets and
associated accumulated amortization and impairment at March 31, 2005 is presented in the following table:



|                             |  |                        |       |                                         |   |      
|---------------------------- |  | ---------------------- | ----- | --------------------------------------- | - | -----
|                             |  | Gross Carrying Amount  |       | Accumulated Amortization and Impairment
|                             |  | (Dollars in thousands)
|Amortized intangible assets: |  |                        |       |                                         |   |      
|Mortgage servicing rights    |  | $                      | 7,449 |                                         | $ | 2,709
|Core deposit intangibles     |  | $                      | 5,804 |                                         | $ | 649  



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 March 31, 2005. Future amortization expense may be significantly different depending upon changes in
the mortgage servicing portfolio, mortgage interest rates and market conditions.



The following table shows the current period and estimated future amortization for intangible assets:



|                                               |  |                           |     |                          |   |       |  |   |      
|---------------------------------------------- |  | ------------------------- | --- | ------------------------ | - | ----- |  | - | -----
|                                               |  | Mortgage Servicing Rights |     | Core Deposit Intangibles |   | Total
|                                               |  | (Dollars in thousands)   
|                                               |  |                          
|Three months ended March 31, 2005 (actual)     |  | $                         | 254 |                          | $ | 186   |  | $ | 440  
|Nine months ended December 31, 2005 (estimate) |  |                           | 740 |                          |   | 557   |  |   | 1,297
|Estimate for the year ended December 31,       |  |                           |     |                          |   |       |  |   |      
|2006                                           |  |                           | 947 |                          |   | 727   |  |   | 1,674
|2007                                           |  |                           | 947 |                          |   | 711   |  |   | 1,658
|2008                                           |  |                           | 871 |                          |   | 695   |  |   | 1,566
|2009                                           |  |                           | 871 |                          |   | 680   |  |   | 1,551
|2010                                           |  |                           | 871 |                          |   | 664   |  |   | 1,535



12



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





5. NEW PRONOUNCEMENTS



Variable Interest Entities



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



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



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



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



Accounting for Stock Based Compensation



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



13



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Mortgage Loan Interest Rate Lock Commitments



The Securities and Exchange Commission staff released Staff Accounting
Bulletin (SAB) 105, Loan Commitments Accounted for as Derivative Instruments. SAB 105 requires that a lender should not consider the expected future cash flows related to loan servicing or include any internally developed
intangible assets, such as customer-related intangible assets, in determining the fair value of loan commitments accounted for as derivatives. Companies were required to adopt SAB 105 effective no later than for commitments entered into after March
31, 2004. The requirements of SAB 105 apply to the Companys mortgage loan interest rate lock commitments related to loans held for sale. At March 31, 2005, such commitments with a notional amount of approximately $15.3 million were
outstanding. The Companys current accounting policy is to not record the fair value of these commitments as management has deemed such amounts immaterial. The Company adopted SAB 105 at the beginning of its second quarter of 2004, and the
application of this guidance did not have a significant impact on the Companys consolidated financial statements.



6. OFF BALANCE SHEET CREDIT COMMITMENTS



In the normal course of business, the Company enters into various transactions, which, in accordance with generally accepted accounting principles, are
not included in its consolidated balance sheet. These transactions are referred to as off balance-sheet commitments. The Company enters into these transactions to meet the financing needs of its customers. These transactions include
commitments to extend credit and standby letters of credit, which involve 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 $181.4 million at March 31, 2005 and
$158.5 million at December 31, 2004.



Standby letters of credit
are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Companys policies generally require that standby letters of credit arrangements contain collateral and debt covenants
similar to those contained in loan agreements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of
future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. Standby letters of credit totaled $4.3
million at March 31, 2005 and $4.5 million at December 31, 2004. As of March 31, 2005 and December 31, 2004, no liability for the fair value of the Companys potential obligations under these guarantees has been recorded since the amount is
deemed immaterial.



7. CRITICAL ACCOUNTING POLICIES



The Companys accounting policies are integral to understanding the
results reported. The Company believes that of its significant accounting policies, the allowance for loan losses and mortgage servicing rights assets may involve a higher degree of judgment and complexity.



The allowance for loan losses is a valuation allowance for probable losses
incurred on loans. Loans are charged to the allowance when the loss actually occurs or when a determination is made that a probable loss has occurred. 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.



14



---

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Mortgage servicing rights assets are established and accounted for based on discounted cash flow
modeling techniques which require management to make estimates regarding the amount and timing of expected future cash flows, including assumptions about loan repayment rates, loan loss experience, and costs to service, as well as discount rates
that consider the risk involved. The Company attempts to offset some of the mortgage servicing rights interest rate risk exposure by designating certain interest rate derivatives as fair value hedges. Because the values of mortgage servicing rights
are sensitive to changes in assumptions, the valuation of such assets is 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 financial assets.



8.
SEGMENT INFORMATION



Beginning in 2004, the Company has
two reportable operating segments; commercial banking and mortgage banking. The Bank owns 100% of CHL and operates CHL as a subsidiary of the Bank. 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-month periods ended March 31, 2005 and
2004:



|                             |  |                                      |           |   |                  |   |        |       |  |   |                    |   |  |                  |         |   |       |   |        |   |  |   |         |  
|---------------------------- |  | ------------------------------------ | --------- | - | ---------------- | - | ------ | ----- |  | - | ------------------ | - |  | ---------------- | ------- | - | ----- | - | ------ | - |  | - | ------- | -
|                             |  | For the Three Months Ended March 31, |          
|                             |  | 2005                                 |           |   | 2004             |  
|                             |  | Commercial Banking                   |           |   | Mortgage Banking |   |        | Total |  |   | Commercial Banking |   |  | Mortgage Banking |         |   | Total |  
|                             |  | (Dollars in thousands)               |          
|                             |  | Restated  See Note 2                |          
|Net interest income          |  | $                                    | 10,061    |   |                  | $ | 1,998  |       |  | $ | 12,059             |   |  | $                | 5,115   |   |       | $ | 1,299  |   |  | $ | 6,414   |  
|Noninterest income           |  |                                      | 4,024     |   |                  |   | 2,273  |       |  |   | 6,297              |   |  |                  | 2,372   |   |       |   | 1,782  |   |  |   | 4,154   |  
|                             |  |                                      |           |   |                  |   |        |       |  |   |                    |   |  |                  |         |   |       |   |        |   |  |   |         |  
|Total income                 |  |                                      | 14,085    |   |                  |   | 4,271  |       |  |   | 18,356             |   |  |                  | 7,487   |   |       |   | 3,081  |   |  |   | 10,568  |  
|Provision for loan losses    |  |                                      | (722      | ) |                  |   |       |       |  |   | (722               | ) |  |                  | (150    | ) |       |   |       |   |  |   | (150    | )
|Noninterest expense          |  |                                      | (10,419   | ) |                  |   | (3,020 | )     |  |   | (13,439            | ) |  |                  | (6,130  | ) |       |   | (2,020 | ) |  |   | (8,150  | )
|                             |  |                                      |           |   |                  |   |        |       |  |   |                    |   |  |                  |         |   |       |   |        |   |  |   |         |  
|Earnings before income taxes |  |                                      | 2,944     |   |                  |   | 1,251  |       |  |   | 4,195              |   |  |                  | 1,207   |   |       |   | 1,061  |   |  |   | 2,268   |  
|Provision for income taxes   |  |                                      | (968      | ) |                  |   | (425   | )     |  |   | (1,393             | ) |  |                  | (371    | ) |       |   | (332   | ) |  |   | (703    | )
|                             |  |                                      |           |   |                  |   |        |       |  |   |                    |   |  |                  |         |   |       |   |        |   |  |   |         |  
|Net earnings                 |  | $                                    | 1,976     |   |                  | $ | 826    |       |  | $ | 2,802              |   |  | $                | 836     |   |       | $ | 729    |   |  | $ | 1,565   |  
|                             |  |                                      |           |   |                  |   |        |       |  |   |                    |   |  |                  |         |   |       |   |        |   |  |   |         |  
|Total assets as of March 31  |  | $                                    | 1,083,574 |   |                  | $ | 96,592 |       |  | $ | 1,180,166          |   |  | $                | 591,700 |   |       | $ | 67,020 |   |  | $ | 658,720 |  
|                             |  |                                      |           |   |                  |   |        |       |  |   |                    |   |  |                  |         |   |       |   |        |   |  |   |         |  



9. SUBSEQUENT EVENTS



On May 2, 2005, the Company entered into a definitive
agreement to acquire Gateway Holding Company, Inc., Dallas, Texas. Under the terms of the merger agreement, shareholders of Gateway will receive, for each share of Gateway common stock they own, a number of shares of Texas United common stock with
an aggregate market value equal to $35.48, plus $15.20 in cash. The market value of the Texas United common stock will be based on the average trading price of the Texas United common stock for the 20 consecutive trading days ending on and including
the tenth trading day preceding the closing date. The Company will operate Gateways wholly-owned subsidiary bank, Gateway National Bank of Dallas, as a separate subsidiary. Gateway National Bank currently has six Dallas area locations 
Dallas, Frisco, Frisco West, Mesquite, Balch Springs and Carrolton. As of March 31, 2005, on a consolidated basis, Gateway had total assets of $207.7 million, total loans of $136.4 million, total deposits of $179.3 million and shareholders
equity of $12.5 million. The Company anticipates completing the acquisition during the fourth quarter of 2005.



15



---

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. The use of any of the
words believe, expect, anticipate, estimate, continue, intend, may, will, should, or similar expressions, identifies these forward-looking
statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement.
These possible events or factors include, without limitation:



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



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



| |  |  | the Company may have difficulty integrating the business of any future acquisitions;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | changes in the interest rate environment adversely affect the level and composition of deposits, loans, the value of loan collateral, investment securities and interest rate
protection agreements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in market rates and prices 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;
| | - |  | ---------------------------------------------



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



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



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



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



Restatement of Financial Statements.The Company restated its condensed consolidated financial statements as of March 31, 2005 and for the three
months ended March 31, 2005 and 2004 to correct the classification of mortgage loan origination fees on loans held for sale originated by State Bank. The restatement decreased interest income by $446,000 or 2.6% and $250,000 or 2.7% for the three
months ended March 31, 2005 and 2004, respectively, and increased noninterest income by these same amounts for the same periods. For the three months ended March 31, 2005 and 2004, the restatement lowered the weighted average yield on earning assets
for both periods by 18 basis points to 6.67% from 6.85% and to 6.22% from 6.40%, respectively. For the three months ended March 31, 2005 and 2004, the restatement lowered the net interest margin by 18 basis points to 4.87% from 5.05% and by 17 basis
points to 4.46% from 4.63%, respectively. The correction did not impact net earnings or earnings per share.



The restatement resulted from a review and assessment by the Company of the classification and recording of mortgage loan origination fees on loans held
for sale. Historically, State Bank recorded mortgage loan origination fees as interest income for all mortgage loans originated. For the periods presented since the Companys acquisition of CHL in February 2004, CHL recorded mortgage loan
origination fees as noninterest income for all mortgage loans originated. The Company has since determined that mortgage loan origination fees on all mortgage loans originated by State Bank and CHL with the intent to sell should be recorded as a
component of gains on sale of loans (in noninterest income) when the loans are sold and has restated its condensed consolidated financial statements to reflect this change. See Note 2 to the accompanying condensed consolidated financial statements.



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



Recent Developments.On May 2, 2005, the Company entered into a definitive agreement to acquire Gateway Holding Company, Inc., Dallas, Texas. Under the terms of the merger agreement, shareholders of Gateway will receive, for each
share of Gateway common stock they own, a number of shares of Texas United common stock with an aggregate market value equal to $35.48, plus $15.20 in cash. The market value of the Texas United common stock will be based on the average trading price
of the Texas United common stock for the 20 consecutive trading days ending on and including the tenth trading day preceding the closing date. The Company will operate Gateways wholly-owned subsidiary bank, Gateway National Bank of Dallas, as
a separate subsidiary. Gateway National Bank currently has six Dallas area locations  Dallas, Frisco, Frisco West, Mesquite, Balch Springs and Carrolton. As of March 31, 2005, on a consolidated basis, Gateway had total assets of $207.7
million, total loans of $136.4 million, total deposits of $179.3 million and shareholders equity of $12.5 million. The Company anticipates completing the acquisition during the fourth quarter of 2005.



16



---

General.Texas United Bancshares, Inc. (the Company) is the bank holding company for
State Bank, a commercial bank headquartered in La Grange, Texas, and GNB Financial, n.a. (GNB Financial), a commercial bank headquartered in Gainesville, Texas. State Bank has twenty full service banking locations serving twelve counties
within central and south central Texas and GNB Financial has seven full service banking centers located in Cooke, Denton and Ellis counties surrounding the Dallas-Ft. Worth metroplex. In addition, State Bank has nineteen loan production offices
located in Houston, San Antonio and Austin through the Bank and its wholly owned subsidiary, Community Home Loan, Inc. (CHL). Texas United provides a wide array of financial services to small and medium-sized businesses, including
commercial loans, commercial mortgage loans, individuals, including mortgage loans, and consumer loans.



Net earnings for the three months ended March 31, 2005 was $2.8 million, an increase of 79.0% compared with net earnings of $1.6 million for the same
period in 2004. The increase in net earnings was primarily due to internal growth, the acquisition of GNB Bancshares, Inc. (GNB Bancshares) in October 2004, the acquisition of the Central Bank branches in July 2004 and the acquisition of
CHL in February 2004 and non-interest income, partially offset by increased non-interest expense. Basic and diluted EPS for the three months ended March 31, 2005 were $0.36 and $0.35 compared with $0.39 and $0.37 for the same period in 2004.



At March 31, 2005, total assets were $1.2 billion compared
with $1.1 billion at December 31, 2004. The $38.8 million or 3.4% increase in total assets from December 31, 2004 was attributable to the increase in net loans. At March 31, 2005, net loans, including loans held for sale, were $718.8 million
compared with $686.9 million at December 31, 2004. Total deposits at March 31, 2005 were $880.3 million compared with $880.1 million at December 31, 2004. Shareholders equity at March 31, 2005 was $104.2 million compared with $104.8 million at
December 31, 2004. The $635,000 or 0.6% decrease is attributable to an unrealized loss position on the fair market value on available-for-sale securities included in accumulated other comprehensive loss, partially offset by earnings retention.



The Companys annualized return on average assets was
0.97% for the three months ended March 31, 2005 and 2004, respectively. The annualized return on average shareholders equity was 10.66% for the three months ended March 31, 2005, down from 15.99% for the same period in 2004. The decrease was
primarily attributed to the issuance of common stock in connection with the public offering in August 2004 and the acquisition of GNB Bancshares in October 2004.



Net Interest Income.For the three months ended March 31, 2005, net interest income, before the provision for loan
losses, increased by 88.0% to $12.1 million compared with $6.4 million for the same period in 2004. The increase was primarily due to the increased volumes in loans and investment securities acquired in connection with acquisitions in 2004 and an
improved net interest margin. For the three months ended March 31, 2005 and 2004, the net interest margin and spread increased by 41 basis points to 4.87% from 4.46% and by 32 basis points to 4.53% from 4.21%, respectively.



Interest income for the three months ended March 31, 2005 was $16.5 million
compared to $8.9 million for the same period in 2004. As compared with the three months ended March 31, 2004, the average total loan volume for the three months ended March 31, 2005 increased by $307.9 million or 78.6% to $699.8 million, and the
average yield on average total loan volume increased 46 basis points to 7.92%. As compared with the three months ended March 31, 2004, the average total investment volume for the three months ended March 31, 2005 increased by $118.0 million or 63.6%
to $695.9 million, and the average yield on average investments increased by 17 basis points to 3.83%. For the three months ended March 31, 2005, as compared with the same period in 2004, the yield on total average earning assets increased by 45
basis points to 6.67%. The increase was primarily attributed to the GNB Bancshares and Central Bank branch acquisitions in 2004 coupled with the increase in interest rates.



Interest expense for the three months ended March 31, 2005 was $4.5 million, an increase of $1.9 million or 75.9% compared
with $2.5 million for the same period in 2004. As compared to the three months ended March 31, 2004, average interest bearing deposit volumes increased by $274.6 million or 65.2% to $695.5 million while the average rates paid on interest bearing
deposits increased by 8 basis points to 1.79%. The increase in volume was primarily attributed to the deposits acquired in connection with the GNB Bancshares and Central Bank branch acquisitions.



17



---

The following table sets 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 table also sets forth the average rate earned on total interest-earning assets, the
average rate paid on total interest-bearing liabilities and the net interest margin 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 table
as loans carrying a zero yield.



|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|--------------------------------------------------------------- |  | ------------------------------------ | --------- | --------------------- | ---- | ----------------------- |  | ---- | --------------------------- |  | --------------------- | ------- | ----------------------- | - | ----- |  | ---- | -
|                                                                |  | For the three months ended March 31, |          
|                                                                |  | 2005                                 |           |                       | 2004 |                        
|                                                                |  | Average Outstanding Balance          |           | Interest Earned/ Paid |      | Average Yield/ Rate (1) |  |      | Average Outstanding Balance |  | Interest Earned/ Paid |         | Average Yield/ Rate (1) |  
|                                                                |  | (Dollars in thousands)               |          
|                                                                |  | Restated  See Note 2                |          
|Assets                                                          |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Interest-earning assets:                                        |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Total loans                                                     |  | $                                    | 699,763   |                       | $    | 13,659                  |  | 7.92 | %                           |  | $                     | 391,820 |                         | $ | 7,267 |  | 7.46 | %
|Taxable securities                                              |  |                                      | 294,674   |                       |      | 2,767                   |  | 3.81 |                             |  |                       | 176,593 |                         |   | 1,587 |  | 3.61 |  
|Tax-exempt securities                                           |  |                                      | 8,709     |                       |      | 97                      |  | 4.52 |                             |  |                       | 8,815   |                         |   | 98    |  | 4.47 |  
|Federal funds sold and other temporary investments              |  |                                      | 1,405     |                       |      | 8                       |  | 2.31 |                             |  |                       | 1,502   |                         |   | 4     |  | 1.07 |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Total interest earning assets                                   |  |                                      | 1,004,551 |                       |      | 16,531                  |  | 6.67 |                             |  |                       | 578,730 |                         |   | 8,956 |  | 6.22 |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Less allowance for loan losses                                  |  |                                      | 6,845     |                       |      |                         |  |      |                             |  |                       | 3,894   |                         |   |       |  |      |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Total interest-earning assets, net of allowance for loan losses |  |                                      | 997,706   |                       |      |                         |  |      |                             |  |                       | 574,836 |                         |   |       |  |      |  
|Noninterest-earning assets                                      |  |                                      | 160,166   |                       |      |                         |  |      |                             |  |                       | 75,774  |                         |   |       |  |      |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Total assets                                                    |  | $                                    | 1,157,872 |                       |      |                         |  |      |                             |  | $                     | 650,610 |                         |   |       |  |      |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Liabilities and shareholders equity                            |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Interest-bearing liabilities:                                   |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Interest-bearing demand deposits                                |  | $                                    | 239,929   |                       | $    | 772                     |  | 1.30 | %                           |  | $                     | 151,712 |                         | $ | 441   |  | 1.17 | %
|Savings and money market accounts                               |  |                                      | 159,844   |                       |      | 474                     |  | 1.20 |                             |  |                       | 87,184  |                         |   | 237   |  | 1.09 |  
|Time deposits                                                   |  |                                      | 296,132   |                       |      | 1,831                   |  | 2.51 |                             |  |                       | 182,444 |                         |   | 1,111 |  | 2.45 |  
|Federal funds purchased                                         |  |                                      | 21,600    |                       |      | 176                     |  | 3.30 |                             |  |                       | 5,195   |                         |   | 14    |  | 1.08 |  
|Securities sold under agreement to repurchase                   |  |                                      | 5,486     |                       |      | 20                      |  | 1.48 |                             |  |                       | 1,925   |                         |   | 9     |  | 1.88 |  
|Junior subordinated deferrable interest debentures              |  |                                      | 17,520    |                       |      | 390                     |  | 9.03 |                             |  |                       | 12,365  |                         |   | 266   |  | 8.65 |  
|Other borrowings                                                |  |                                      | 105,086   |                       |      | 809                     |  | 3.12 |                             |  |                       | 65,861  |                         |   | 464   |  | 2.83 |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Total interest-bearing liabilities                              |  |                                      | 845,597   |                       |      | 4,472                   |  | 2.14 |                             |  |                       | 506,686 |                         |   | 2,542 |  | 2.02 |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Noninterest-bearing liabilities:                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Noninterest-bearing demand deposits                             |  |                                      | 188,212   |                       |      |                         |  |      |                             |  |                       | 95,980  |                         |   |       |  |      |  
|Other liabilities                                               |  |                                      | 18,873    |                       |      |                         |  |      |                             |  |                       | 7,099   |                         |   |       |  |      |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Total liabilities                                               |  |                                      | 1,052,682 |                       |      |                         |  |      |                             |  |                       | 609,765 |                         |   |       |  |      |  
|Shareholders equity                                            |  |                                      | 105,190   |                       |      |                         |  |      |                             |  |                       | 40,845  |                         |   |       |  |      |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Total liabilities and shareholders equity                      |  | $                                    | 1,157,872 |                       |      |                         |  |      |                             |  | $                     | 650,610 |                         |   |       |  |      |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Net interest income                                             |  |                                      |           |                       | $    | 12,059                  |  |      |                             |  |                       |         |                         | $ | 6,414 |  |      |  
|                                                                |  |                                      |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |       |  |      |  
|Net interest spread                                             |  |                                      |           |                       |      |                         |  | 4.53 | %                           |  |                       |         |                         |   |       |  | 4.21 | %
|Net interest margin                                             |  |                                      |           |                       |      |                         |  | 4.87 | %                           |  |                       |         |                         |   |       |  | 4.46 | %

---

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





18



---

The following table presents 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) related to changes in outstanding balances and changes in interest rates for the three month period ended March 31, 2005
compared with the same period ended March 31, 2004. For purposes of these tables, changes attributable to both rate and volume have been allocated proportionately to the change due to volume and rate.



|                                                   |  |                              |       |      |   |       |  |   |      
|-------------------------------------------------- |  | ---------------------------- | ----- | ---- | - | ----- |  | - | -----
|                                                   |  | Three months ended March 31,
|                                                   |  | 2005 vs. 2004               
|                                                   |  | Increase (Decrease) Due to   |       |     
|                                                   |  | Volume                       |       | Rate |   | Total
|                                                   |  | (Dollars in thousands)      
|                                                   |  | Restated  See Note 2       
|Interest-earning assets:                           |  |                              |       |      |   |       |  |   |      
|Total loans                                        |  | $                            | 5,908 |      | $ | 484   |  | $ | 6,392
|Investment securities                              |  |                              | 1,060 |      |   | 119   |  |   | 1,179
|Federal funds sold and other temporary investments |  |                              |      |      |   | 4     |  |   | 4    
|                                                   |  |                              |       |      |   |       |  |   |      
|Total increase in interest income                  |  |                              | 6,968 |      |   | 607   |  |   | 7,575
|Interest-bearing liabilities:                      |  |                              |       |      |   |       |  |   |      
|Interest-bearing demand deposits                   |  |                              | 256   |      |   | 75    |  |   | 331  
|Savings and money market accounts                  |  |                              | 198   |      |   | 39    |  |   | 237  
|Time deposits                                      |  |                              | 692   |      |   | 28    |  |   | 720  
|Federal funds purchased                            |  |                              | 44    |      |   | 118   |  |   | 162  
|Junior subordinated deferrable interest debentures |  |                              | 111   |      |   | 13    |  |   | 124  
|Securities sold under agreements to repurchase     |  |                              |      |      |   | 11    |  |   | 11   
|Other borrowings                                   |  |                              | 260   |      |   | 85    |  |   | 345  
|                                                   |  |                              |       |      |   |       |  |   |      
|Total increase in interest expense                 |  |                              | 1,561 |      |   | 369   |  |   | 1,930
|                                                   |  |                              |       |      |   |       |  |   |      
|Increase in net interest income                    |  | $                            | 5,407 |      | $ | 238   |  | $ | 5,645
|                                                   |  |                              |       |      |   |       |  |   |      



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 adequate by management. For the three months ended March 31, 2005 compared with the same period in 2004, the
provision increased by $572,000 or 381.3% to $722,000. The increase in provisions for loan losses is primarily due to net charge-offs of $476,000 for the three months ended March 31, 2005 compared to a net recovery of $50,000 for the same period in
2004 and an increase in loans. Total loans increased $318.9 million, or 78.4%, to $725.7 million at March 31, 2005 compared with $406.8 million at March 31, 2004.



The allowance for loan losses at March 31, 2005 was $6.9 million, compared with $6.7 million at December 31, 2004. At March
31, 2005 and December 31, 2004, the ratio of the allowance for loan losses to total loans was 0.96%.



19



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Noninterest Income. Noninterest income for the three months ended March 31, 2005 and 2004 was $6.3
million and $4.2 million, respectively, an increase of $2.1 million or 51.6%. The increase is primarily attributed to an increase in service charges on deposit accounts as a result of accounts acquired in the GNB Bancshares and Central Bank branch
acquisitions, an increase in the net gains on the sale of mortgage and SBA loans and an increase in commissions on the sale of investment products.



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



|                                                  |  |                                      |       |   |      |   |      
|------------------------------------------------- |  | ------------------------------------ | ----- | - | ---- | - | -----
|                                                  |  | For the three months ended March 31,
|                                                  |  | 2005                                 |       |   | 2004
|                                                  |  | (Dollars in thousands)              
|                                                  |  | Restated  See Note 2               
|                                                  |  |                                     
|Service charges on deposit accounts               |  | $                                    | 1,834 |   |      | $ | 1,597
|Mortgage servicing revenue                        |  |                                      | 296   |   |      |   | 208  
|(Loss) gain on sale of investment securities, net |  |                                      | (38   | ) |      |   | 77   
|Net gain on sale of loans                         |  |                                      | 2,590 |   |      |   | 1,781
|Other noninterest income                          |  |                                      | 1,615 |   |      |   | 491  
|                                                  |  |                                      |       |   |      |   |      
|Total noninterest income                          |  | $                                    | 6,297 |   |      | $ | 4,154
|                                                  |  |                                      |       |   |      |   |      



Noninterest
Expense. For the three months ended March 31, 2005, noninterest expense increased by $5.3 million or 64.9% to $13.4 million compared with the same period in 2004. The increase in non-interest expense was primarily due to additional employee
compensation and benefits and other operating expenses related to the GNB Bancshares, Central Bank branches and the CHL acquisitions and increased occupancy costs.



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



|                                   |  |                                      |        |      |   |      
|---------------------------------- |  | ------------------------------------ | ------ | ---- | - | -----
|                                   |  | For the three months ended March 31,
|                                   |  | 2005                                 |        | 2004
|                                   |  | (Dollars in thousands)              
|                                   |  |                                     
|Employee compensation and benefits |  | $                                    | 7,061  |      | $ | 4,274
|Non-staff expenses:                |  |                                      |        |      |   |      
|Net occupancy expense              |  |                                      | 1,805  |      |   | 583  
|Depreciation and amortization      |  |                                      | 1,106  |      |   | 750  
|Data processing                    |  |                                      | 211    |      |   | 312  
|Legal and professional fees        |  |                                      | 528    |      |   | 357  
|Advertising                        |  |                                      | 220    |      |   | 83   
|Printing and supplies              |  |                                      | 214    |      |   | 116  
|Mortgage servicing expense         |  |                                      | 254    |      |   | 213  
|Telecommunications                 |  |                                      | 264    |      |   | 134  
|Other noninterest expense          |  |                                      | 1,776  |      |   | 1,328
|                                   |  |                                      |        |      |   |      
|Total non-staff expenses           |  |                                      | 6,378  |      |   | 3,876
|                                   |  |                                      |        |      |   |      
|Total noninterest expense          |  | $                                    | 13,439 |      | $ | 8,150
|                                   |  |                                      |        |      |   |      



Employee compensation
and benefits expense represents 52.5% of total non-interest expense for the three months ended March 31, 2005. Employee compensation and benefits expense for the three months ended March 31, 2005 and 2004 was $7.1 million and $4.3 million,
respectively, an increase of $2.8 million or 65.2%. The increase for the three month period ended March 31, 2005 was primarily due to costs associated with the additional staff hired to meet loan growth and additional staff acquired with the GNB
Bancshares, Central Bank branches and CHL acquisitions. Total full-time equivalent (FTE) employees at March 31, 2005 and 2004 were 557 and 369, respectively.



For the three months ended March 31, 2005, non-staff expenses increased by $2.5 million or 64.6% compared with the same period in 2004. The increased
non-staff expense was primarily attributed to higher occupancy expense, depreciation and amortization, legal and professional fees and the 2004 acquisitions.



20



---

Financial Condition



Loan Portfolio.Total loans, including loans held for sale, increased by $32.2 million or 4.6%, from $693.5 million at December 31, 2004 to $725.7
million at March 31, 2005. The increase is primarily attributed to an increase in commercial real estate loans and 1-4 family residential loans. Commercial real estate loans were $233.8 million at March 31, 2005, an increase of $9.8 million or 4.4%,
compared with $224.0 million at December 31, 2004. 1-4 family residential loans were $207.2 million at March 31, 2005, an increase of $14.4 million or 7.5%, compared with $192.8 million at December 31, 2004.



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



|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|------------------------- |  | ---------------------- | ------- | - | ----------------- | ----- | - | ------ | - | ------- | ------- |  | ----- | -
|                          |  | March 31, 2005         |         |   | December 31, 2004 |      
|                          |  | Amount                 |         |   | Percent           |       |   | Amount |   |         | Percent | 
|                          |  | (Dollars in thousands) |        
|                          |  |                        |        
|Commercial and industrial |  | $                      | 142,465 |   |                   | 19.6  | % |        | $ | 136,197 |         |  | 19.6  | %
|Real estate:              |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|1-4 family residential    |  |                        | 207,214 |   |                   | 28.6  |   |        |   | 192,791 |         |  | 27.8  |  
|Commercial mortgages      |  |                        | 233,835 |   |                   | 32.2  |   |        |   | 223,987 |         |  | 32.3  |  
|Held for sale             |  |                        | 26,353  |   |                   | 3.6   |   |        |   | 26,979  |         |  | 3.9   |  
|Other                     |  |                        | 47,095  |   |                   | 6.5   |   |        |   | 44,494  |         |  | 6.4   |  
|Consumer and other, net   |  |                        | 68,762  |   |                   | 9.5   |   |        |   | 69,100  |         |  | 10.0  |  
|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|Total loans               |  | $                      | 725,724 |   |                   | 100.0 | % |        | $ | 693,548 |         |  | 100.0 | %
|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|Allowance for loan losses |  |                        | (6,931  | ) |                   |       |   |        |   | (6,685  | )       |  |       |  
|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|Net loans                 |  | $                      | 718,793 |   |                   |       |   |        | $ | 686,863 |         |  |       |  
|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  



Nonperforming
Assets.Nonperforming assets were $3.8 million at March 31, 2005 and $3.9 million at December 31, 2004. 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 is recorded as a reduction of principal as long as doubt exists as to collection.



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



|                                                          |  |                        |       |   |                   |   |       |  
|--------------------------------------------------------- |  | ---------------------- | ----- | - | ----------------- | - | ----- | -
|                                                          |  | March 31, 2005         |       |   | December 31, 2004 |  
|                                                          |  | (Dollars in thousands) |      
|                                                          |  |                        |      
|Nonaccrual loans                                          |  | $                      | 1,696 |   |                   | $ | 1,725 |  
|Accruing loans 90 days or more past due                   |  |                        | 1,512 |   |                   |   | 1,286 |  
|Other real estate                                         |  |                        | 641   |   |                   |   | 906   |  
|                                                          |  |                        |       |   |                   |   |       |  
|Total nonperforming assets                                |  | $                      | 3,849 |   |                   | $ | 3,917 |  
|                                                          |  |                        |       |   |                   |   |       |  
|Nonperforming assets to total assets                      |  |                        | 0.33  | % |                   |   | 0.34  | %
|Nonperforming assets to total loans and other real estate |  |                        | 0.53  | % |                   |   | 0.56  | %



Allowance for Loan
Losses.The Company has several systems in place to assist in maintaining the overall quality of its loan portfolio. The Company has established underwriting guidelines to be followed by its loan officers. The Company also monitors its
delinquency levels for any negative or adverse trends and particularly monitors credits that have a total exposure of $75,000 or more.



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. The loan grades aid management in monitoring the overall quality of its loan portfolio. 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.



21



---

For the three months ended March 31, 2005, net charge-offs were $476,000 or 0.06% of average loans
outstanding. Net charge-offs were $964,000 or 0.19% of average loans outstanding for the year ended December 31, 2004. At March 31, 2005 and December 31, 2004, the allowance for loan losses aggregated $6.9 million and $6.7 million, respectively, or
0.96% of total loans for both periods. At March 31, 2005, the allowance for loan losses as a percentage of nonperforming loans was 216.05% compared with 222.02% at December 31, 2004.



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



|                                                                        |  |                                   |         |   |                              |   |         |  
|----------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ---------------------------- | - | ------- | -
|                                                                        |  | Three months ended March 31, 2005 |         |   | Year ended December 31, 2004 |  
|                                                                        |  | (Dollars in thousands)            |        
|Average total loans outstanding                                         |  | $                                 | 699,763 |   |                              | $ | 493,490 |  
|                                                                        |  |                                   |         |   |                              |   |         |  
|Total loans outstanding at end of period                                |  | $                                 | 725,724 |   |                              | $ | 693,548 |  
|                                                                        |  |                                   |         |   |                              |   |         |  
|Allowance for loan losses at beginning of period                        |  | $                                 | 6,685   |   |                              | $ | 3,893   |  
|Provision for loan losses                                               |  |                                   | 722     |   |                              |   | 1,850   |  
|Balance acquired from GNB Bancshares                                    |  |                                   |        |   |                              |   | 1,906   |  
|Charge-offs:                                                            |  |                                   |         |   |                              |   |         |  
|Commercial and industrial                                               |  |                                   | (341    | ) |                              |   | (167    | )
|Real estate                                                             |  |                                   | (5      | ) |                              |   | (167    | )
|Consumer                                                                |  |                                   | (338    | ) |                              |   | (1,266  | )
|Other                                                                   |  |                                   |        |   |                              |   | (106    | )
|                                                                        |  |                                   |         |   |                              |   |         |  
|Total charge-offs                                                       |  |                                   | (684    | ) |                              |   | (1,706  | )
|                                                                        |  |                                   |         |   |                              |   |         |  
|Recoveries:                                                             |  |                                   |         |   |                              |   |         |  
|Commercial and industrial                                               |  |                                   | 95      |   |                              |   | 222     |  
|Real estate                                                             |  |                                   | 4       |   |                              |   | 45      |  
|Consumer                                                                |  |                                   | 109     |   |                              |   | 450     |  
|Other                                                                   |  |                                   |        |   |                              |   | 25      |  
|                                                                        |  |                                   |         |   |                              |   |         |  
|Total recoveries                                                        |  |                                   | 208     |   |                              |   | 742     |  
|                                                                        |  |                                   |         |   |                              |   |         |  
|Net charge-offs                                                         |  |                                   | (476    | ) |                              |   | (964    | )
|                                                                        |  |                                   |         |   |                              |   |         |  
|Allowance for loan losses at end of period                              |  | $                                 | 6,931   |   |                              | $ | 6,685   |  
|                                                                        |  |                                   |         |   |                              |   |         |  
|Ratio of allowance to end of period total loans                         |  |                                   | 0.96    | % |                              |   | 0.96    | %
|Ratio of net charge-offs to average total loans                         |  |                                   | 0.06    | % |                              |   | 0.19    | %
|Ratio of allowance for loan losses to end of period nonperforming loans |  |                                   | 216.05  | % |                              |   | 222.02  | %



Securities.At
March 31, 2005, the securities portfolio totaled $305.0 million, reflecting an increase of $3.4 million or 1.1% from $301.6 million at December 31, 2004. During the three months ended March 31, 2005, the Company purchased $25.2 million in investment
securities. Additionally, the Company sold $3.5 million of securities in an effort to reposition the portfolio for current economic conditions and to provide funding for loan growth. The Company also received $15.1 million in maturities and
principal paydowns on investment securities.



Deposits.
At March 31, 2005, total deposits were $880.3 million, an increase of $231,000 from $880.1 million at December 31, 2004. The increase is primarily due to internal growth. Non-interest-bearing deposits at March 31, 2005 increased by $5.3 million or
2.8% to $192.7 million from $187.5 million at December 31, 2004. Interest-bearing deposits at March 31, 2005 decreased by $5.0 million or 0.7% to $687.6 million from $692.6 million at December 31, 2004. The Companys ratios of
non-interest-bearing demand deposits to total deposits as of March 31, 2005 and December 31, 2004 were 21.9% and 21.3%, respectively.



22



---

Borrowings.The Company utilizes borrowings to supplement deposits to fund its lending and
investing activities. Borrowings consist of short-term and long-term advances from the Federal Home Loan Bank (FHLB) and advances on a revolving credit line with a correspondent bank. Federal funds purchased increased $38.7 million to
$53.8 million at March 31, 2005 from $15.1 million at December 31, 2004. The increase was used to fund loan growth. FHLB borrowings increased $1.7 million to $107.6 million at March 31, 2005 from $105.9 million at December 31, 2004. The maturity
dates for the FHLB borrowings range from the years 2005 to 2024 and have interest rates ranging from 2.75% to 6.56%.



At March 31, 2005, the Company had nothing advanced on its $10.0 million revolving credit line with a correspondent bank. The line of credit bears
interest at Federal funds rate plus 2.25% and expires in April 2006.



At March 31, 2004, the Companys had $17.5 million outstanding in junior subordinated deferrable interest debentures as follows:



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

---

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

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



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



Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. At March 31, 2005, the Company had cash and cash equivalents of $39.6 million, down $1.2 million or 2.9%, from $40.8
million at December 31, 2004. The decrease is mainly attributed to growth in the investment and loan portfolios, partially offset by the increases in federal funds purchased and borrowings.



The Company views time deposits as a stable means of supporting loan growth.
The Company believes, based on its historical experience, that its large time deposits have core-type characteristics. The Company anticipates that this source of funding will continue to sustain a portion of the Companys asset growth in the
future.



Capital Resources. Shareholders equity
decreased from $104.8 million at December 31, 2004 to $104.2 million at March 31, 2005, a decrease of $635,000 or 0.6%. The decrease was primarily due to $2.9 million in unrealized securities losses and dividends declared of $624,000, partially
offset by net earnings of $2.8 million.



23



---

The following table provides a comparison of the Companys, State Banks and GNB
Financials leverage and risk-weighted capital ratios as of March 31, 2005 to the minimum and well-capitalized regulatory standards:



|                                |  |                                               |      |  |                                                                                 |   |  |                                |  
|------------------------------- |  | --------------------------------------------- | ---- |  | ------------------------------------------------------------------------------- | - |  | ------------------------------ | -
|                                |  | Minimum Required forCapital Adequacy Purposes |      |  | To be Categorized as Well Capitalized Under Prompt Corrective Action Provisions |   |  | Actual Ratio at March 31, 2005 |  
|Texas United                    |  |                                               |      |  |                                                                                 |   |  |                                |  
|Leverage ratio                  |  | 4.00                                          | %(1) |  | N/A                                                                             |   |  | 7.10                           | %
|Tier 1 risk-based capital ratio |  | 4.00                                          |      |  | N/A                                                                             |   |  | 9.96                           |  
|Risk-based capital ratio        |  | 8.00                                          |      |  | N/A                                                                             |   |  | 10.83                          |  
|State Bank                      |  |                                               |      |  |                                                                                 |   |  |                                |  
|Leverage ratio                  |  | 4.00                                          | %(2) |  | 5.00                                                                            | % |  | 6.30                           | %
|Tier 1 risk-based capital ratio |  | 4.00                                          |      |  | 6.00                                                                            |   |  | 9.16                           |  
|Risk-based capital ratio        |  | 8.00                                          |      |  | 10.00                                                                           |   |  | 10.00                          |  
|GNB Financial                   |  |                                               |      |  |                                                                                 |   |  |                                |  
|Leverage ratio                  |  | 4.00                                          | %(3) |  | 5.00                                                                            | % |  | 9.99                           | %
|Tier 1 risk-based capital ratio |  | 4.00                                          |      |  | 6.00                                                                            |   |  | 11.70                          |  
|Risk-based capital ratio        |  | 8.00                                          |      |  | 10.00                                                                           |   |  | 12.72                          |  

---

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

|(2) | The Federal Deposit Insurance Corporation may require State Bank to maintain a leverage ratio above the required minimum.
|--- | -------------------------------------------------------------------------------------------------------------------------

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



Item 4.Controls and Procedures



Disclosure Controls and Procedures



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



In connection with the Companys determination to restate
the items in Note 2 to the condensed consolidated financial statements, management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report and as of September 29, 2005. Based on the most recent evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded that as of March 31, 2005, the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) were not effective
solely because of the material weakness related to controls over the preparation and review of its consolidated statements of earnings and consolidated statements of cash flows. Specifically, the Company did not maintain effective controls to
appropriately classify mortgage loan origination fees on loans held for sale originated by State Bank and CHL. For the three months ended March 31, 2005, the Company classified such mortgage loan origination fees on loans held for sale
originated by State Bank as interest income rather than as a component of gains on sale of loans (in noninterest income) when the loans were sold. This change in classification resulted in a decrease in interest income, net interest income and net
interest margin and a corresponding increase in noninterest income. The change also resulted in a decrease in cash flows from operating activities and a corresponding increase in cash flows from investing activities. There was no change in net
earnings or earnings per share. Further, these changes had no effect on the Companys consolidated balance sheets, consolidated statements of comprehensive income or consolidated statements of changes in shareholders equity.



Changes in Internal Control Over Financial Reporting



There were no changes in the Companys
internal control over financial reporting in the quarter ended March 31, 2005 that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. However, during the third
quarter of 2005, in an effort to remediate the material weakness in the Companys internal control over the preparation and review of its consolidated statements of earnings and consolidated statements of cash flows described above, management
has implemented procedures and controls to aid in correctly classifying mortgage loan origination fees on loans held for sale originated by State Bank and CHL, including (a) enhancing the method of preparation of the consolidated financial
statements and (b) adding staff to the accounting and finance group. Accordingly, management believes these changes will remediate the material weakness discussed above.



24



---

PART II



OTHER INFORMATION



Item 6.Exhibits



|              |  |                                                                                                                                                                                                                                                              
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Identification of Exhibit                                                                                                                                                                                                                                    
|2.1           |  | Agreement and Plan of Reorganization, dated as of May 2, 2005, by and between Texas United Bancshares, Inc. and Gateway Holding Company, Inc. (incorporated herein by reference to Exhibit 2.1
to the Companys Current Report on Form 8-K dated May 2, 2005)
|              | 
|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 the 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 Chief Executive Officer pursuant to U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                 
|              | 
|32.2*         |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                              

---

|* | Filed herewith
|- | --------------



25



---

SIGNATURES



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



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





26