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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

Commission file number 000-49928

TEXAS UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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)

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

None

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

Common Stock, par value $1.00 per share

(Title of class)

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

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

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

PART I

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

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)

See accompanying notes to condensed consolidated financial statements

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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

Year Ended December 31, 2004 and

Three Months Ended March 31, 2005

(In thousands, except share amounts)

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)

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”), GNB Financial, n.a. (“GNB”) and Community Home Loan, Inc. (“CHL”). All material intercompany accounts and transactions have been eliminated in the consolidated report of the Company.

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

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

These financial statements and the notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2004 appearing in the Company’s Annual Report on Form 10-K.

Stock Based Compensation

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

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

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

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2. EARNINGS PER COMMON SHARE

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

3. INTANGIBLE ASSETS

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

The projections of amortization expense shown below for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of March 31, 2005. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.

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

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4. NEW PRONOUNCEMENTS

Variable Interest Entities

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

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

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

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

Accounting for Stock Based Compensation

In December 2004, the FASB issued a revision to FASB Statement No. 123, Accounting for Stock 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

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implementation guidance. SFAS 123(R) established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, including transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. The impact to the Company of SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions —in this case primarily stock options. The Company currently accounts for its stock-based compensation using the intrinsic method as defined in APB 25 and, accordingly, has not recognized any expense for stock option plans in the Consolidated Financial Statements. Implementation of SFAS 123(R) is required for the Company at the beginning of its fiscal year ending December 31, 2006. The Company is currently analyzing this new pronouncement to determine the impact on its consolidated financial statements. As a result of SFAS 123(R), the Company may adopt different models than are currently utilized to calculate the expense effect associated with the Company’s stock options. Note 1 of the Condensed Consolidated Financial Statements illustrates the effect on net earnings and earnings per share if the Company had applied the fair value provisions of SFAS 123.

Mortgage Loan Interest Rate Lock Commitments

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

5. OFF BALANCE SHEET CREDIT COMMITMENTS

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

The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Commitments to extend credit totaled $181.4 million at March 31, 2005 and $158.5 million at December 31, 2004.

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

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6. CRITICAL ACCOUNTING POLICIES

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

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

Mortgage servicing rights assets are established and accounted for based on discounted cash flow modeling techniques which require management to make estimates regarding the amount and timing of expected future cash flows, including assumptions about loan repayment rates, loan loss experience, and costs to service, as well as discount rates that consider the risk involved. The Company attempts to offset some of the mortgage servicing rights interest rate risk exposure by designating certain interest rate derivatives as fair value hedges. Because the values of mortgage servicing rights are sensitive to changes in assumptions, the valuation of such assets is considered a critical accounting estimate. Please refer to Note 3 to the Condensed Consolidated Financial Statements above for additional insight into management’s approach in estimating transfers and servicing of financial assets.

7. SEGMENT INFORMATION

Beginning in 2004, the Company has two reportable operating segments; commercial banking and mortgage banking. The Bank owns 100% of CHL and operates CHL as a subsidiary of the Bank. The Company reports the financial position and the results of operations on a consolidated basis. The commercial banking and the mortgage banking segments are managed separately because each business requires different marketing strategies and each offers different products and services.

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Summarized below is the financial information by operating segment for the three-month periods ended March 31, 2005 and 2004 (dollars in thousands):

8. SUBSEQUENT EVENT

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

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

Special Cautionary Notice Regarding Forward-looking Statements

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

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

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

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

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

At March 31, 2005, total assets were $1.2 billion compared with $1.1 billion at December 31, 2004. The $38.8 million or 3.4% increase in total assets from December 31, 2004 was attributable to the increase in net loans. At March 31, 2005, net loans, including loans held for sale, were $718.8 million compared with $686.9 million at

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December 31, 2004. Total deposits at March 31, 2005 were $880.3 million compared with $880.1 million at December 31, 2004. Shareholders’ equity at March 31, 2005 was $104.2 million compared with $104.8 million at December 31, 2004. The $635,000 or 0.6% decrease is attributable to an unrealized loss position on the fair market value on available-for-sale securities included in accumulated other comprehensive loss, partially offset by earnings retention.

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

Net Interest Income. For the three months ended March 31, 2005, net interest income, before the provision for loan losses, increased by 87.7% to $12.5 million compared with $6.7 million for the same period in 2004. The increase was primarily due to the increased volumes in loans and investment securities acquired in connection with acquisitions in 2004 and an improved net interest margin. For the three months ended March 31, 2005 and 2004, the net interest margin and spread increased by 42 basis points to 5.05% from 4.63% and by 33 basis points to 4.71% from 4.38%, respectively.

Interest income for the three months ended March 31, 2005 was $17.0 million compared to $9.2 million for the same period in 2004. As compared with the three months ended March 31, 2004, the average total loan volume for the three months ended March 31, 2005 increased by $307.9 million or 78.6% to $699.8 million, and the average yield on average total loan volume increased 45 basis points to 8.17%. As compared with the three months ended March 31, 2004, the average total investment volume for the three months ended March 31, 2005 increased by $118.0 million or 63.6% to $695.9 million, and the average yield on average investments increased by 17 basis points to 3.83%. For the three months ended March 31, 2005, as compared with the same period in 2004, the yield on total average earning assets increased by 45 basis points to 6.85%. The increases are primarily attributed to the GNB Bancshares and Central Bank branch acquisitions in 2004 coupled with the increase in interest rates.

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

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