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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005



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



Commission file number 000-49928



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TEXAS UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



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



202 W. COLORADO

LA GRANGE, TEXAS 78945

(Address of principal executive offices including zip code)



(979) 968-8451

(Registrants telephone number, including area code)



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



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



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



As of October 31, 2005, the number of outstanding shares of Common Stock, par value $1.00 per share, was 7,845,472.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



TABLE OF CONTENTS



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I                                                                                        |  |   
|Item 1.
Condensed Consolidated Financial Statements                                           |  | 3 
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                         |  | 3 
|CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS                                                 |  | 4 
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                               |  | 5 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY                                    |  | 6 
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                               |  | 7 
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          |  | 8 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16
|Item 3.
Quatitiative and Qualitiative Disclosures About Market Risk                           |  | 29
|Item 4.
Controls and Procedures                                                               |  | 29
|                                                                                              | 
|PART II                                                                                       |  |   
|Item 1.
Legal Proceedings                                                                     |  | 30
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 30
|Item 3.
Defaults Upon Senior Securities                                                       |  | 30
|Item 4.
Submission of Matters to a Vote of Security Holders                                   |  | 30
|Item 5.
Other Information                                                                     |  | 30
|Item 6.
Exhibits                                                                              |  | 31
|Signatures                                                                                    |  | 32



2



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##### Table of Contents

PART I



FINANCIAL INFORMATION



Item 1.Condensed Consolidated Financial Statements.



TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Balance Sheets



(In thousands, except share data)



|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                               |  | September 30, 2005 |           |   | December 31,2004 |  
|                                                                                                                                                                                                               |  | (Unaudited)        |           |   |                  |  
|ASSETS                                                                                                                                                                                                         |  |                    |           |   |                  |   |           |  
|Cash and cash equivalents:                                                                                                                                                                                     |  |                    |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                                                        |  | $                  | 41,282    |   |                  | $ | 36,752    |  
|Federal funds sold and other temporary investments                                                                                                                                                             |  |                    | 6,600     |   |                  |   | 4,015     |  
|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  
|Total cash and cash equivalents                                                                                                                                                                                |  |                    | 47,882    |   |                  |   | 40,767    |  
|Investment securities available-for-sale, at fair value                                                                                                                                                        |  |                    | 223,668   |   |                  |   | 301,631   |  
|Investment securities held-to-maturity, at cost                                                                                                                                                                |  |                    | 24,563    |   |                  |   |          |  
|Loans, net                                                                                                                                                                                                     |  |                    | 829,725   |   |                  |   | 659,884   |  
|Loans held for sale                                                                                                                                                                                            |  |                    | 10,301    |   |                  |   | 26,979    |  
|Premises and equipment, net                                                                                                                                                                                    |  |                    | 43,807    |   |                  |   | 39,730    |  
|Accrued interest receivable                                                                                                                                                                                    |  |                    | 6,207     |   |                  |   | 5,214     |  
|Goodwill                                                                                                                                                                                                       |  |                    | 40,117    |   |                  |   | 40,117    |  
|Core deposit intangibles                                                                                                                                                                                       |  |                    | 4,783     |   |                  |   | 5,341     |  
|Mortgage servicing rights                                                                                                                                                                                      |  |                    | 4,834     |   |                  |   | 4,698     |  
|Other assets                                                                                                                                                                                                   |  |                    | 19,635    |   |                  |   | 17,005    |  
|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  
|Total assets                                                                                                                                                                                                   |  | $                  | 1,255,522 |   |                  | $ | 1,141,366 |  
|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                           |  |                    |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                                      |  |                    |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                                                                            |  | $                  | 217,638   |   |                  | $ | 187,454   |  
|Interest-bearing                                                                                                                                                                                               |  |                    | 663,090   |   |                  |   | 692,621   |  
|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                                                 |  |                    | 880,728   |   |                  |   | 880,075   |  
|                                                                                                                                                                                                               |  |                   
|Federal funds purchased                                                                                                                                                                                        |  |                    |          |   |                  |   | 15,125    |  
|Other liabilities                                                                                                                                                                                              |  |                    | 13,708    |   |                  |   | 11,603    |  
|Borrowings                                                                                                                                                                                                     |  |                    | 227,882   |   |                  |   | 105,940   |  
|Securities sold under repurchase agreements                                                                                                                                                                    |  |                    | 6,698     |   |                  |   | 6,291     |  
|Junior subordinated deferrable interest debentures                                                                                                                                                             |  |                    | 17,520    |   |                  |   | 17,520    |  
|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                              |  |                    | 1,146,536 |   |                  |   | 1,036,554 |  
|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  
|Commitments and contingencies                                                                                                                                                                                  |  |                    |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                                                          |  |                    |           |   |                  |   |           |  
|Preferred stock, no par value, 500,000 shares authorized, none of which are issued and outstanding                                                                                                             |  |                    |          |   |                  |   |          |  
|Common stock, $1.00 par value, 20,000,000 authorized; 7,851,567 shares issued and 7,845,472 outstanding as of September 30, 2005 and
7,802,467 shares issued and 7,796,372 outstanding as of December 31, 2004 |  |                    | 7,851     |   |                  |   | 7,802     |  
|Additional paid-in capital                                                                                                                                                                                     |  |                    | 76,171    |   |                  |   | 75,935    |  
|Retained earnings                                                                                                                                                                                              |  |                    | 28,149    |   |                  |   | 21,921    |  
|Accumulated other comprehensive loss                                                                                                                                                                           |  |                    | (3,068    | ) |                  |   | (729      | )
|Less treasury stock, at cost                                                                                                                                                                                   |  |                    | (117      | ) |                  |   | (117      | )
|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                                     |  |                    | 108,986   |   |                  |   | 104,812   |  
|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                     |  | $                  | 1,255,522 |   |                  | $ | 1,141,366 |  
|                                                                                                                                                                                                               |  |                    |           |   |                  |   |           |  



See accompanying notes
to condensed consolidated financial statements.



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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 September 30, |        | For the Nine MonthsEnded September 30,
|                                                    |  | 2005                                    |        |                                        | 2004 (Restated See Note 2) |   | 2005   |  |   | 2004 (Restated See Note 2)
|Interest income:                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Loans                                               |  | $                                       | 17,079 |                                        |                             | $ | 8,966  |  | $ | 45,452                      |   |  | $ | 23,956
|Investment securities:                              |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Taxable                                             |  |                                         | 2,483  |                                        |                             |   | 2,227  |  |   | 7,994                       |   |  |   | 5,639 
|Tax-exempt                                          |  |                                         | 296    |                                        |                             |   | 97     |  |   | 529                         |   |  |   | 292   
|Federal funds sold and other temporary investments  |  |                                         | 17     |                                        |                             |   | 7      |  |   | 58                          |   |  |   | 14    
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Total interest income                               |  |                                         | 19,875 |                                        |                             |   | 11,297 |  |   | 54,033                      |   |  |   | 29,901
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Interest expense:                                   |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Deposits                                            |  |                                         | 3,499  |                                        |                             |   | 2,320  |  |   | 9,927                       |   |  |   | 6,144 
|Federal funds purchased                             |  |                                         | 378    |                                        |                             |   | 57     |  |   | 851                         |   |  |   | 119   
|Borrowings                                          |  |                                         | 1,824  |                                        |                             |   | 643    |  |   | 3,765                       |   |  |   | 1,535 
|Securities sold under agreements to repurchase      |  |                                         | 29     |                                        |                             |   |       |  |   | 75                          |   |  |   |      
|Junior subordinated deferrable interest debentures  |  |                                         | 391    |                                        |                             |   | 266    |  |   | 1,171                       |   |  |   | 798   
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Total interest expense                              |  |                                         | 6,121  |                                        |                             |   | 3,286  |  |   | 15,789                      |   |  |   | 8,596 
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Net interest income                                 |  |                                         | 13,754 |                                        |                             |   | 8,011  |  |   | 38,244                      |   |  |   | 21,305
|Provision for loan losses                           |  |                                         | 1,035  |                                        |                             |   | 700    |  |   | 2,798                       |   |  |   | 1,150 
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Net interest income after provision for loan losses |  |                                         | 12,719 |                                        |                             |   | 7,311  |  |   | 35,446                      |   |  |   | 20,155
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Noninterest income:                                 |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Service charges on deposit accounts                 |  |                                         | 2,398  |                                        |                             |   | 1,869  |  |   | 6,696                       |   |  |   | 5,196 
|Mortgage servicing revenue                          |  |                                         | 358    |                                        |                             |   | 217    |  |   | 917                         |   |  |   | 715   
|(Loss) gain on sale of investment securities, net   |  |                                         | (63    | )                                      |                             |   | 19     |  |   | (184                        | ) |  |   | 167   
|Net gain on sale of loans                           |  |                                         | 2,521  |                                        |                             |   | 2,716  |  |   | 7,496                       |   |  |   | 6,930 
|Other noninterest income                            |  |                                         | 1,206  |                                        |                             |   | 367    |  |   | 3,984                       |   |  |   | 1,269 
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Total noninterest income                            |  |                                         | 6,420  |                                        |                             |   | 5,188  |  |   | 18,909                      |   |  |   | 14,277
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Noninterest expense:                                |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Employee compensation and benefits                  |  |                                         | 9,492  |                                        |                             |   | 5,664  |  |   | 24,733                      |   |  |   | 15,660
|Occupancy                                           |  |                                         | 1,986  |                                        |                             |   | 1,214  |  |   | 5,786                       |   |  |   | 3,419 
|Other noninterest expense                           |  |                                         | 3,724  |                                        |                             |   | 3,411  |  |   | 11,754                      |   |  |   | 8,556 
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Total noninterest expense                           |  |                                         | 15,202 |                                        |                             |   | 10,289 |  |   | 42,273                      |   |  |   | 27,635
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Earnings before provision for income taxes          |  |                                         | 3,937  |                                        |                             |   | 2,210  |  |   | 12,082                      |   |  |   | 6,797 
|Provision for income taxes                          |  |                                         | 1,247  |                                        |                             |   | 649    |  |   | 3,978                       |   |  |   | 2,176 
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Net earnings                                        |  | $                                       | 2,690  |                                        |                             | $ | 1,561  |  | $ | 8,104                       |   |  | $ | 4,621 
|                                                    |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Earnings per common share:                          |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Basic                                               |  | $                                       | 0.34   |                                        |                             | $ | 0.30   |  | $ | 1.04                        |   |  | $ | 1.04  
|Diluted                                             |  | $                                       | 0.34   |                                        |                             | $ | 0.29   |  | $ | 1.02                        |   |  | $ | 1.00  
|Weighted average shares outstanding:                |  |                                         |        |                                        |                             |   |        |  |   |                             |   |  |   |       
|Basic                                               |  |                                         | 7,815  |                                        |                             |   | 5,249  |  |   | 7,806                       |   |  |   | 4,427 
|Diluted                                             |  |                                         | 7,979  |                                        |                             |   | 5,421  |  |   | 7,965                       |   |  |   | 4,605 



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Comprehensive Income



(In thousands)

(Unaudited)



|                                                                                     |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|------------------------------------------------------------------------------------ |  | --------------------------------------- | ----- | -------------------------------------- | ---- | - | ----- |  | - | ------ | - |  | - | -----
|                                                                                     |  | For the Three MonthsEnded September 30, |       | For the Nine MonthsEnded September 30,
|                                                                                     |  | 2005                                    |       |                                        | 2004 |   | 2005  |  |   | 2004  
|Net earnings                                                                         |  | $                                       | 2,690 |                                        |      | $ | 1,561 |  | $ | 8,104  |   |  | $ | 4,621
|                                                                                     |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|Other comprehensive (loss) income, net of tax:                                       |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|Unrealized holding (losses) gains on investment securities arising during the period |  |                                         | (711  | )                                      |      |   | 3,821 |  |   | (2,218 | ) |  |   | 737  
|Less: Reclassification adjustment for (losses) gains included in net earnings        |  |                                         | (42   | )                                      |      |   | 13    |  |   | (121   | ) |  |   | 110  
|                                                                                     |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|Other comprehensive (loss) income                                                    |  |                                         | (753  | )                                      |      |   | 3,808 |  |   | (2,339 | ) |  |   | 627  
|                                                                                     |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|Total comprehensive income                                                           |  | $                                       | 1,937 |                                        |      | $ | 5,369 |  | $ | 5,765  |   |  | $ | 5,248
|                                                                                     |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      



See accompanying notes
to condensed consolidated financial statements.



5



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Changes in Shareholders Equity



Year Ended December 31, 2004 and

Nine Months Ended September 30,
2005



(In thousands, except share amounts)



|                                                                                 |  |              |  |                            |       |                   |   |        |                                      |   |        |                        |  |   |       |   |  |   |      |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------ |  | -------------------------- | ----- | ----------------- | - | ------ | ------------------------------------ | - | ------ | ---------------------- |  | - | ----- | - |  | - | ---- | - |  | - | ------- | -
|                                                                                 |  | Common Stock |  | Additional Paid-in Capital |       | Retained Earnings |   |        | Accumulated Other Comprehensive Loss |   |        | Treasury Stock At Cost |  |   | Total |  
|                                                                                 |  | Shares       |  | At Par                     |       |                   |   |        |                                     
|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    | )
|                                                                                 |  |              |  |                            |       |                   |   |        |                                      |   |        |                        |  |   |       |   |  |   |      |   |  |   |         |  
|Accumulated 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 Financial, n.a.       |  | 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 |   |        | AccumulatedOtherComprehensiveLoss |   |        | TreasuryStock AtCost |  |   | Total  |  
|                                                                          |  | Shares       |  | At Par                   |       |                  |   |        |                                  
|Balance at January 1, 2005                                                |  | 7,802,467    |  | $                        | 7,802 |                  | $ | 75,935 |                                   | $ | 21,921 |                      |  | $ | (729   | ) |  | $ | (117 | ) |  | $ | 104,812 |  
|Net earnings                                                              |  |             |  |                          |      |                  |   |       |                                   |   | 8,104  |                      |  |   |       |   |  |   |     |   |  |   | 8,104   |  
|Unrealized loss on securities, net of tax and reclassification adjustment |  |             |  |                          |      |                  |   |       |                                   |   |       |                      |  |   | (2,339 | ) |  |   |     |   |  |   | (2,339  | )
|                                                                          |  |              |  |                          |       |                  |   |        |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|Accumulated other comprehensive income                                    |  |             |  |                          |      |                  |   |       |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 5,765   |  
|Issuance of common stock upon exercise of employee stock options          |  | 49,100       |  |                          | 49    |                  |   | 236    |                                   |   |       |                      |  |   |       |   |  |   |     |   |  |   | 285     |  
|Dividends ($0.24 per share)                                               |  |             |  |                          |      |                  |   |       |                                   |   | (1,876 | )                    |  |   |       |   |  |   |     |   |  |   | (1,876  | )
|                                                                          |  |              |  |                          |       |                  |   |        |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  
|Balance at September 30, 2005                                             |  | 7,851,567    |  | $                        | 7,851 |                  | $ | 76,171 |                                   | $ | 28,149 |                      |  | $ | (3,068 | ) |  | $ | (117 | ) |  | $ | 108,986 |  
|                                                                          |  |              |  |                          |       |                  |   |        |                                   |   |        |                      |  |   |        |   |  |   |      |   |  |   |         |  



See accompanying notes
to condensed consolidated financial statements.



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Cash Flows



(In thousands)

(Unaudited)



|                                                                                                                          |  |                                        |          |   |                              |   |          |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | -------- | - | ---------------------------- | - | -------- | -
|                                                                                                                          |  | For the Nine MonthsEnded September 30, |         
|                                                                                                                          |  | 2005                                   |          |   | 2004 (Restated  See Note 2) |  
|Cash flows from operating activities net of effects of acquisitions:                                                      |  |                                        |          |   |                              |   |          |  
|Net earnings                                                                                                              |  | $                                      | 8,104    |   |                              | $ | 4,621    |  
|Adjustments to reconcile net earnings to net cash provided (used) by operating activities net of effects of acquisitions: |  |                                        |          |   |                              |   |          |  
|Depreciation and amortization                                                                                             |  |                                        | 3,672    |   |                              |   | 2,375    |  
|Reversal of mortgage servicing rights impairment                                                                          |  |                                        |         |   |                              |   | (263     | )
|Provision for loan losses                                                                                                 |  |                                        | 2,798    |   |                              |   | 1,150    |  
|Loss (gain) on sales of securities, net                                                                                   |  |                                        | 184      |   |                              |   | (167     | )
|Gain on sale of other real estate and premises and equipment                                                              |  |                                        | 92       |   |                              |   | 75       |  
|Gains on sales of loans                                                                                                   |  |                                        | (7,496   | ) |                              |   | (6,930   | )
|Amortization of premium, net of discounts on securities                                                                   |  |                                        | 1,008    |   |                              |   | 975      |  
|Changes in:                                                                                                               |  |                                        |          |   |                              |   |          |  
|Loans held for sale                                                                                                       |  |                                        | 16,678   |   |                              |   | 1,546    |  
|Other assets                                                                                                              |  |                                        | (4,696   | ) |                              |   | (3,877   | )
|Other liabilities                                                                                                         |  |                                        | 3,310    |   |                              |   | 1,718    |  
|                                                                                                                          |  |                                        |          |   |                              |   |          |  
|Net cash provided by operating activities                                                                                 |  |                                        | 23,654   |   |                              |   | 1,223    |  
|                                                                                                                          |  |                                        |          |   |                              |   |          |  
|Cash flows from investing activities net of effects of acquisitions:                                                      |  |                                        |          |   |                              |   |          |  
|Purchases of securities, available-for-sale                                                                               |  |                                        | (25,075  | ) |                              |   | (121,303 | )
|Purchases of securities, held-to-maturity                                                                                 |  |                                        | (24,568  | ) |                              |   |         |  
|Proceeds from sales, maturities, and principal paydowns of securities available-for-sale                                  |  |                                        | 98,307   |   |                              |   | 50,240   |  
|Net change in loans                                                                                                       |  |                                        | (169,874 | ) |                              |   | (72,584  | )
|Proceeds from sale of other real estate, loans, premises and equipment                                                    |  |                                        | 5,061    |   |                              |   | 1,742    |  
|Purchases of premises and equipment                                                                                       |  |                                        | (6,676   | ) |                              |   | (4,035   | )
|Acquisition of Central Bank branches                                                                                      |  |                                        |         |   |                              |   | 62,515   |  
|Acquisition of Community Home Loan, Inc.                                                                                  |  |                                        |         |   |                              |   | (538     | )
|                                                                                                                          |  |                                        |          |   |                              |   |          |  
|Net cash used in investing activities                                                                                     |  |                                        | (122,825 | ) |                              |   | (83,963  | )
|                                                                                                                          |  |                                        |          |   |                              |   |          |  
|Cash flows from financing activities net of effects of acquisitions:                                                      |  |                                        |          |   |                              |   |          |  
|Net change in:                                                                                                            |  |                                        |          |   |                              |   |          |  
|Deposits                                                                                                                  |  |                                        | 653      |   |                              |   | 88,399   |  
|Other borrowings                                                                                                          |  |                                        | 121,942  |   |                              |   | (41,314  | )
|Federal funds purchased                                                                                                   |  |                                        | (15,125  | ) |                              |   | (5,918   | )
|Securities sold under repurchase agreements                                                                               |  |                                        | 407      |   |                              |   | 8,116    |  
|Net proceeds from issuance of common stock upon exercise of employee stock options                                        |  |                                        | 285      |   |                              |   | 96       |  
|Net proceeds from issuance of common stock in public offering                                                             |  |                                        |         |   |                              |   | 36,128   |  
|Dividends paid                                                                                                            |  |                                        | (1,876   | ) |                              |   | (839     | )
|                                                                                                                          |  |                                        |          |   |                              |   |          |  
|Net cash provided by financing activities                                                                                 |  |                                        | 106,286  |   |                              |   | 84,668   |  
|                                                                                                                          |  |                                        |          |   |                              |   |          |  
|Net increase in cash and cash equivalents                                                                                 |  |                                        | 7,115    |   |                              |   | 1,928    |  
|Cash and cash equivalents at beginning of period                                                                          |  |                                        | 40,767   |   |                              |   | 17,268   |  
|                                                                                                                          |  |                                        |          |   |                              |   |          |  
|Cash and cash equivalents at end of period                                                                                |  | $                                      | 47,882   |   |                              | $ | 19,196   |  
|                                                                                                                          |  |                                        |          |   |                              |   |          |  



See accompanying notes
to condensed consolidated financial statements.



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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), and GNB Financial, n.a. (GNB). All material intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements of the Company.



The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the Companys consolidated financial position at September 30, 2005, the Companys consolidated results of
operations for the three and nine months ended September 30, 2005 and 2004, respectively, consolidated cash flows for the nine months ended September 30, 2005 and 2004, and consolidated changes in shareholders equity for the nine
months ended September 30, 2005 and the year ended December 31, 2004. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. The 2004 year-end consolidated balance sheet and
statement of changes in shareholders equity data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.



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



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



Stock Based Compensation



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



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



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                                                                                                               |  |                                         |       |                                        |   |       |  |      |       |  |   |      
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ----- | -------------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                                                                                               |  | For the Three MonthsEnded September 30, |       | For the Nine MonthsEnded September 30,
|                                                                                                               |  | 2005                                    |       | 2004                                   |   | 2005  |  | 2004
|                                                                                                               |  | (In thousands)                         
|Net earnings, as reported                                                                                      |  | $                                       | 2,690 |                                        | $ | 1,561 |  | $    | 8,104 |  | $ | 4,621
|Less: Total stock-based compensation expense determined under the fair value method for all awards, net of tax |  |                                         | 18    |                                        |   | 9     |  |      | 56    |  |   | 19   
|                                                                                                               |  |                                         |       |                                        |   |       |  |      |       |  |   |      
|Pro forma net earnings                                                                                         |  | $                                       | 2,672 |                                        | $ | 1,552 |  | $    | 8,048 |  | $ | 4,602
|                                                                                                               |  |                                         |       |                                        |   |       |  |      |       |  |   |      
|                                                                                                               |  |                                        
|                                                                                                               |  | For the Three MonthsEnded September 30, |       | For the Nine MonthsEnded September 30,
|                                                                                                               |  | 2005                                    |       | 2004                                   |   | 2005  |  | 2004
|Earnings per share:                                                                                            |  |                                         |       |                                        |   |       |  |      |       |  |   |      
|Basic - as reported                                                                                            |  | $                                       | 0.34  |                                        | $ | 0.30  |  | $    | 1.04  |  | $ | 1.04 
|Basic - pro forma                                                                                              |  |                                         | 0.34  |                                        |   | 0.30  |  |      | 1.04  |  |   | 1.04 
|                                                                                                               |  |                                         |       |                                       
|Diluted - as reported                                                                                          |  | $                                       | 0.34  |                                        | $ | 0.29  |  | $    | 1.02  |  | $ | 1.00 
|Diluted - pro forma                                                                                            |  |                                         | 0.33  |                                        |   | 0.29  |  |      | 1.02  |  |   | 1.00 



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



2. RESTATEMENT



In the third quarter 2005, management concluded that the Company did not properly classify mortgage loan origination fees on loans held for sale.
Specifically, the Company classified such fees as interest income rather than as a component of gains on sale of loans (in noninterest income) when the loans were sold. This resulted in the restatement of amounts previously reported in the
Companys consolidated statements of earnings for the three and nine months ended September 30, 2004 and the consolidated statement of cash flows for the nine months ended September 30, 2004. In addition, certain disclosures in other
notes to the condensed consolidated financial statements were restated to reflect the reclassification adjustments.



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



9



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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 September 30, 2004
|                                                      |  | As Reported                                   |        | Adjustment |   |      | As Restated
|Interest income:                                      |  |                                               |        |            |   |      |             |  |   |       
|Loans                                                 |  | $                                             | 9,146  |            | $ | (180 | )           |  | $ | 8,966 
|Investment securities                                 |  |                                               | 2,324  |            |   |     |             |  |   | 2,324 
|Federal funds sold and other temporary investments    |  |                                               | 7      |            |   |     |             |  |   | 7     
|                                                      |  |                                               |        |            |   |      |             |  |   |       
|Total interest income                                 |  |                                               | 11,477 |            |   | (180 | )           |  |   | 11,297
|Total interest expense                                |  |                                               | 3,286  |            |   |     |             |  |   | 3,286 
|                                                      |  |                                               |        |            |   |      |             |  |   |       
|Net interest income, before provision for loan losses |  |                                               | 8,191  |            |   | (180 | )           |  |   | 8,011 
|Provision for loan losses                             |  |                                               | 700    |            |   |     |             |  |   | 700   
|                                                      |  |                                               |        |            |   |      |             |  |   |       
|Net interest income, after provision for loan losses  |  |                                               | 7,491  |            |   | (180 | )           |  |   | 7,311 
|                                                      |  |                                               |        |            |   |      |             |  |   |       
|Noninterest income:                                   |  |                                               |        |            |   |      |             |  |   |       
|Service charges on deposit accounts                   |  |                                               | 1,869  |            |   |     |             |  |   | 1,869 
|Mortgage servicing revenue                            |  |                                               | 217    |            |   |     |             |  |   | 217   
|Gain on sale of investment securities, net            |  |                                               | 19     |            |   |     |             |  |   | 19    
|Net gain on sale of loans                             |  |                                               | 2,364  |            |   | 180  |             |  |   | 2,544 
|Other noninterest income                              |  |                                               | 539    |            |   |     |             |  |   | 539   
|                                                      |  |                                               |        |            |   |      |             |  |   |       
|Total noninterest income                              |  |                                               | 5,008  |            |   | 180  |             |  |   | 5,188 
|                                                      |  |                                               |       
|Total noninterest expense                             |  |                                               | 10,289 |            |   |     |             |  |   | 10,289
|                                                      |  |                                               |        |            |   |      |             |  |   |       
|Earnings before provision for income taxes            |  |                                               | 2,210  |            |   |     |             |  |   | 2,210 
|Provision for income taxes                            |  |                                               | 649    |            |   |     |             |  |   | 649   
|                                                      |  |                                               |        |            |   |      |             |  |   |       
|Net earnings                                          |  | $                                             | 1,561  |            | $ |     |             |  | $ | 1,561 
|                                                      |  |                                               |        |            |   |      |             |  |   |       



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|                                                      |  |                                              |        |            |   |      |             |  |   |       
|----------------------------------------------------- |  | -------------------------------------------- | ------ | ---------- | - | ---- | ----------- |  | - | ------
|                                                      |  | For the Nine Months Ended September 30, 2004
|                                                      |  | As Reported                                  |        | Adjustment |   |      | As Restated
|Interest income:                                      |  |                                              |        |            |   |      |             |  |   |       
|Loans                                                 |  | $                                            | 24,654 |            | $ | (698 | )           |  | $ | 23,956
|Investment securities                                 |  |                                              | 5,931  |            |   |     |             |  |   | 5,931 
|Federal funds sold and other temporary investments    |  |                                              | 14     |            |   |     |             |  |   | 14    
|                                                      |  |                                              |        |            |   |      |             |  |   |       
|Total interest income                                 |  |                                              | 30,599 |            |   | (698 | )           |  |   | 29,901
|                                                      |  |                                              |       
|Total interest expense                                |  |                                              | 8,596  |            |   |     |             |  |   | 8,596 
|                                                      |  |                                              |        |            |   |      |             |  |   |       
|Net interest income, before provision for loan losses |  |                                              | 22,003 |            |   | (698 | )           |  |   | 21,305
|                                                      |  |                                              |       
|Provision for loan losses                             |  |                                              | 1,150  |            |   |     |             |  |   | 1,150 
|                                                      |  |                                              |        |            |   |      |             |  |   |       
|Net interest income, after provision for loan losses  |  |                                              | 20,853 |            |   | (698 | )           |  |   | 20,155
|                                                      |  |                                              |        |            |   |      |             |  |   |       
|Noninterest income:                                   |  |                                              |        |            |   |      |             |  |   |       
|Service charges on deposit accounts                   |  |                                              | 5,196  |            |   |     |             |  |   | 5,196 
|Mortgage servicing revenue                            |  |                                              | 715    |            |   |     |             |  |   | 715   
|Gain on sale of investment securities, net            |  |                                              | 167    |            |   |     |             |  |   | 167   
|Net gain on sale of loans                             |  |                                              | 5,506  |            |   | 698  |             |  |   | 6,204 
|Other noninterest income                              |  |                                              | 1,995  |            |   |     |             |  |   | 1,995 
|                                                      |  |                                              |        |            |   |      |             |  |   |       
|Total noninterest income                              |  |                                              | 13,579 |            |   | 698  |             |  |   | 14,277
|                                                      |  |                                              |       
|Total noninterest expense                             |  |                                              | 27,635 |            |   |     |             |  |   | 27,635
|                                                      |  |                                              |        |            |   |      |             |  |   |       
|Earnings before provision for income taxes            |  |                                              | 6,797  |            |   |     |             |  |   | 6,797 
|Provision for income taxes                            |  |                                              | 2,176  |            |   |     |             |  |   | 2,176 
|                                                      |  |                                              |        |            |   |      |             |  |   |       
|Net earnings                                          |  | $                                            | 4,621  |            | $ |     |             |  | $ | 4,621 
|                                                      |  |                                              |        |            |   |      |             |  |   |       



For the nine months
ended September 30, 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 nine months ended September 30, 2004, the restatement decreased net cash provided from operating activities (specifically, an increase in the gain on sale of loans) by approximately $698,000. For the nine months ended September 30,
2004, the restatement decreased net cash used by investing activities (proceeds from the sale of loans) by the same amount. There was no impact on net increase in cash and cash equivalents or end of period cash and cash equivalents.



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



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



|                                                                                          |  |                                         |       |                                        |   |       |  |      |       |  |   |      
|----------------------------------------------------------------------------------------- |  | --------------------------------------- | ----- | -------------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                                                                          |  | For the Three MonthsEnded September 30, |       | For the Nine MonthsEnded September 30,
|                                                                                          |  | 2005                                    |       | 2004                                   |   | 2005  |  | 2004
|                                                                                          |  | (In thousands, except per share data)  
|Net earnings available to common shareholders used in basic and diluted EPS               |  | $                                       | 2,690 |                                        | $ | 1,561 |  | $    | 8,104 |  | $ | 4,621
|                                                                                          |  |                                         |       |                                        |   |       |  |      |       |  |   |      
|Weighted average common shares used in basic EPS                                          |  |                                         | 7,815 |                                        |   | 5,249 |  |      | 7,806 |  |   | 4,427
|Effect of dilutive securities:                                                            |  |                                         |       |                                        |   |       |  |      |       |  |   |      
|Stock options                                                                             |  |                                         | 164   |                                        |   | 172   |  |      | 159   |  |   | 178  
|                                                                                          |  |                                         |       |                                        |   |       |  |      |       |  |   |      
|Weighted average common shares and potentially dilutive common shares used in diluted EPS |  |                                         | 7,979 |                                        |   | 5,421 |  |      | 7,965 |  |   | 4,605
|                                                                                          |  |                                         |       |                                        |   |       |  |      |       |  |   |      
|Basic EPS                                                                                 |  | $                                       | 0.34  |                                        | $ | 0.30  |  | $    | 1.04  |  | $ | 1.04 
|Diluted EPS                                                                               |  | $                                       | 0.34  |                                        | $ | 0.29  |  | $    | 1.02  |  | $ | 1.00 



4. INTANGIBLE ASSETS



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



|                            |  |                     |       |                                        |       
|--------------------------- |  | ------------------- | ----- | -------------------------------------- | ------
|                            |  | GrossCarryingAmount |       | AccumulatedAmortization and Impairment
|                            |  | (In thousands)     
|Amortized intangible assets |  |                     |       |                                        |       
|Mortgage servicing rights   |  | $                   | 8,070 |                                        | $3,391
|Core deposit intangibles    |  | $                   | 5,804 |                                        | $1,021



The projections of
amortization expense shown below for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2005. Future amortization expense may be significantly different depending upon
changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.



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



|                                                |  |                         |     |                         |   |       |  |   |      
|----------------------------------------------- |  | ----------------------- | --- | ----------------------- | - | ----- |  | - | -----
|                                                |  | MortgageServicingRights |     | Core DepositIntangibles |   | Total
|                                                |  | (In thousands)         
|Nine months ended September 30, 2005 (actual)   |  | $                       | 781 |                         | $ | 574   |  | $ | 1,355
|Three months ended December 31, 2005 (estimate) |  |                         | 177 |                         |   | 186   |  |   | 363  
|                                                |  |                         |    
|Estimate for the year ended December 31,        |  |                         |     |                         |   |       |  |   |      
|2006                                            |  | $                       | 648 |                         | $ | 743   |  | $ | 1,391
|2007                                            |  |                         | 570 |                         |   | 743   |  |   | 1,313
|2008                                            |  |                         | 498 |                         |   | 703   |  |   | 1,201
|2009                                            |  |                         | 437 |                         |   | 655   |  |   | 1,092
|2010                                            |  |                         | 383 |                         |   | 655   |  |   | 1,038



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





5. NEW ACCOUNTING PRONOUNCEMENTS



Variable Interest Entities



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



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



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



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



Accounting for Stock Based Compensation



In December 2004, the FASB issued a revision to FASB Statement No. 123, Accounting for Stock Based Compensation (SFAS 123). FASB Statement No. 123(R), Share Based Payment (SFAS 123(R)), supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and its related implementation guidance. SFAS 123(R) established standards for the accounting for transactions in which an entity exchanges
its equity instruments for goods or services, including transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the
issuance of the equity instruments. The impact to the Company of SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions in this case primarily stock
options. The Company currently accounts for its stock-based compensation using the intrinsic method as defined in APB 25 and, accordingly, has not recognized any expense for stock option plans in the consolidated financial statements. Implementation
of SFAS 123(R) is required for the Company beginning in the interim period ending June 30, 2006. The Company is currently analyzing this new pronouncement to determine the impact on its consolidated financial statements. As a result of SFAS
123(R), the Company may adopt different models than are currently utilized to calculate the expense effect associated with the Companys stock options. Note 1 of the condensed consolidated financial statements illustrates the effect on net
earnings and earnings per share if the Company had applied the fair value provisions of SFAS 123.



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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
June 30, 2004. The requirements of SAB 105 apply to the Companys mortgage loan interest rate lock commitments related to loans held for sale. At September 30, 2005, such commitments with a notional amount of approximately $44.4
million were outstanding. The Companys current accounting policy is to not record the fair value of these commitments as management has deemed such amounts immaterial. The Company adopted SAB 105 at the beginning of its second quarter of 2004,
and the application of this guidance did not have a significant impact on the Companys consolidated financial statements.



6. OFF BALANCE SHEET CREDIT COMMITMENTS



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



The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the
Companys commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the
level of the allowance for loan losses. Commitments to extend credit totaled $203.9 million at September 30, 2005 and $154.0 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 $4.0 million at September 30, 2005 and $4.5 million at December 31, 2004. As of
September 30, 2005 and December 31, 2004, no liability for the fair value of the Companys potential obligations under these guarantees has been recorded since the amount was deemed immaterial.



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





7. SEGMENT INFORMATION



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



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



|                                      |  |                                              |           |   |                                              |   |         |              |  |   |                    |   |  |                  |           |   |              |   |         |   |  |   |           |  
|------------------------------------- |  | -------------------------------------------- | --------- | - | -------------------------------------------- | - | ------- | ------------ |  | - | ------------------ | - |  | ---------------- | --------- | - | ------------ | - | ------- | - |  | - | --------- | -
|                                      |  | For the Three Months EndedSeptember 30, 2005 |           |   | For the Nine Months Ended September 30, 2005 |  
|                                      |  | Commercial Banking                           |           |   | Mortgage Banking                             |   |         | Consolidated |  |   | Commercial Banking |   |  | Mortgage Banking |           |   | Consolidated |  
|                                      |  | (Dollars In thousands)                       |          
|Net interest income                   |  | $                                            | 10,815    |   |                                              | $ | 2,939   |              |  | $ | 13,754             |   |  | $                | 30,874    |   |              | $ | 7,370   |   |  | $ | 38,244    |  
|Noninterest income                    |  |                                              | 2,476     |   |                                              |   | 3,944   |              |  |   | 6,420              |   |  |                  | 9,259     |   |              |   | 9,650   |   |  |   | 18,909    |  
|                                      |  |                                              |           |   |                                              |   |         |              |  |   |                    |   |  |                  |           |   |              |   |         |   |  |   |           |  
|Total income                          |  |                                              | 13,291    |   |                                              |   | 6,883   |              |  |   | 20,174             |   |  |                  | 40,133    |   |              |   | 17,020  |   |  |   | 57,153    |  
|Provision for loan losses             |  |                                              | (1,035    | ) |                                              |   |        |              |  |   | (1,035             | ) |  |                  | (2,798    | ) |              |   |        |   |  |   | (2,798    | )
|Noninterest expense                   |  |                                              | (10,099   | ) |                                              |   | (5,103  | )            |  |   | (15,202            | ) |  |                  | (30,188   | ) |              |   | (12,085 | ) |  |   | (42,273   | )
|                                      |  |                                              |           |   |                                              |   |         |              |  |   |                    |   |  |                  |           |   |              |   |         |   |  |   |           |  
|Earnings before income taxes          |  |                                              | 2,157     |   |                                              |   | 1,780   |              |  |   | 3,937              |   |  |                  | 7,147     |   |              |   | 4,935   |   |  |   | 12,082    |  
|Provision for income taxes            |  |                                              | (642      | ) |                                              |   | (605    | )            |  |   | (1,247             | ) |  |                  | (2,300    | ) |              |   | (1,678  | ) |  |   | (3,978    | )
|                                      |  |                                              |           |   |                                              |   |         |              |  |   |                    |   |  |                  |           |   |              |   |         |   |  |   |           |  
|Net earnings                          |  | $                                            | 1,515     |   |                                              | $ | 1,175   |              |  | $ | 2,690              |   |  | $                | 4,847     |   |              | $ | 3,257   |   |  | $ | 8,104     |  
|                                      |  |                                              |           |   |                                              |   |         |              |  |   |                    |   |  |                  |           |   |              |   |         |   |  |   |           |  
|Total assets as of September 30, 2005 |  | $                                            | 1,111,841 |   |                                              | $ | 143,681 |              |  | $ | 1,255,522          |   |  | $                | 1,111,841 |   |              | $ | 143,681 |   |  | $ | 1,255,522 |  
|                                      |  |                                              |           |   |                                              |   |         |              |  |   |                    |   |  |                  |           |   |              |   |         |   |  |   |           |  



8. PENDING ACQUISITIONS



On October 26, 2005, the Company entered into a
definitive agreement to acquire The Express Bank of Texas (Express), Round Rock, Texas through a merger of Express into State Bank, a wholly-owned subsidiary of Texas United. Under the terms of the agreement, aggregate consideration to
be paid by Texas United to the shareholders of Express will be $9,350,000, consisting of cash in the amount of $4,675,000 and a number of shares of Texas United common stock valued at $4,675,000, subject to adjustment as provided in the merger
agreement. 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 acquisition is subject to customary closing conditions, including regulatory approval and the approval of the shareholders of Express. At September 30, 2005, Express had total assets of $42.8 million, total loans of $21.2 million, deposits
of $36.4 million, and shareholders equity of $4.3 million. The Company anticipates the acquisition will be completed during the first quarter of 2006.



On May 2, 2005, the Company entered into a definitive agreement to acquire Gateway Holding Company, Inc., Dallas, Texas. Under the terms of the
merger agreement, shareholders of Gateway will receive, for each share of Gateway common stock they own, a number of shares of Texas United common stock with an aggregate market value equal to $35.48, plus $15.20 in cash. The market value of the
Texas United common stock will be based on the average closing sales price of the Texas United common stock for the 20 consecutive trading days ending on and including the tenth trading day immediately preceding the closing date of the merger.
Following the merger, the Company intends to operate Gateways wholly-owned subsidiary bank, Gateway National Bank, as a separate subsidiary. Gateway National Bank currently has six Dallas area locations  Dallas, Frisco, Frisco West,
Mesquite, Balch Springs and Carrolton. As of September 30, 2005, on a consolidated basis, Gateway had total assets of $228.2 million, total loans of $138.5 million, total deposits of $200.2 million and shareholders equity of $15.7 million. The
Company anticipates the acquisition will be completed during the fourth quarter of 2005.



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



Special Cautionary Notice Regarding Forward-looking Statements



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



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



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



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



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



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



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



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



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



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



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



| |  |  | 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 September 30, 2004 and for the
three and nine months ended September 30, 2004 to correct the classification of mortgage loan origination fees on loans held for sale. For the three months ended September 30, 2004, the restatement decreased total interest income by
approximately $180,000 or 2.0% and increased total noninterest income by the same amount. For the three months ended September 30, 2004, the restatement lowered the weighted average yield on earning assets by 10 basis points to 6.10% from 6.20%
and lowered the net interest margin by 9 basis points to 4.33% from 4.42%.



For the nine months ended September 30, 2004, the restatement decreased total interest income by approximately $698,000 or 2.8% and increased total noninterest income by the same amount. For the nine months ended
September 30, 2004, the restatement lowered the weighted average yield on earning assets by 14 basis points to 6.11% from 6.25% and lowered the net interest margin by 14 basis points to 4.35% from 4.49%. The correction had no impact on net
earnings or earnings per share.



The restatement resulted from
a review and assessment by the Company of the classification and recording of mortgage loan origination fees on loans held for sale. Historically, State Bank recorded mortgage loan origination fees as interest income for all mortgage loans
originated. Since the Companys acquisition of CHL in February 2004, CHL recorded mortgage loan origination fees as noninterest income for all mortgage loans originated. In the second quarter of 2005, CHL



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was restructured and became a part of the mortgage division of State Bank. After that occurred, to be consistent with the
way the Company has historically recorded mortgage loan origination fees for loans originated by State Bank, the Company reclassified mortgage loan origination fees for loans generated by CHL (operating as a division of State Bank) as interest
income. The Company has since determined that mortgage loan origination fees on all mortgage loans originated by State Bank and CHL with the intent to sell should be recorded as a component of gains on sale of loans (in noninterest income) when the
loans are sold and has restated its condensed consolidated financial statements to reflect this change. See Note 2 to the accompanying condensed consolidated financial statements.



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



Recent Developments. On October 26, 2005, the Company entered
into a definitive agreement to acquire The Express Bank of Texas (Express), Round Rock, Texas through a merger of Express into State Bank, a wholly-owned subsidiary of Texas United. Under the terms of the agreement, aggregate
consideration to be paid by Texas United to the shareholders of Express will be $9,350,000, consisting of cash in the amount of $4,675,000 and a number of shares of Texas United common stock valued at $4,675,000, subject to adjustment as provided in
the merger agreement. 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 acquisition is subject to customary closing conditions, including regulatory approval and the approval of the shareholders of Express. At September 30, 2005, Express had total assets of $42.8 million total loans of $21.2
million, deposits of $36.4 million, and shareholders equity of $4.3 million. The Company anticipates the acquisition will be completed during the first quarter of 2006.



On May 2, 2005, the Company entered into a definitive agreement to acquire Gateway Holding Company, Inc., Dallas,
Texas. Under the terms of the merger agreement, shareholders of Gateway will receive, for each share of Gateway common stock they own, a number of shares of Texas United common stock with an aggregate market value equal to $35.48, plus $15.20 in
cash. The market value of the Texas United common stock will be based on the average closing sales price of the Texas United common stock for the 20 consecutive trading days ending on and including the tenth trading day immediately preceding the
closing date of the merger. Following the merger, the Company intends to operate Gateways wholly-owned subsidiary bank, Gateway National Bank, as a separate subsidiary. Gateway National Bank currently has six Dallas area locations 
Dallas, Frisco, Frisco West, Mesquite, Balch Springs and Carrolton. The Company anticipates completing the acquisition, subject to shareholder and regulatory approval, during the fourth quarter of 2005. As of September 30, 2005, on a consolidated
basis, Gateway had total assets of $228.2 million, total loans of $138.5 million, total deposits of $200.2 million and shareholders equity of $15.7 million. The Company anticipates the acquisition will be completed during the fourth quarter of
2005.



General.The Company is the bank holding company
for State Bank, a commercial bank headquartered in La Grange, Texas, and GNB Financial, n.a., a commercial bank headquartered in Gainesville, Texas. State Bank has twenty full service banking locations serving twelve counties within central and
south central Texas and GNB Financial has seven full service banking centers located in Cooke, Denton and Ellis counties surrounding the Dallas-Ft. Worth metroplex. In addition, State Bank has four loan production offices and thirteen limited
services branches located in Houston, San Antonio and Austin, Texas. In May 2005, the thirteen loan production offices of CHL became limited service branches of State Bank. These limited service branches have the capability to make lending
decisions, in addition to obtaining loan applications. The Company provides a wide array of financial services to small and medium-sized businesses, including commercial loans and commercial mortgage loans, and loans to individuals, including 1-4
family residential mortgage loans and consumer loans.



Net
earnings for the three months ended September 30, 2005 were $2.7 million, an increase of $1.1 million or 72.3% compared with $1.6 million for the same period in 2004. Basic and diluted earnings per share (EPS) for the three months ended
September 30, 2005 were both $0.34, compared with $0.30 and $0.29, respectively for the same period in 2004. Diluted EPS for the three months ended September 30, 2005 reflect the full impact of the sale of 2,300,000 shares of common stock
through a public offering in August 2004 and the issuance of approximately 1,457,000 shares in connection with the acquisition of GNB Bancshares, Inc. in October 2004. The weighted average diluted shares outstanding for the three months ended
September 30, 2005 was approximately 7,979,000 compared with 5,421,000 for the same period in 2004. The increase in net earnings and diluted EPS for the three months ended September 30, 2005, compared with the same period in 2004, was
primarily due to the effect of the acquisitions of two Central Bank branches and GNB Bancshares, Inc., occurring in the third and fourth quarters of 2004, in addition to internal growth combined with the effect of higher market interest rates on new
and existing earning assets.



Net earnings for the nine months
ended September 30, 2005 were $8.1 million, an increase of $3.5 million or 75.4% compared with $4.6 million for the same period in 2004. Basic and diluted EPS for the nine months ended September 30, 2005 were $1.04 and $1.02, respectively,
compared with $1.04 and $1.00, respectively, for the same period in 2004. Diluted EPS for the nine months ended September 30, 2005 was also affected by the full impact of the above-mentioned issuance of common stock. The weighted average
diluted shares outstanding for the nine months ended September 30, 2005 was approximately 7,965,000 compared with 4,605,000 for the same period in 2004. The increase in net earnings for the nine months ended September 30, 2005, compared
with the same period in 2004, was primarily attributed to higher market interest rates on increased earning assets as a result of internal growth, the acquisition of GNB Bancshares and the Central Bank branches and increased gains on sales of
mortgage loans as a result of increased mortgage banking activities.



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Total assets at September 30, 2005 were $1.3 billion, an increase of $114.2 million or 10.0%
compared with $1.1 billion at December 31, 2004. Total investment securities at September 30, 2005 were $248.2 million, a decrease of $53.4 million or 17.7% compared with $301.6 million at December 31, 2004. Total loans at
September 30, 2005 were $847.9 million, an increase of $154.3 million or 22.2% compared with $693.5 million at December 31, 2004. Total deposits at September 30, 2005 were $880.7 million, an increase of $653,000 or 0.07% compared with
$880.1 million at December 31, 2004. Total borrowings at September 30, 2005 were $227.9 million, an increase of $121.9 million or 115.1% compared with $105.9 million at December 31, 2004. Loan growth during the nine months ended
September 30, 2005 was primarily funded by bank borrowings as deposit growth has softened primarily due to increased competition.



Shareholders equity at September 30, 2005 was $109.0 million, an increase of $4.2 million or 4.0% compared with $104.8 million at
December 31, 2004. The increase in shareholders equity for the nine months ended September 30, 2005 was primarily attributed to earnings retention of $8.1 million that was partially offset by dividend payments to shareholders of $1.9
million and a decline in the fair market value on available-for-sale securities (included in accumulated other comprehensive losses) of $2.3 million. The Companys return on average assets for the nine months ended September 30, 2005 and
2004 was 0.89% and 0.85%, respectively. The Companys return on average shareholders equity for the nine months ended September 30, 2005 and 2004 was 10.2% and 13.4%, respectively.



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



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



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



Net Interest Income.For the three
months ended September 30, 2005, net interest income, before the provision for loan losses, was $13.8 million, an increase of $5.7 million or 71.7% compared with $8.0 million for the same period in 2004. The net interest margin for the three
months ended September 30, 2005 was 4.85%, an increase of 52 basis points compared with 4.33% for the same period in 2004. The increased net interest income and the improved net interest margin for the three months ended September 30, 2005
were primarily the result of additional interest income earned on larger earning-asset volumes due to the 2004 acquisitions and internal growth coupled with higher earning-asset yields, that was partially offset by additional interest expense on
higher volumes of interest-bearing liabilities coupled with higher interest rates paid for those funding sources.



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For the nine months ended September 30, 2005, net interest income, before the provision for loan
losses, was $38.2 million, an increase of $16.9 million or 79.5% compared with $21.3 million for the same period in 2004. The net interest margin for the nine months ended September 30, 2005 was 4.81%, an increase of 46 basis points compared
with 4.35% for the same period in 2004. The increased net interest income and interest margin for the nine months ended September 30, 2005 were primarily the result of additional interest income earned on larger earning-asset volumes as a
result of the 2004 acquisitions and continued internal growth coupled with higher earning-asset yields, that was partially offset by additional interest expense on higher volumes of interest-bearing liabilities coupled with higher interest rates
paid for those funding sources. The net interest margin for the three and nine months ended September 30, 2005 has benefited from the gradual increase in short-term market interest rates over the past twelve to fifteen months.



Interest Income.Total interest income for the three months ended
September 30, 2005 was $19.9 million, an increase of $8.6 million or 75.9% compared with $11.3 million for the same period in 2004. Average earning-asset volumes for the three months ended September 30, 2005 were $1.1 billion, an increase
of $387.6 million or 52.6% compared with $736.5 million for the same period in 2004. The average yield on average earning-assets for the three months ended September 30, 2005 was 7.01%, an increase of 91 basis points compared with 6.10% for the
same period in 2004. Interest income from average total loans for the three months ended September 30, 2005 was $17.1 million, an increase of $8.1 million or 90.5% compared with $9.0 million for the same period in 2004. Average total loan
volumes for the three months ended September 30, 2005 were $822.9 million, an increase of $346.1 million or 72.6% compared with $476.8 million for the same period in 2004. The average yield on average total loans for the three months ended
September 30, 2005 was 8.23%, an increase of 75 basis points compared with 7.48% for the same period in 2004. Interest income from average total investments for the three months ended September 30, 2005 was $2.8 million, an increase of
$465,000 or 19.9% compared with $2.3 million for the same period in 2004. Average total investment volumes for the three months ended September 30, 2005 were $301.2 million, an increase of $41.5 million or 16.0% compared with $259.7 million for
the same period in 2004. The average yield on average total investments for the three months ended September 30, 2005 was 3.68%, an increase of 11 basis points compared with 3.57% for the same period in 2004.



Total interest income for the nine months ended September 30, 2005 was
$54.0 million, an increase of $24.1 million or 80.7% compared with $29.9 million for the same period in 2004. Average earning-asset volumes for the nine months ended September 30, 2005 were $1.1 billion, an increase of $409.6 million or 62.6%
compared with $654.1 million for the same period in 2004. The average yield on average earning-assets for the nine months ended September 30, 2005 was 6.79%, an increase of 68 basis points compared with 6.11% for the same period in 2004.
Interest income from average total loans for the nine months ended September 30, 2005 was $45.5 million, an increase of $21.5 million or 89.7% compared with $24.0 million for the same period in 2004. Average total loan volumes for the nine
months ended September 30, 2005 were $759.2 million, an increase of $328.0 million or 76.0% compared with $431.3 million for the same period in 2004. The average yield on average total loans for the nine months ended September 30, 2005 was
8.00%, an increase of 58 basis points compared with 7.42% for the same period in 2004. Interest income from average total investments for the nine months ended September 30, 2005 was $8.6 million, an increase of $2.6 million or 44.3% compared
with $5.9 million for the same period in 2004. Average total investment volumes for the nine months ended September 30, 2005 were $304.5 million, an increase of $81.7 million or 36.7% compared with $222.8 million for the same period in 2004.
The average yield on average total investments for the nine months ended September 30, 2005 was 3.76%, an increase of 20 basis points compared with 3.56% for the same period in 2004.



Interest Expense. Total interest expense for the three months ended September 30, 2005 was $6.1 million, an
increase of $2.8 million or 86.3% compared with $3.3 million for the same period in 2004. Average interest-bearing liability volumes for the three months ended September 30, 2005 were $938.0 million, an increase of $326.7 million or 53.4%
compared with $611.3 million for the same period in 2004. The average interest rate paid on average interest-bearing liabilities for the three months ended September 30, 2005 was 2.59%, an increase of 45 basis points compared with 2.14% for the
same period in 2004. Interest expense from average total interest-bearing deposits for the three months ended September 30, 2005 was $3.5 million, an increase of $1.2 million or 50.8% compared with $2.3 million for the same period in 2004.
Average total interest-bearing deposit volumes for the three months ended September 30, 2005 were $674.9 million, an increase of $143.6 million or 27.0% compared with $531.3 million for the same period in 2004. The average interest rate paid on
average total interest-bearing deposits for the three months ended September 30, 2005 was 2.06%, an increase of 32 basis points compared with 1.74% for the same period in 2004. Interest expense from average total borrowings for the three months
ended September 30, 2005 was $2.6 million, an increase of $1.7 million or 171.4% compared with $966,000 for the same period in 2004. Average total borrowing volumes for the three months ended September 30, 2005 were $263.1 million, an
increase of $183.1 million or 228.7% compared with $80.1 million for the same period in 2004. The average interest rate paid on average total borrowings for the three months ended September 30, 2005 was 3.95%, an increase of 76 basis points
compared with 3.19% for the same period in 2004.



19



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##### Table of Contents

Total interest expense for the nine months ended September 30, 2005 was $15.8 million, an increase
of $7.2 million or 83.7% compared with $8.6 million for the same period in 2004. Average interest-bearing liability volumes for the nine months ended September 30, 2005 were $888.0 million, an increase of $322.6 million or 57.1% compared with
$565.4 million for the same period in 2004. The average interest rate paid on average interest-bearing liabilities for the nine months ended September 30, 2005 was 2.38%, an increase of 35 basis points compared with 2.03% for the same period in
2004. Interest expense from average total interest-bearing deposits for the nine months ended September 30, 2005 was $9.9 million, an increase of $3.8 million or 61.6% compared with $6.1 million for the same period in 2004. Average total
interest-bearing deposit volumes for the nine months ended September 30, 2005 were $688.0 million, an increase of $214.1 million or 45.2% compared with $473.9 million for the same period in 2004. The average interest rate paid on average total
interest-bearing deposits for the nine months ended September 30, 2005 was 1.93%, an increase of 20 basis points compared with 1.73% for the same period in 2004. Interest expense from average total borrowings for the nine months ended
September 30, 2005 was $5.9 million, an increase of $3.4 million or 139.1% compared with $2.5 million for the same period in 2004. Average total borrowing volumes for the nine months ended September 30, 2005 were $206.0 million, an
increase of $114.5 million or 125.2% compared with $91.5 million for the same period in 2004. The average interest rate paid on average total borrowings for the nine months ended September 30, 2005 was 3.92%, an increase of 34 basis points
compared with 3.58% for the same period in 2004. Borrowings have been an alternative and increasing funding source the Company has utilized to compliment deposits in funding earning-asset growth.



20



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##### Table of Contents

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



|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|--------------------------------------------------------------- |  | ---------------------------------------- | --------- | --------------------- | ---- | ----------------------- |  | ---- | --------------------------- |  | --------------------- | ------- | ----------------------- | - | ------ |  | ---- | -
|                                                                |  | For the Three Months Ended September 30, |          
|                                                                |  | 2005                                     |           |                       | 2004 |                        
|                                                                |  | Average Outstanding Balance              |           | Interest Earned/ Paid |      | Average Yield/ Rate (1) |  |      | Average Outstanding Balance |  | Interest Earned/ Paid |         | Average Yield/ Rate (1) |  
|                                                                |  |                                          |           |                       |      |                         |  |      | (Restated  See Note 2)     | 
|                                                                |  | (Dollars in thousands)                   |          
|Assets                                                          |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Interest-earning assets:                                        |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total loans                                                     |  | $                                        | 822,938   |                       | $    | 17,079                  |  | 8.23 | %                           |  | $                     | 476,826 |                         | $ | 8,966  |  | 7.48 | %
|Taxable securities                                              |  |                                          | 271,008   |                       |      | 2,483                   |  | 3.63 |                             |  |                       | 248,203 |                         |   | 2,227  |  | 3.57 |  
|Tax-exempt securities                                           |  |                                          | 28,419    |                       |      | 296                     |  | 4.13 |                             |  |                       | 8,687   |                         |   | 97     |  | 4.44 |  
|Federal funds sold and other temporary investments              |  |                                          | 1,730     |                       |      | 17                      |  | 3.90 |                             |  |                       | 2,800   |                         |   | 7      |  | 1.00 |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total interest earning assets                                   |  |                                          | 1,124,095 |                       |      | 19,875                  |  | 7.01 |                             |  |                       | 736,516 |                         |   | 11,297 |  | 6.10 |  
|                                                                |  |                                          |           |                       |      |                        
|Less allowance for loan losses                                  |  |                                          | 7,391     |                       |      |                         |  |      |                             |  |                       | 4,253   |                         |   |        |  |      |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total interest-earning assets, net of allowance for loan losses |  |                                          | 1,116704  |                       |      |                         |  |      |                             |  |                       | 732,263 |                         |   |        |  |      |  
|Noninterest-earning assets                                      |  |                                          | 150,583   |                       |      |                         |  |      |                             |  |                       | 79,571  |                         |   |        |  |      |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total assets                                                    |  | $                                        | 1,267,287 |                       |      |                         |  |      |                             |  | $                     | 811,834 |                         |   |        |  |      |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Liabilities and Shareholders Equity                            |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Interest-bearing liabilities:                                   |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Interest-bearing demand deposits                                |  | $                                        | 204,378   |                       | $    | 646                     |  | 1.25 | %                           |  | $                     | 196,222 |                         | $ | 665    |  | 1.35 | %
|Savings and money market accounts                               |  |                                          | 153,559   |                       |      | 507                     |  | 1.31 |                             |  |                       | 115,974 |                         |   | 351    |  | 1.20 |  
|Time deposits                                                   |  |                                          | 316,919   |                       |      | 2,346                   |  | 2.94 |                             |  |                       | 219,076 |                         |   | 1,304  |  | 2.37 |  
|Federal funds purchased                                         |  |                                          | 36,502    |                       |      | 378                     |  | 4.11 |                             |  |                       | 7,568   |                         |   | 57     |  | 3.00 |  
|Securities sold under agreement to repurchase                   |  |                                          | 6,309     |                       |      | 29                      |  | 1.82 |                             |  |                       |        |                         |   |       |  |     |  
|Junior subordinated deferrable interest debentures              |  |                                          | 17,520    |                       |      | 391                     |  | 8.85 |                             |  |                       | 12,365  |                         |   | 266    |  | 8.56 |  
|Other borrowings                                                |  |                                          | 202,802   |                       |      | 1,824                   |  | 3.57 |                             |  |                       | 60,126  |                         |   | 643    |  | 4.25 |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total interest-bearing liabilities                              |  |                                          | 937,989   |                       |      | 6,121                   |  | 2.59 |                             |  |                       | 611,331 |                         |   | 3,286  |  | 2.14 |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Noninterest-bearing liabilities:                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Noninterest-bearing demand deposits                             |  |                                          | 209,065   |                       |      |                         |  |      |                             |  |                       | 133,288 |                         |   |        |  |      |  
|Other liabilities                                               |  |                                          | 13,635    |                       |      |                         |  |      |                             |  |                       | 7,216   |                         |   |        |  |      |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total liabilities                                               |  |                                          | 1,160,689 |                       |      |                         |  |      |                             |  |                       | 751,835 |                         |   |        |  |      |  
|Shareholders equity                                            |  |                                          | 106,598   |                       |      |                         |  |      |                             |  |                       | 59,999  |                         |   |        |  |      |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total liabilities and shareholders equity                      |  | $                                        | 1,267,287 |                       |      |                         |  |      |                             |  | $                     | 811,834 |                         |   |        |  |      |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Net interest income                                             |  |                                          |           |                       | $    | 13,754                  |  |      |                             |  |                       |         |                         | $ | 8,011  |  |      |  
|                                                                |  |                                          |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Net interest spread                                             |  |                                          |           |                       |      |                         |  | 4.42 | %                           |  |                       |         |                         |   |        |  | 3.96 | %
|Net interest margin                                             |  |                                          |           |                       |      |                         |  | 4.85 | %                           |  |                       |         |                         |   |        |  | 4.33 | %

---

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



21



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##### Table of Contents

|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|--------------------------------------------------------------- |  | --------------------------------------- | --------- | --------------------- | ---- | ----------------------- |  | ---- | --------------------------- |  | --------------------- | ------- | ----------------------- | - | ------ |  | ---- | -
|                                                                |  | For the Nine Months Ended September 30, |          
|                                                                |  | 2005                                    |           |                       | 2004 |                        
|                                                                |  | Average Outstanding Balance             |           | Interest Earned/ Paid |      | Average Yield/ Rate (1) |  |      | Average Outstanding Balance |  | Interest Earned/ Paid |         | Average Yield/ Rate (1) |  
|                                                                |  |                                         |           |                       |      |                         |  |      | (Restated  See Note 2)     | 
|                                                                |  | (Dollars in thousands)                  |          
|Assets                                                          |  |                                         |           |                      
|Interest-earning assets:                                        |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total loans                                                     |  | $                                       | 759,217   |                       | $    | 45,452                  |  | 8.00 | %                           |  | $                     | 431,255 |                         | $ | 23,956 |  | 7.42 | %
|Taxable securities                                              |  |                                         | 285,426   |                       |      | 7,994                   |  | 3.74 |                             |  |                       | 212,208 |                         |   | 5,639  |  | 3.55 |  
|Tax-exempt securities                                           |  |                                         | 16,604    |                       |      | 529                     |  | 4.26 |                             |  |                       | 8,729   |                         |   | 292    |  | 4.47 |  
|Federal funds sold and other temporary investments              |  |                                         | 2,468     |                       |      | 58                      |  | 3.14 |                             |  |                       | 1,887   |                         |   | 14     |  | 0.99 |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total interest earning assets                                   |  |                                         | 1,063,715 |                       |      | 54,033                  |  | 6.79 |                             |  |                       | 654,079 |                         |   | 29,901 |  | 6.11 |  
|Less allowance for loan losses                                  |  |                                         | 7,079     |                       |      |                         |  |      |                             |  |                       | 4,061   |                         |   |        |  |      |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total interest-earning assets, net of allowance for loan losses |  |                                         | 1,056,636 |                       |      |                         |  |      |                             |  |                       | 650,018 |                         |   |        |  |      |  
|Noninterest-earning assets                                      |  |                                         | 155,765   |                       |      |                         |  |      |                             |  |                       | 75,432  |                         |   |        |  |      |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total assets                                                    |  | $                                       | 1,212,401 |                       |      |                         |  |      |                             |  | $                     | 725,450 |                         |   |        |  |      |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Liabilities and Shareholders Equity                            |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Interest-bearing liabilities:                                   |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Interest-bearing demand deposits                                |  | $                                       | 220,908   |                       | $    | 2,134                   |  | 1.29 | %                           |  | $                     | 173,328 |                         | $ | 1,617  |  | 1.25 | %
|Savings and money market accounts                               |  |                                         | 156,829   |                       |      | 1,468                   |  | 1.25 |                             |  |                       | 100,410 |                         |   | 838    |  | 1.11 |  
|Time deposits                                                   |  |                                         | 310,286   |                       |      | 6,325                   |  | 2.73 |                             |  |                       | 200,184 |                         |   | 3,689  |  | 2.46 |  
|Federal funds purchased                                         |  |                                         | 30,410    |                       |      | 851                     |  | 3.74 |                             |  |                       | 9,887   |                         |   | 119    |  | 1.61 |  
|Securities sold under agreement to repurchase                   |  |                                         | 6,022     |                       |      | 75                      |  | 1.67 |                             |  |                       |        |                         |   |       |  |     |  
|Junior subordinated deferrable interest debentures              |  |                                         | 17,520    |                       |      | 1,171                   |  | 8.94 |                             |  |                       | 12,365  |                         |   | 798    |  | 8.62 |  
|Other borrowings                                                |  |                                         | 146,045   |                       |      | 3,765                   |  | 3.45 |                             |  |                       | 69,222  |                         |   | 1,535  |  | 2.96 |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total interest-bearing liabilities                              |  |                                         | 888,020   |                       |      | 15,789                  |  | 2.38 |                             |  |                       | 565,396 |                         |   | 8,596  |  | 2.03 |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Noninterest-bearing liabilities:                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Noninterest-bearing demand deposits                             |  |                                         | 200,351   |                       |      |                         |  |      |                             |  |                       | 112,010 |                         |   |        |  |      |  
|Other liabilities                                               |  |                                         | 18,079    |                       |      |                         |  |      |                             |  |                       | 2,113   |                         |   |        |  |      |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total liabilities                                               |  |                                         | 1,106,450 |                       |      |                         |  |      |                             |  |                       | 679,519 |                         |   |        |  |      |  
|Shareholders equity                                            |  |                                         | 105,951   |                       |      |                         |  |      |                             |  |                       | 45,931  |                         |   |        |  |      |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Total liabilities and shareholders equity                      |  | $                                       | 1,212,401 |                       |      |                         |  |      |                             |  | $                     | 725,450 |                         |   |        |  |      |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Net interest income                                             |  |                                         |           |                       | $    | 38,244                  |  |      |                             |  |                       |         |                         | $ | 21,305 |  |      |  
|                                                                |  |                                         |           |                       |      |                         |  |      |                             |  |                       |         |                         |   |        |  |      |  
|Net interest spread                                             |  |                                         |           |                       |      |                         |  | 4.41 | %                           |  |                       |         |                         |   |        |  | 4.08 | %
|Net interest margin                                             |  |                                         |           |                       |      |                         |  | 4.81 | %                           |  |                       |         |                         |   |        |  | 4.35 | %

---

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



22



---

##### Table of Contents

The following tables present the dollar amount of changes in interest income and interest expense for the
major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) attributable to changes in outstanding balances and changes in interest rates for the three and nine month periods ended
September 30, 2005 compared with the same periods in 2004. For purposes of these tables, changes attributable to both volume and rate have been allocated proportionately to the change due to volume and rate.



|                                                   |  |                                      |        |   |      |   |       |       |  |   |        |  
|-------------------------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ----- | ----- |  | - | ------ | -
|                                                   |  | Three Months Ended September 30,     |       
|                                                   |  | 2005 vs. 2004                        |       
|                                                   |  | Increase (Decrease) Due to Change in |        |   |      |  
|                                                   |  | Volume                               |        |   | Rate |   |       | Total | 
|                                                   |  | (Dollars in thousands)               |       
|Interest-earning assets:                           |  |                                      |        |   |      |   |       |       |  |   |        |  
|Total loans                                        |  | $                                    | 6,508  |   |      | $ | 1,605 |       |  | $ | 8,113  |  
|Taxable securities                                 |  |                                      | 205    |   |      |   | 51    |       |  |   | 256    |  
|Tax-exempt securities                              |  |                                      | 221    |   |      |   | (22   | )     |  |   | 199    |  
|Federal funds sold and other temporary investments |  |                                      | (3     | ) |      |   | 13    |       |  |   | 10     |  
|                                                   |  |                                      |        |   |      |   |       |       |  |   |        |  
|Total increase in interest income                  |  |                                      | 6,931  |   |      |   | 1,647 |       |  |   | 8,578  |  
|Interest-bearing liabilities:                      |  |                                      |        |   |      |   |       |       |  |   |        |  
|Interest-bearing demand deposits                   |  |                                      | 28     |   |      |   | (47   | )     |  |   | (19    | )
|Savings and money market accounts                  |  |                                      | 114    |   |      |   | 42    |       |  |   | 156    |  
|Time deposits                                      |  |                                      | 582    |   |      |   | 460   |       |  |   | 1,042  |  
|Federal funds purchased                            |  |                                      | 218    |   |      |   | 103   |       |  |   | 321    |  
|Junior subordinated deferrable interest debentures |  |                                      | 111    |   |      |   | 14    |       |  |   | 125    |  
|Securities sold under agreements to repurchase     |  |                                      | 29     |   |      |   |      |       |  |   | 29     |  
|Other borrowings                                   |  |                                      | 1,526  |   |      |   | (345  | )     |  |   | 1,181  |  
|                                                   |  |                                      |        |   |      |   |       |       |  |   |        |  
|Total increase in interest expense                 |  |                                      | 2,608  |   |      |   | 227   |       |  |   | 2,835  |  
|                                                   |  |                                      |        |   |      |   |       |       |  |   |        |  
|Increase in net interest income                    |  | $                                    | 4,323  |   |      | $ | 1,420 |       |  | $ | 5,743  |  
|                                                   |  |                                      |        |   |      |   |       |       |  |   |        |  
|                                                   | 
|                                                   |  | Nine Months Ended September 30,      |       
|                                                   |  | 2005 vs. 2004                        |       
|                                                   |  | Increase (Decrease) Due to Change in |        |   |      |  
|                                                   |  | Volume                               |        |   | Rate |   |       | Total | 
|                                                   |  | (Dollars in thousands)               |       
|Interest-earning assets:                           |  |                                      |        |   |      |   |       |       |  |   |        |  
|Total loans                                        |  | $                                    | 18,218 |   |      | $ | 3,278 |       |  | $ | 21,496 |  
|Taxable securities                                 |  |                                      | 1,946  |   |      |   | 409   |       |  |   | 2,355  |  
|Tax-exempt securities                              |  |                                      | 263    |   |      |   | (26   | )     |  |   | 237    |  
|Federal funds sold and other temporary investments |  |                                      | 4      |   |      |   | 40    |       |  |   | 44     |  
|                                                   |  |                                      |        |   |      |   |       |       |  |   |        |  
|Total increase in interest income                  |  |                                      | 20,431 |   |      |   | 3,701 |       |  |   | 24,132 |  
|Interest-bearing liabilities:                      |  |                                      |        |   |      |   |       |       |  |   |        |  
|Interest-bearing demand deposits                   |  |                                      | 444    |   |      |   | 73    |       |  |   | 517    |  
|Savings and money market accounts                  |  |                                      | 471    |   |      |   | 159   |       |  |   | 630    |  
|Time deposits                                      |  |                                      | 2,029  |   |      |   | 607   |       |  |   | 2,636  |  
|Federal funds purchased                            |  |                                      | 247    |   |      |   | 485   |       |  |   | 732    |  
|Junior subordinated deferrable interest debentures |  |                                      | 333    |   |      |   | 40    |       |  |   | 373    |  
|Securities sold under agreements to repurchase     |  |                                      | 75     |   |      |   |      |       |  |   | 75     |  
|Other borrowings                                   |  |                                      | 1,704  |   |      |   | 526   |       |  |   | 2,230  |  
|                                                   |  |                                      |        |   |      |   |       |       |  |   |        |  
|Total increase in interest expense                 |  |                                      | 5,303  |   |      |   | 1,890 |       |  |   | 7,193  |  
|                                                   |  |                                      |        |   |      |   |       |       |  |   |        |  
|Increase in net interest income                    |  | $                                    | 15,128 |   |      | $ | 1,811 |       |  | $ | 16,939 |  
|                                                   |  |                                      |        |   |      |   |       |       |  |   |        |  



23



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##### Table of Contents

Provision for Loan Losses.Provisions for loan losses are charged to income to bring the
Companys allowance for loan losses to a level deemed appropriate by management. The provisions for loan losses for the three and nine months ended September 30, 2005 were $1.0 million and $2.8 million, respectively, an increase of $335,000 or
47.9% and an increase of $1.6 million or 143.3%, respectively, compared with the three and nine months ended September 30, 2004. The increase in the provision for loan losses for both periods was primarily the result of growth in loans. Total loans
at September 30, 2005 were $847.9 million, an increase of $349,000 or 70.0%, compared with $498.6 million at September 30, 2004.



The allowance for loan losses at September 30, 2005 was $7.8 million compared with $6.7 million at December 31, 2004. At September 30,
2005, the ratio of the allowance for loan losses to total loans was 0.92% compared with 0.96% at December 31, 2004.



Noninterest Income. Total noninterest income for the three months ended September 30, 2005 was $6.4 million, an increase of $1.2 million or
23.7% compared with $5.2 million for the same period in 2004. The increase was primarily due to service charges on additional deposit accounts acquired in the 2004 acquisitions, higher mortgage servicing revenue as a result of increased mortgage
servicing activities and increased non-deposit sales, partially offset by a net loss on sales of securities.



Total noninterest income for the nine months ended September 30, 2005 was $18.9 million, an increase of $4.6 million or 32.4% compared with $14.3
million for the same period in 2004. The increase was primarily due to service charges on additional deposit accounts acquired in the 2004 acquisitions, higher mortgage servicing revenue as a result of increased mortgage servicing activities,
increased non-deposit sales, and higher gains on sales of mortgage loans as a result of increased mortgage loan originations, partially offset by net losses on sales of securities.



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



|                                      |  |                                          |       |                                         |                       |   |       |  |   |                       |   |  |   |       
|------------------------------------- |  | ---------------------------------------- | ----- | --------------------------------------- | --------------------- | - | ----- |  | - | --------------------- | - |  | - | ------
|                                      |  | For the Three Months Ended September 30, |       | For the Nine Months Ended September 30,
|                                      |  | 2005                                     |       |                                         | 2004                  |   | 2005  |  |   | 2004                 
|                                      |  |                                          |       |                                         | (Restated-See Note 2) |   |       |  |   | (Restated-See Note 2)
|                                      |  | (Dollars in thousands)                  
|Service charges on deposit accounts   |  | $                                        | 2,398 |                                         |                       | $ | 1,869 |  | $ | 6,696                 |   |  | $ | 5,196 
|Mortgage servicing revenue            |  |                                          | 358   |                                         |                       |   | 217   |  |   | 917                   |   |  |   | 715   
|Net (loss) gain on sale of securities |  |                                          | (63   | )                                       |                       |   | 19    |  |   | (184                  | ) |  |   | 167   
|Net gain on sale of loans             |  |                                          | 2,521 |                                         |                       |   | 2,716 |  |   | 7,496                 |   |  |   | 6,930 
|Other noninterest income              |  |                                          | 1,206 |                                         |                       |   | 367   |  |   | 3,984                 |   |  |   | 1,269 
|                                      |  |                                          |       |                                         |                       |   |       |  |   |                       |   |  |   |       
|Total noninterest income              |  | $                                        | 6,420 |                                         |                       | $ | 5,188 |  | $ | 18,909                |   |  | $ | 14,277
|                                      |  |                                          |       |                                         |                       |   |       |  |   |                       |   |  |   |       



Noninterest
Expense. Total noninterest expense for the three months ended September 30, 2005 was $15.2 million, an increase of $4.9 million or 47.8% compared with $10.3 million for the same period in 2004. Employee compensation and benefits expense for
three months ended September 30, 2005 represented 62.4% of total noninterest expense and was $9.5 million, an increase of $3.8 million or 67.6% compared with $5.7 million or 55.0% of total noninterest expense for the same period in 2004. All
other noninterest expense (non-staff) for the three months ended September 30, 2005 was $5.7 million, an increase of $1.1 million or 23.5% compared with $4.6 million for the same period in 2004. The efficiency ratio for the three months ended
September 30, 2005 was 75.12%, an improvement of 283 basis points compared with 77.95% for the same period in 2004.



Total noninterest expense for the nine months ended September 30, 2005 was $42.3 million, an increase of $14.6 million or 53.0% compared with $27.6
million for the same period in 2004. Employee compensation and benefits expense for nine months ended September 30, 2005 represented 58.5% of total noninterest expense and was $24.7 million, an increase of $9.1 million or 57.9% compared with
$15.7 million or 56.7% of total noninterest expense for the same period in 2004. All other noninterest expense (non-staff) for the nine months ended September 30, 2005 was $17.5 million, an increase of $5.6 million or 46.5% compared with $12.0
million for the same period in 2004. The efficiency ratio for the nine months ended September 30, 2005 was 73.73%, an improvement of 394 basis points compared with 77.67% for the same period in 2004.



24



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##### Table of Contents

The increases in total noninterest expense for the three and nine months ended September 30, 2005
reflect the Companys expansion activities over the past six quarters, including additional staffing to handle expanded back office operations, professional fees related to compliance and acquisition projects, the construction of three
full-service banking centers, expanded mortgage banking activities with the acquisition of CHL, the acquisition of GNB Bancshares, Inc., and the acquisition of the two Central Bank branches.



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



|                                   |  |                                          |        |                                         |   |        |  |      |        |  |   |       
|---------------------------------- |  | ---------------------------------------- | ------ | --------------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                   |  | For the Three Months Ended September 30, |        | For the Nine Months Ended September 30,
|                                   |  | 2005                                     |        | 2004                                    |   | 2005   |  | 2004
|                                   |  | (Dollars in thousands)                  
|Employee compensation and benefits |  | $                                        | 9,492  |                                         | $ | 5,664  |  | $    | 24,733 |  | $ | 15,660
|Non-staff expenses:                |  |                                          |        |                                         |   |        |  |      |        |  |   |       
|Occupancy                          |  |                                          | 1,070  |                                         |   | 690    |  |      | 3,388  |  |   | 1,877 
|Depreciation and amortization      |  |                                          | 790    |                                         |   | 524    |  |      | 2,619  |  |   | 1,961 
|Data processing                    |  |                                          | 244    |                                         |   | 242    |  |      | 784    |  |   | 758   
|Legal and professional fees        |  |                                          | 481    |                                         |   | 276    |  |      | 1,595  |  |   | 867   
|Advertising                        |  |                                          | 356    |                                         |   | 100    |  |      | 932    |  |   | 289   
|Printing and supplies              |  |                                          | 252    |                                         |   | 172    |  |      | 711    |  |   | 423   
|Telecommunications                 |  |                                          | 287    |                                         |   | 228    |  |      | 852    |  |   | 449   
|Mortgage servicing expense         |  |                                          | 200    |                                         |   | 236    |  |      | 761    |  |   | 414   
|Other noninterest expense          |  |                                          | 2,030  |                                         |   | 2,157  |  |      | 5,898  |  |   | 4,937 
|                                   |  |                                          |        |                                         |   |        |  |      |        |  |   |       
|Total non-staff expenses           |  |                                          | 5,710  |                                         |   | 4,625  |  |      | 17,540 |  |   | 11,975
|                                   |  |                                          |        |                                         |   |        |  |      |        |  |   |       
|Total noninterest expense          |  | $                                        | 15,202 |                                         | $ | 10,289 |  | $    | 42,273 |  | $ | 27,635
|                                   |  |                                          |        |                                         |   |        |  |      |        |  |   |       



Financial Condition



Loan Portfolio.Total loans, including loans held for sale, at
September 30, 2005 were $847.9 million, an increase of $154.3 million or 22.2% compared with $693.5 million at December 31, 2004. The increase was primarily the result of a $38.7 million increase in commercial and industrial loans, a $65.1
million increase in 1-4 family residential loans, a $52.8 million increase in commercial mortgages, partially offset by a $16.9 million decrease in loans held for sale. At September 30, 2005 and December 31, 2004, the ratio of total loans
to total deposits was 96.3% and 78.0%, respectively. For the same periods, total loans represented 67.5% and 60.8% of total assets, respectively.



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



|                                |  |                        |         |         |                   |   |        |   |         |  |       |  
|------------------------------- |  | ---------------------- | ------- | ------- | ----------------- | - | ------ | - | ------- |  | ----- | -
|                                |  | September 30, 2005     |         |         | December 31, 2004 |  
|                                |  | Amount                 |         | Percent |                   |   | Amount |   | Percent | 
|                                |  | (Dollars in thousands) |        
|Commercial and industrial       |  | $                      | 174,889 |         | 20.6              | % |        | $ | 136,197 |  | 19.6  | %
|Real estate mortgage            |  |                        |         |         |                   |   |        |   |         |  |       |  
|1-4 family residential          |  |                        | 257,865 |         | 30.4              |   |        |   | 192,791 |  | 27.8  |  
|Commercial mortgages            |  |                        | 276,788 |         | 32.7              |   |        |   | 223,987 |  | 32.3  |  
|Held for sale                   |  |                        | 10,097  |         | 1.2               |   |        |   | 26,979  |  | 3.9   |  
|Other                           |  |                        | 59,290  |         | 7.0               |   |        |   | 44,494  |  | 6.4   |  
|Consumer and other, net         |  |                        | 68,932  |         | 8.1               |   |        |   | 69,100  |  | 10.0  |  
|                                |  |                        |         |         |                   |   |        |   |         |  |       |  
|Total loans                     |  | $                      | 847,861 |         | 100.0             | % |        | $ | 693,548 |  | 100.0 | %
|                                |  |                        |         |         |                   |   |        |   |         |  |       |  
|Less: Allowance for loan losses |  |                        | 7,835   |         |                   |   |        |   | 6,685   |  |       |  
|                                |  |                        |         |         |                   |   |        |   |         |  |       |  
|Net loans                       |  | $                      | 840,026 |         |                   |   |        | $ | 686,863 |  |       |  
|                                |  |                        |         |         |                   |   |        |   |         |  |       |  



25



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##### Table of Contents

Nonperforming Assets.Nonperforming assets at September 30, 2005 and December 31, 2004
were $6.1 million and $3.8 million, respectively. The Company generally places a loan on nonaccrual status and ceases to accrue interest when loan payment performance is deemed unsatisfactory. Loans where the interest payments jeopardize the
collection of principal are placed on nonaccrual status, unless the loan is both well-secured and in the process of collection. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction of principal as long as doubt
exists as to collection.



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



|                                                          |  |                        |       |   |                   |   |       |  
|--------------------------------------------------------- |  | ---------------------- | ----- | - | ----------------- | - | ----- | -
|                                                          |  | September 30, 2005     |       |   | December 31, 2004 |  
|                                                          |  | (Dollars in thousands) |      
|Nonaccrual loans                                          |  | $                      | 2,804 |   |                   | $ | 1,725 |  
|Accruing loans 90 days or more past due                   |  |                        | 2,149 |   |                   |   | 1,286 |  
|Other real estate                                         |  |                        | 1,167 |   |                   |   | 906   |  
|                                                          |  |                        |       |   |                   |   |       |  
|Total nonperforming assets                                |  | $                      | 6,120 |   |                   | $ | 3,917 |  
|                                                          |  |                        |       |   |                   |   |       |  
|Nonperforming assets to total assets                      |  |                        | 0.49  | % |                   |   | 0.34  | %
|Nonperforming assets to total loans and other real estate |  |                        | 0.72  | % |                   |   | 0.56  | %



Allowance for Loan
Losses.The Company has several systems in place to assist it in maintaining the overall quality of its loan portfolio. The Company has established underwriting guidelines to be followed at each of its banking centers. The Company also monitors
its delinquency levels for any negative or adverse trends and particularly monitors credits that have a total exposure of $75,000 or more. There can be no assurance, however, that the Companys loan portfolio will not become subject to
increasing pressure from deteriorating borrower credit due to general economic conditions.



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



For the nine months ended September 30, 2005, net charge-offs were $1.6 million or 0.22% of average total loans outstanding compared with $964,000 or
0.19% of average loans for the year ended December 31, 2004. The allowance for loan losses at September 30, 2005 and December 31, 2004, aggregated $7.8 million and $6.7 million, or 0.92% and 0.96% of total loans, respectively. The
allowance for loan losses as a percentage of nonperforming loans at September 30, 2005 was 149.1% compared with 158.2% at December 31, 2004.



26



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##### Table of Contents

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



|                                                        |  |                                      |         |   |                              |   |         |  
|------------------------------------------------------- |  | ------------------------------------ | ------- | - | ---------------------------- | - | ------- | -
|                                                        |  | Nine Months Ended September 30, 2005 |         |   | Year Ended December 31, 2004 |  
|                                                        |  | (Dollars in thousands)               |        
|Average total loans outstanding                         |  | $                                    | 759,217 |   |                              | $ | 493,490 |  
|                                                        |  |                                      |         |   |                              |   |         |  
|Total loans outstanding at end of period                |  | $                                    | 847,861 |   |                              | $ | 693,548 |  
|                                                        |  |                                      |         |   |                              |   |         |  
|Allowance for loan losses at beginning of period        |  |                                      | 6,685   |   |                              |   | 3,893   |  
|Balance acquired from GNB Bancshares                    |  |                                      |        |   |                              |   | 1,850   |  
|Provision for loan losses                               |  |                                      | 2,798   |   |                              |   | 1,906   |  
|Charge-offs:                                            |  |                                      |         |   |                              |   |         |  
|Commercial and industrial                               |  |                                      | (881    | ) |                              |   | (167    | )
|Real estate                                             |  |                                      | (400    | ) |                              |   | (167    | )
|Consumer                                                |  |                                      | (1,052  | ) |                              |   | (1,266  | )
|Other                                                   |  |                                      | (41     | ) |                              |   | (106    | )
|                                                        |  |                                      |         |   |                              |   |         |  
|Total charge-offs                                       |  |                                      | (2,374  | ) |                              |   | (1,706  | )
|                                                        |  |                                      |         |   |                              |   |         |  
|Recoveries:                                             |  |                                      |         |   |                              |   |         |  
|Commercial and industrial                               |  |                                      | 272     |   |                              |   | 222     |  
|Real estate                                             |  |                                      | 194     |   |                              |   | 45      |  
|Consumer                                                |  |                                      | 260     |   |                              |   | 450     |  
|Other                                                   |  |                                      |        |   |                              |   | 25      |  
|                                                        |  |                                      |         |   |                              |   |         |  
|Total recoveries                                        |  |                                      | 726     |   |                              |   | 742     |  
|                                                        |  |                                      |         |   |                              |   |         |  
|Net charge-offs                                         |  |                                      | (1,648  | ) |                              |   | (964    | )
|                                                        |  |                                      |         |   |                              |   |         |  
|Allowance for loan losses at end of period              |  | $                                    | 7,835   |   |                              | $ | 6,685   |  
|                                                        |  |                                      |         |   |                              |   |         |  
|                                                        |  |                                      |         |   |                              |   |         |  
|Ratio of allowance to end of period total loans         |  |                                      | 0.92    | % |                              |   | 0.96    | %
|Ratio of net charge-offs to average total loans         |  |                                      | 0.22    | % |                              |   | 0.19    | %
|Ratio of allowance to end of period nonperforming loans |  |                                      | 158.2   | % |                              |   | 222.02  | %
|                                                        |  |                                      |         |   |                              |   |         |  



Securities.At
September 30, 2005, the securities portfolio was $248.2 million, a decrease of $53.4 million or 17.7% compared with $301.6 million at December 31, 2004. During the nine months ended September 30, 2005, the Company purchased $49.6 million
of investment securities. During the same period, in efforts to reposition the portfolio for current economic conditions and to provide additional funding for loan growth, the Company sold $65.9 million of investment securities. Additionally, the
Company received $32.4 million in maturities and principal paydowns that was partially offset by approximately $1.0 million in net premium amortization.



Deposits. At September 30, 2005, total deposits were $880.7 million, an increase of $653,000 or 0.07% compared with $880.1 million at
December 31, 2004. Noninterest-bearing deposits at September 30, 2005 increased by $30.2 million or 16.1% to $217.6 million from $187.5 million at December 31, 2004. Interest-bearing deposits at September 30, 2005 decreased by
$29.5 million or 4.3% to $663.1 million from $692.6 million at December 31, 2004. The Companys ratios of noninterest-bearing demand deposits to total deposits for September 30, 2005 and December 31, 2004 were 24.7% and 21.3%,
respectively.



Borrowings.The Company utilizes
borrowings to supplement deposits in funding its lending and investing activities. Borrowings consist of short-term and long-term advances from the Federal Home Loan Bank (FHLB) and advances on a revolving credit line with a correspondent bank. At
September 30, 2005, the Company had no federal funds purchased. Borrowings at September 30, 2005 were $227.9 million, an increase of $121.9 million or 115.1% compared with $105.9 million at December 31, 2004. The additional borrowings
were primarily used to fund loan growth. The maturity dates for the FHLB borrowings range from the years 2005 to 2024 with interest rates ranging from 2.75% to 5.91%.



At September 30, 2005, the Company had $8.5 million borrowed on its $20.0 million revolving credit line with a
correspondent bank. The funds were used for a capital injection into State Bank and general corporate operating expenses. The line of credit bears interest at Federal Funds rate plus 2.25% and expires in July 2006.



27



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##### Table of Contents

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



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

---

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

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



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



Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. At September 30, 2005, the Company had cash and cash equivalents of $47.9 million, up $7.1 million or 17.5% from $40.8
million at December 31, 2004.



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.



28



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##### Table of Contents

Capital Resources. Shareholders equity at September 30, 2005 was $109.0 million, an
increase of $4.2 million or 4.0% compared with $104.8 million at December 31, 2004. The increase was primarily due to net earnings for the period of $8.1 million, partially offset by decline in unrealized securities losses of $2.3 million and
dividend payments of $1.9 million.



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 September 30, 2005 to the minimum and well-capitalized regulatory standards:



|                                |  |                                                |      |  |                                                                  |   |  |                                   |  
|------------------------------- |  | ---------------------------------------------- | ---- |  | ---------------------------------------------------------------- | - |  | --------------------------------- | -
|                                |  | Minimum Required for Capital Adequacy Purposes |      |  | To be Well Capitalized Under Prompt Corrective Action Provisions |   |  | Actual Ratio atSeptember 30, 2005 |  
|Texas United                    |  |                                                |      |  |                                                                  |   |  |                                   |  
|Leverage ratio                  |  | 4.00                                           | %(1) |  | N/A                                                              |   |  | 6.92                              | %
|Tier 1 risk-based capital ratio |  | 4.00                                           |      |  | N/A                                                              |   |  | 9.14                              |  
|Risk-based capital ratio        |  | 8.00                                           |      |  | N/A                                                              |   |  | 9.99                              |  
|State Bank                      |  |                                                |      |  |                                                                  |   |  |                                   |  
|Leverage ratio                  |  | 4.00                                           | %(2) |  | 5.00                                                             | % |  | 6.59                              | %
|Tier 1 risk-based capital ratio |  | 4.00                                           |      |  | 6.00                                                             |   |  | 9.15                              |  
|Risk-based capital ratio        |  | 8.00                                           |      |  | 10.00                                                            |   |  | 10.00                             |  
|GNB Financial                   |  |                                                |      |  |                                                                  |   |  |                                   |  
|Leverage ratio                  |  | 4.00                                           | %(3) |  | 5.00                                                             | % |  | 10.36                             | %
|Tier 1 risk-based capital ratio |  | 4.00                                           |      |  | 6.00                                                             |   |  | 11.63                             |  
|Risk-based capital ratio        |  | 8.00                                           |      |  | 10.00                                                            |   |  | 12.51                             |  

---

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

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

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



Item 3.Quantitative and Qualitative Disclosures About Market Risk.



There have been no material changes since December 31, 2004. For more information regarding quantitative and qualitative disclosures about market
risk, please refer to the Companys Annual Report on Form 10-K/A as of and for the year ended December 31, 2004, and in particular, Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Sensitivity and Market Risk.



Item 4.Controls and Procedures



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



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##### Table of Contents

Changes in Internal Control Over Financial Reporting.During the third quarter of 2005, management
implemented changes in 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. Management believes these changes are reasonably likely to materially improve the Companys internal control over financial reporting. Other than such changes,
there were no changes in the Companys internal control over financial reporting in the quarter ended September 30, 2005 that materially affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.



PART II



OTHER INFORMATION



Item 1.Legal Proceedings



Not applicable



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



Not applicable



Item 3.Defaults Upon Senior Securities



Not applicable



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



Not applicable



Item 5.Other Information



Not applicable



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##### Table of Contents

Item 6.Exhibits



|               |  |                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Identification of Exhibit                                                                                                                          
|31.1           |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                        
|               | 
|31.2           |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                        
|               | 
|32.1           |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|               | 
|32.2           |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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##### Table of Contents

SIGNATURES



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



|                        |  |     |  |                                      
|----------------------- |  | --- |  | -------------------------------------
|Date: November 17, 2005 |  | By: |  | /s/ L. Don Stricklin                 
|                        |  |     |  | L. Don Stricklin                     
|                        |  |     |  | President and Chief Executive Officer
|                        |  |     |  | (principal executive officer)        
|                        |  |    
|Date: November 17, 2005 |  | By: |  | /s/ Jeffrey A. Wilkinson             
|                        |  |     |  | Jeffrey A. Wilkinson                 
|                        |  |     |  | Executive Vice President and         
|                        |  |     |  | Chief Financial Officer              
|                        |  |     |  | (principal financial officer/        
|                        |  |     |  | principal accounting officer)        



32