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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

(Mark One)

|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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)


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

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 o.

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

As of July 31, 2003, the number of outstanding shares of Common Stock, par
value $1.00 per share was 2,662,744.



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TABLE OF CONTENTS



|                                             |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                      
|                                             | Item 1. Condensed Consolidated Financial Statements                                          
|                                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                             | Item 4. Controls and Procedures                                                              
|PART II                                     
|                                             | Item 1. Legal Proceedings                                                                    
|                                             | Item 2. Changes in Securities and Use of Proceeds                                            
|                                             | Item 3. Defaults Upon Senior Securities                                                      
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                             | Item 5. Other Information                                                                    
|                                             | Item 6(a). Exhibits                                                                          
|                                             | Item 6(b). Reports on Form 8-K                                                               
|SIGNATURES                                  
|Certification of CEO Pursuant to Section 302
|Certification of CFO Pursuant to Section 302
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906




PART I

FINANCIAL INFORMATION




Item 1.Condensed Consolidated Financial Statements.

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |              |         |         |  | 
|------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------ | ------- | ------- | ----------- | ------- | ------------ | ------- | ------- |  | 
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         | June 30,    |         | December 31,
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         | 2003        |         | 2002        
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         | (Unaudited) |         |              |         |        
|ASSETS                                                                         
|Cash and cash equivalents:                                                      |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                | Cash and due from banks                                                                                                                                                                                   |                                 | $                                          | 21,365  |         |             | $       | 20,574       |        
|                                                                                | Federal funds sold and other temporary investments                                                                                                                                                        |                                 |                                            |        |         |             |         |             |        
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                |                                                                                                                                                                                                           | Total cash and cash equivalents |                                            |         | 21,365  |             |         |              | 20,574  |        
|Investment securities available-for-sale, at fair value                         |                                                                                                                                                                                                           |                                 | 174,349                                    |         |         |             | 132,140 |             
|Loans, net                                                                      |                                                                                                                                                                                                           |                                 | 357,461                                    |         |         |             | 349,345 |             
|Loans held for sale                                                             |                                                                                                                                                                                                           |                                 | 8,469                                      |         |         |             | 33,674  |             
|Premises and equipment, net                                                     |                                                                                                                                                                                                           |                                 | 23,968                                     |         |         |             | 23,363  |             
|Accrued interest receivable                                                     |                                                                                                                                                                                                           |                                 | 2,966                                      |         |         |             | 3,006   |             
|Goodwill                                                                        |                                                                                                                                                                                                           |                                 | 9,432                                      |         |         |             | 9,432   |             
|Core
deposit intangibles                                                        |                                                                                                                                                                                                           |                                 | 452                                        |         |         |             | 512     |             
|Mortgage servicing
rights                                                       |                                                                                                                                                                                                           |                                 | 3,012                                      |         |         |             | 2,877   |             
|Other assets                                                                    |                                                                                                                                                                                                           |                                 | 12,900                                     |         |         |             | 12,139  |             
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                |                                                                                                                                                                                                           | Total assets                    |                                            | $       | 614,374 |             |         | $            | 587,062 |        
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                           
|Deposits:                                                                       |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                | Noninterest-bearing                                                                                                                                                                                       |                                 | $                                          | 97,538  |         |             | $       | 82,294       |        
|                                                                                | Interest-bearing                                                                                                                                                                                          |                                 |                                            | 398,076 |         |             |         | 370,625      |        
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                |                                                                                                                                                                                                           | Total deposits                  |                                            |         | 495,614 |             |         |              | 452,919 |        
|Federal funds purchased                                                         |                                                                                                                                                                                                           |                                 | 12,263                                     |         |         |             | 19,732  |             
|Other liabilities                                                               |                                                                                                                                                                                                           |                                 | 6,850                                      |         |         |             | 5,807   |             
|Borrowings                                                                      |                                                                                                                                                                                                           |                                 | 54,000                                     |         |         |             | 62,945  |             
|Subordinated notes and debentures                                               |                                                                                                                                                                                                           |                                 |                                           |         |         |             | 3,241   |             
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                |                                                                                                                                                                                                           | Total liabilities               |                                            |         | 568,727 |             |         |              | 544,644 |        
|Commitments and contingencies                                                   |                                                                                                                                                                                                           |                                 |                                           |         |         |             |        |             
|Company obligated mandatorily redeemable capital securities
of subsidiary trust |                                                                                                                                                                                                           |                                 | 7,000                                      |         |         |             | 7,000   |             
|Shareholders equity:                                                           |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                | Preferred stock, $1.00 par value, 500,000 shares
authorized, none of which are issued and outstanding                                                                                                     |                                 |                                            |        |         |             |         |             |        
|                                                                                | Common stock, $1.00 par value, 20,000,000 authorized;
2,668,839 shares issued and 2,662,744 outstanding as of
June 30, 2003 and 2,646,139 shares issued and 2,640,044
outstanding as of December 31, 2002 |                                 |                                            | 2,669   |         |             |         | 2,646        |        
|                                                                                | Additional paid-in capital                                                                                                                                                                                |                                 |                                            | 16,870  |         |             |         | 16,683       |        
|                                                                                | Retained earnings                                                                                                                                                                                         |                                 |                                            | 16,586  |         |             |         | 14,594       |        
|                                                                                | Accumulated other comprehensive income                                                                                                                                                                    |                                 |                                            | 2,639   |         |             |         | 1,612        |        
|                                                                                | Less treasury stock, at cost                                                                                                                                                                              |                                 |                                            | (117    | )       |             |         | (117         | )      
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                |                                                                                                                                                                                                           |                                 | Total shareholders equity                 |         |         | 38,647      |         |              |         | 35,418  | 
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             
|                                                                                |                                                                                                                                                                                                           |                                 | Total liabilities and shareholders equity |         | $       | 614,374     |         |              | $       | 587,062 | 
|                                                                                |                                                                                                                                                                                                           |                                 |                                            |         |         |             |         |             

See accompanying notes to condensed consolidated financial statements

1



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income


(In thousands, except per share data)

(Unaudited)


|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |        |       |        | 
|--------------------------------------------------- | ------------------------------------------------------------------------------- | ---------- | -------------------------- | ----- | -------------------- | ----- | ------------------ | ----- | ----- | ----- | ------ | ------ | ----- | ------ | ----- | ------ | ----- | ------ | 
|                                                    |                                                                                 |            |                            |       | For the three months |       | For the six months
|                                                    |                                                                                 |            |                            |       | ended June 30,       |       | ended June 30,    
|                                                    |                                                                                 |            |                            |       |                      |       |                   
|                                                    |                                                                                 |            |                            |       | 2003                 |       | 2002               |       | 2003  |       | 2002  
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |       
|Interest income:                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    | Loans                                                                           |            | $                          | 7,957 |                      |       | $                  | 5,896 |       |       | $      | 15,764 |       |        | $     | 11,714 |      
|                                                    | Investment securities:                                                          |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |        |      
|                                                    |                                                                                 | Taxable    |                            |       | 1,366                |       |                    |       | 1,342 |       |        |        | 2,630 |        |       |        | 2,504 |       
|                                                    |                                                                                 | Tax-exempt |                            |       | 147                  |       |                    |       | 248   |       |        |        | 298   |        |       |        | 537   |       
|                                                    | Federal funds sold and other temporary investments                              |            |                            | 44    |                      |       |                    | 15    |       |       |        | 53     |       |        |       | 53     |      
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    |                                                                                 |            | Total interest income      |       |                      | 9,514 |                    |       |       | 7,501 |        |        |       | 18,745 |       |        |       | 14,808 | 
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|Interest expense:                                   |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    | Deposits                                                                        |            |                            | 1,956 |                      |       |                    | 1,817 |       |       |        | 3,889  |       |        |       | 4,054  |      
|                                                    | Federal funds purchased                                                         |            |                            | 45    |                      |       |                    | 100   |       |       |        | 85     |       |        |       | 169    |      
|                                                    | Borrowings                                                                      |            |                            | 534   |                      |       |                    | 196   |       |       |        | 1,024  |       |        |       | 366    |      
|                                                    | Subordinated notes and debentures                                               |            |                            |      |                      |       |                    |      |       |       |        | 87     |       |        |       |       |      
|                                                    | Company obligated mandatorily redeemable capital
securities of subsidiary trust |            |                            | 186   |                      |       |                    | 200   |       |       |        | 369    |       |        |       | 383    |      
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    |                                                                                 |            | Total interest expense     |       |                      | 2,721 |                    |       |       | 2,313 |        |        |       | 5,454  |       |        |       | 4,972  | 
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|Net interest income                                 |                                                                                 |            | 6,793                      |       |                      |       | 5,188              |       |       |       | 13,291 |        |       |        | 9,836 |       
|Provision for loan losses                           |                                                                                 |            | 500                        |       |                      |       | 400                |       |       |       | 1,300  |        |       |        | 850   |       
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|Net interest income after provision for loan losses |                                                                                 |            | 6,293                      |       |                      |       | 4,788              |       |       |       | 11,991 |        |       |        | 8,986 |       
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|Non-interest income:                                |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    | Service charges on deposit accounts                                             |            |                            | 1,689 |                      |       |                    | 1,266 |       |       |        | 3,298  |       |        |       | 2,409  |      
|                                                    | Net servicing fees                                                              |            |                            | 132   |                      |       |                    | 463   |       |       |        | 150    |       |        |       | 1,402  |      
|                                                    | Gain on sale of investment securities, net                                      |            |                            | 684   |                      |       |                    | 252   |       |       |        | 915    |       |        |       | 552    |      
|                                                    | Other non-interest income                                                       |            |                            | 884   |                      |       |                    | 590   |       |       |        | 1,605  |       |        |       | 1,243  |      
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    |                                                                                 |            | Total non-interest income  |       |                      | 3,389 |                    |       |       | 2,571 |        |        |       | 5,968  |       |        |       | 5,606  | 
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|Non-interest expense:                               |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    | Employee compensation and benefits                                              |            |                            | 4,349 |                      |       |                    | 2,941 |       |       |        | 7,805  |       |        |       | 5,934  |      
|                                                    | Occupancy                                                                       |            |                            | 1,144 |                      |       |                    | 824   |       |       |        | 2,265  |       |        |       | 1,543  |      
|                                                    | Other non-interest expense                                                      |            |                            | 2,166 |                      |       |                    | 1,800 |       |       |        | 4,305  |       |        |       | 3,401  |      
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    |                                                                                 |            | Total non-interest expense |       |                      | 7,659 |                    |       |       | 5,565 |        |        |       | 14,375 |       |        |       | 10,878 | 
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|Income before provision for income taxes            |                                                                                 |            | 2,023                      |       |                      |       | 1,794              |       |       |       | 3,584  |        |       |        | 3,714 |       
|Provision for income taxes                          |                                                                                 |            | 631                        |       |                      |       | 501                |       |       |       | 1,061  |        |       |        | 1,021 |       
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|Net income                                          |                                                                                 | $          | 1,392                      |       |                      | $     | 1,293              |       |       | $     | 2,523  |        |       | $      | 2,693 |       
|                                                    |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|Earnings per common share:                          |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    | Basic                                                                           |            | $                          | 0.52  |                      |       | $                  | 0.52  |       |       | $      | 0.95   |       |        | $     | 1.08   |      
|                                                    | Diluted                                                                         |            | $                          | 0.50  |                      |       | $                  | 0.50  |       |       | $      | 0.92   |       |        | $     | 1.03   |      
|Weighted average shares outstanding:                |                                                                                 |            |                            |       |                      |       |                    |       |       |       |        |        |       |        |       |       
|                                                    | Basic                                                                           |            |                            | 2,652 |                      |       |                    | 2,502 |       |       |        | 2,648  |       |        |       | 2,500  |      
|                                                    | Diluted                                                                         |            |                            | 2,759 |                      |       |                    | 2,613 |       |       |        | 2,753  |       |        |       | 2,612  |      

See accompanying notes to condensed consolidated financial statements

2



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)


|                                                                   |                                                                             |   |                      |       |                    |   |       |       |      |   |       |       |  |   |       |       | 
|------------------------------------------------------------------ | --------------------------------------------------------------------------- | - | -------------------- | ----- | ------------------ | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                                   |                                                                             |   | For the three months |       | For the six months
|                                                                   |                                                                             |   | ended June 30,       |       | ended June 30,    
|                                                                   |                                                                             |   |                      |       |                   
|                                                                   |                                                                             |   | 2003                 |       | 2002               |   | 2003  |       | 2002
|                                                                   |                                                                             |   |                      |       |                    |   |       |       |     
|Net income                                                         |                                                                             | $ | 1,392                |       |                    | $ | 1,293 |       |      | $ | 2,523 |       |  | $ | 2,693 |      
|                                                                   |                                                                             |   |                      |       |                    |   |       |       |      |   |       |       |  |   |       |      
|Other comprehensive income, net of tax:                            |                                                                             |   |                      |       |                    |   |       |       |      |   |       |       |  |   |       |      
|                                                                   | Unrealized holding gains on investment securities arising during the
period |   |                      | 984   |                    |   |       | 1,555 |      |   |       | 1,631 |  |   |       | 1,095 | 
|Less: reclassification adjustment for gains included in net income |                                                                             |   | 451                  |       |                    |   | 166   |       |      |   | 604   |       |  |   | 364   |      
|                                                                   |                                                                             |   |                      |       |                    |   |       |       |      |   |       |       |  |   |       |      
|                                                                   | Other comprehensive income                                                  |   |                      | 533   |                    |   |       | 1,389 |      |   |       | 1,027 |  |   |       | 731   | 
|                                                                   |                                                                             |   |                      |       |                    |   |       |       |      |   |       |       |  |   |       |      
|                                                                   | Total comprehensive income                                                  |   | $                    | 1,925 |                    |   | $     | 2,682 |      |   | $     | 3,550 |  |   | $     | 3,424 | 
|                                                                   |                                                                             |   |                      |       |                    |   |       |       |      |   |       |       |  |   |       |      

See accompanying notes to condensed consolidated financial statements

3



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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders Equity

Year Ended December 31, 2002 and
Six Months Ended June 30, 2003
(In thousands, except share amounts)

|                                                                                                           |  |              |           |         |  |          |       |               |  |               |        |         |  |       |        |       |  |             |       |   |  |   |      |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------- |  | -------- | ----- | ------------- |  | ------------- | ------ | ------- |  | ----- | ------ | ----- |  | ----------- | ----- | - |  | - | ---- | - |  | - | ------ | -
|                                                                                                           |  |              |           |         |  |          |       |               |  |               |        |         |  |       |        |       |  | Accumulated |       |   |  |   |      |   |  |  
|                                                                                                           |  |              |           |         |  |          |       |               |  | Additional    |        |         |  |       |        | Other |  | Treasury    |       |   |  |  
|                                                                                                           |  | Common Stock |           | Paid-in |  | Retained |       | Comprehensive |  | Stock         |        |         |  |      
|                                                                                                           |  | Shares       |           | Amount  |  | Capital  |       | Earnings      |  | Income (loss) |        | at Cost |  | Total
|                                                                                                           |  |              |           |         |  |          |       |               |  |               |        |         |  |      
|Balance at January 1, 2002                                                                                 |  |              | 2,502,145 |         |  | $        | 2,502 |               |  | $             | 14,136 |         |  | $     | 11,342 |       |  | $           | (275  | ) |  | $ | (333 | ) |  | $ | 27,372 |  
|Net income                                                                                                 |  |              |          |         |  |          |      |               |  |               |       |         |  |       | 4,278  |       |  |             |      |   |  |   |     |   |  |   | 4,278  |  
|Other comprehensive income                                                                                 |  |              |          |         |  |          |      |               |  |               |       |         |  |       |       |       |  |             | 1,887 |   |  |   |     |   |  |   | 1,887  |  
|Issuance of common stock upon exercise of employee stock
options                                           |  |              | 6,291     |         |  |          | 6     |               |  |               | 47     |         |  |       |       |       |  |             |      |   |  |   |     |   |  |   | 53     |  
|Issuance of common stock related to the acquisition of
The Bryan-College Station Financial Holding
Company |  |              | 137,703   |         |  |          | 138   |               |  |               | 2,477  |         |  |       |       |       |  |             |      |   |  |   |     |   |  |   | 2,615  |  
|Compensation related to grant of treasury stock to employees                                               |  |              |          |         |  |          |      |               |  |               | 5      |         |  |       |       |       |  |             |      |   |  |   | 45   |   |  |   | 50     |  
|Sale of treasury stock                                                                                     |  |              |          |         |  |          |      |               |  |               | 18     |         |  |       |       |       |  |             |      |   |  |   | 171  |   |  |   | 189    |  
|Dividends                                                                                                  |  |              |          |         |  |          |      |               |  |               |       |         |  |       | (1,026 | )     |  |             |      |   |  |   |     |   |  |   | (1,026 | )
|                                                                                                           |  |              |           |         |  |          |       |               |  |               |        |         |  |       |        |       |  |             |       |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2002                                                                               |  |              | 2,646,139 |         |  | $        | 2,646 |               |  | $             | 16,683 |         |  | $     | 14,594 |       |  | $           | 1,612 |   |  | $ | (117 | ) |  | $ | 35,418 |  
|                                                                                                           |  |              |           |         |  |          |       |               |  |               |        |         |  |       |        |       |  |             |       |   |  |   |      |   |  |   |        |  

Unaudited

|                                                                 |  |              |           |         |  |          |       |               |  |               |        |         |  |       |        |       |  |             |       |  |  |   |      |   |  |   |        |  
|---------------------------------------------------------------- |  | ------------ | --------- | ------- |  | -------- | ----- | ------------- |  | ------------- | ------ | ------- |  | ----- | ------ | ----- |  | ----------- | ----- |  |  | - | ---- | - |  | - | ------ | -
|                                                                 |  |              |           |         |  |          |       |               |  |               |        |         |  |       |        |       |  | Accumulated |       |  |  |   |      |   |  |  
|                                                                 |  |              |           |         |  |          |       |               |  | Additional    |        |         |  |       |        | Other |  | Treasury    |       |  |  |  
|                                                                 |  | Common Stock |           | Paid-in |  | Retained |       | Comprehensive |  | Stock         |        |         |  |      
|                                                                 |  | Shares       |           | Amount  |  | Capital  |       | Earnings      |  | Income (loss) |        | at Cost |  | Total
|                                                                 |  |              |           |         |  |          |       |               |  |               |        |         |  |      
|Balance at January 1, 2003                                       |  |              | 2,646,139 |         |  | $        | 2,646 |               |  | $             | 16,683 |         |  | $     | 14,594 |       |  | $           | 1,612 |  |  | $ | (117 | ) |  | $ | 35,418 |  
|Net income                                                       |  |              |          |         |  |          |      |               |  |               |       |         |  |       | 2,523  |       |  |             |      |  |  |   |     |   |  |   | 2,523  |  
|Other comprehensive income                                       |  |              |          |         |  |          |      |               |  |               |       |         |  |       |       |       |  |             | 1,027 |  |  |   |     |   |  |   | 1,027  |  
|Issuance of common stock upon exercise of employee
stock options |  |              | 22,700    |         |  |          | 23    |               |  |               | 187    |         |  |       |       |       |  |             |      |  |  |   |     |   |  |   | 210    |  
|Dividends                                                        |  |              |          |         |  |          |      |               |  |               |       |         |  |       | (531   | )     |  |             |      |  |  |   |     |   |  |   | (531   | )
|                                                                 |  |              |           |         |  |          |       |               |  |               |        |         |  |       |        |       |  |             |       |  |  |   |      |   |  |   |        |  
|Balance at June 30, 2003                                         |  |              | 2,668,839 |         |  | $        | 2,669 |               |  | $             | 16,870 |         |  | $     | 16,586 |       |  | $           | 2,639 |  |  | $ | (117 | ) |  | $ | 38,647 |  
|                                                                 |  |              |           |         |  |          |       |               |  |               |        |         |  |       |        |       |  |             |       |  |  |   |      |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements

4



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##### 



TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |       |         |   |         |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------ | ------------------------------------------------ | -------- | ------------------ | ------- | ----- | ------- | - | ------- | -
|                                                     |                                                                                    |                                                                                          |        |                                                  |          | For the six months
|                                                     |                                                                                    |                                                                                          |        |                                                  |          | ended June 30,    
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                   
|                                                     |                                                                                    |                                                                                          |        |                                                  |          | 2003               |         | 2002 
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|Cash flows from operating activities:                |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|                                                     | Net income                                                                         |                                                                                          | $      | 2,523                                            |          |                    | $       | 2,693 |        
|                                                     | Adjustments to reconcile net income to net cash provided by operating activities:  |                                                                                          |        |                                                  |          |                    |         |       |        
|                                                     |                                                                                    | Depreciation and amortization                                                            |        |                                                  | 1,512    |                    |         |       | 835     |  
|                                                     |                                                                                    | Impairment of mortgage servicing rights                                                  |        |                                                  | 856      |                    |         |       |        |  
|                                                     |                                                                                    | Provision for loan losses                                                                |        |                                                  | 1,300    |                    |         |       | 850     |  
|                                                     |                                                                                    | Gain on sales of securities, net                                                         |        |                                                  | (915     | )                  |         |       | (552    | )
|                                                     |                                                                                    | (Gain) loss on sale of other real estate, loans, premises and equipment                  |        |                                                  | (242     | )                  |         |       | 15      |  
|                                                     |                                                                                    | Amortization of premium, net of discounts on securities                                  |        |                                                  | 737      |                    |         |       | 108     |  
|                                                     |                                                                                    | Changes in:                                                                              |        |                                                  |          |                    |         |       |         |  
|                                                     |                                                                                    |                                                                                          |        | Loans held for sale                              |          |                    | 25,483  |       |         |   | (5,616  | )
|                                                     |                                                                                    |                                                                                          |        | Other assets                                     |          |                    | (2,125  | )     |         |   | (4,825  | )
|                                                     |                                                                                    |                                                                                          |        | Other liabilities                                |          |                    | 530     |       |         |   | 1,208   |  
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|                                                     |                                                                                    |                                                                                          |        | Net cash provided (used) by operating activities |          |                    | 29,659  |       |         |   | (5,284  | )
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|Cash flows from investing activities:                |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|                                                     |                                                                                    | Purchases of securities available-for-sale                                               |        |                                                  | (116,912 | )                  |         |       | (65,853 | )
|                                                     |                                                                                    | Proceeds from sales, maturities, and principal paydowns of securities
available-for-sale |        |                                                  | 76,383   |                    |         |       | 64,080  |  
|                                                     |                                                                                    | Net change in loans                                                                      |        |                                                  | (9,416   | )                  |         |       | 5,462   |  
|                                                     |                                                                                    | Proceeds from sale of other real estate, loans, premises and equipment                   |        |                                                  | 520      |                    |         |       | 3,902   |  
|                                                     |                                                                                    | Purchases of premises and equipment                                                      |        |                                                  | (2,164   | )                  |         |       | (3,625  | )
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|                                                     |                                                                                    |                                                                                          |        | Net cash (used) provided by investing activities |          |                    | (51,589 | )     |         |   | 3,966   |  
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|Cash flows from financing activities:                |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|                                                     | Net change in:                                                                     |                                                                                          |        |                                                  |          |                    |         |       |        
|                                                     |                                                                                    | Deposits                                                                                 |        |                                                  | 42,695   |                    |         |       | (3,921  | )
|                                                     |                                                                                    | Other borrowings                                                                         |        |                                                  | (8,945   | )                  |         |       | (15,866 | )
|                                                     |                                                                                    | Federal funds purchased                                                                  |        |                                                  | (7,469   | )                  |         |       | 9,353   |  
|                                                     |                                                                                    | Subordinated notes and debentures                                                        |        |                                                  | (3,241   | )                  |         |       |        |  
|                                                     | Net proceeds from issuance of common stock upon exercise of employee stock
options |                                                                                          |        | 210                                              |          |                    |         | 36    |        
|                                                     | Treasury stock sold                                                                |                                                                                          |        |                                                 |          |                    |         | 171   |        
|                                                     | Dividends paid                                                                     |                                                                                          |        | (529                                             | )        |                    |         | (499  | )      
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|                                                     |                                                                                    |                                                                                          |        | Net cash provided (used) by financing activities |          |                    | 22,721  |       |         |   | (10,726 | )
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|Net increase (decrease) in cash and cash equivalents |                                                                                    |                                                                                          | 791    |                                                  |          |                    | (12,044 | )    
|Cash and cash equivalents at beginning of period     |                                                                                    |                                                                                          | 20,574 |                                                  |          |                    | 32,666  |      
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      
|Cash and cash equivalents at end of period           |                                                                                    | $                                                                                        | 21,365 |                                                  |          | $                  | 20,622  |      
|                                                     |                                                                                    |                                                                                          |        |                                                  |          |                    |         |      

See accompanying notes to condensed consolidated financial statements

5



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##### 



TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | BASIS OF PRESENTATION
|-- |  | ---------------------

The unaudited condensed consolidated financial statements include the
accounts of Texas United Bancshares, Inc. (the Company) and its wholly-owned
subsidiaries Texas United Nevada, Inc. (TUNI), State Bank (the Bank), Third
Coast Wealth Advisors, Inc. (Third Coast), and TXUI Statutory Trust I (the
Trust). 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 June 30, 2003, the Companys consolidated results of operations for
the three and six months ended June 30, 2003 and 2002, respectively,
consolidated cash flows for the six months ended June 30, 2003 and 2002, and
consolidated changes in shareholders equity for the six months ended June 30,
2003. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period. The 2002 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, 2002 appearing in the Companys Annual Report on
Form 10-K for 2002.



|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. Options to purchase 9,849 and 10,467 shares of common
stock were not included in the computation of diluted EPS for the
three months and six months ended June 30, 2003, respectively,
because the option exercise price did not exceed the average market
price of the common stock.

|                                                                      |  |                                       |       |                    |  |      |       |      |  |   |       |  |  |   |       | 
|--------------------------------------------------------------------- |  | ------------------------------------- | ----- | ------------------ |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                                      |  | For the three months                  |       | For the six months
|                                                                      |  | ended June 30,                        |       | ended June 30,    
|                                                                      |  |                                       |       |                   
|                                                                      |  | 2003                                  |       | 2002               |  | 2003 |       | 2002
|                                                                      |  |                                       |       |                    |  |      |       |     
|                                                                      |  | (In thousands, except per share data)
|Net income available to
common shareholders                           |  | $                                     | 1,392 |                    |  | $    | 1,293 |      |  | $ | 2,523 |  |  | $ | 2,693 | 
|                                                                      |  |                                       |       |                    |  |      |       |      |  |   |       |  |  |   |       | 
|Weighted-average common
shares outstanding                            |  |                                       | 2,652 |                    |  |      | 2,502 |      |  |   | 2,648 |  |  |   | 2,500 | 
|                                                                      |  |                                       |       |                    |  |      |       |      |  |   |       |  |  |   |       | 
|Weighted-average common
shares and potentially
dilutive common
shares |  |                                       | 2,759 |                    |  |      | 2,613 |      |  |   | 2,753 |  |  |   | 2,612 | 
|                                                                      |  |                                       |       |                    |  |      |       |      |  |   |       |  |  |   |       | 
|Basic
EPS                                                             |  | $                                     | 0.52  |                    |  | $    | 0.52  |      |  | $ | 0.95  |  |  | $ | 1.08  | 
|Diluted
EPS                                                           |  | $                                     | 0.50  |                    |  | $    | 0.50  |      |  | $ | 0.92  |  |  | $ | 1.03  | 

6



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##### 





|3. |  | INTANGIBLE ASSETS
|-- |  | -----------------

The gross carrying amount of intangible assets and associated amortization
at June 30, 2003 is presented in the following table:

|                             |                           |  |                |       |                |  |   |       | 
|---------------------------- | ------------------------- |  | -------------- | ----- | -------------- |  | - | ----- | 
|                             |                           |  | Gross          |       | Accumulated   
|                             |                           |  | Carrying       |       | Amortization  
|                             |                           |  | Amount         |       | and Impairment
|                             |                           |  |                |       |               
|                             |                           |  | (In thousands)
|Amortized intangible assets: |                           |  |                |       |                |  |   |      
|                             | Mortgage servicing rights |  | $              | 5,441 |                |  | $ | 2,429 | 
|                             | Core deposit intangibles  |  | $              | 564   |                |  | $ | 112   | 

The projections of amortization expense shown below for mortgage servicing
rights are based on existing asset balances and the existing interest rate
environment as of June 30, 2003. Future amortization expense may be
significantly different depending upon changes in the mortgage servicing
portfolio, mortgage interest rates and market conditions.

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

|                                              |      |   |           |                |              |   |       |     |  |   |     |       | 
|--------------------------------------------- | ---- | - | --------- | -------------- | ------------ | - | ----- | --- |  | - | --- | ----- | 
|                                              |      |   | Mortgage  |                |              |   |       |     |  |   |    
|                                              |      |   | Servicing |                | Core Deposit |   |       |     | 
|                                              |      |   | Rights    |                | Intangibles  |   | Total
|                                              |      |   |           |                |              |   |      
|                                              |      |   |           | (In thousands)
|Six months ended June 30, 2003 (actual)       |      | $ | 398       |                |              | $ | 60    |     |  | $ | 458 |      
|Six months ended December 31, 2003 (estimate) |      |   | 454       |                |              |   | 59    |     |  |   | 513 |      
|Estimate for the year ended December 31,      |      |   |           |                |              |   |       |     |  |   |     |      
|                                              | 2004 |   |           | 907            |              |   |       | 103 |  |   |     | 1,010 | 
|                                              | 2005 |   |           | 907            |              |   |       | 88  |  |   |     | 995   | 
|                                              | 2006 |   |           | 876            |              |   |       | 72  |  |   |     | 948   | 
|                                              | 2007 |   |           | 798            |              |   |       | 56  |  |   |     | 854   | 
|                                              | 2008 |   |           | 762            |              |   |       | 40  |  |   |     | 802   | 



|4. |  | 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 its 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.

|                                                                                                               |  |                  |       |      |  |   |       | 
|-------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | ---- |  | - | ----- | 
|                                                                                                               |  | Six Months Ended
|                                                                                                               |  | June 30,        
|                                                                                                               |  |                 
|                                                                                                               |  | 2003             |       | 2002
|                                                                                                               |  |                  |       |     
|                                                                                                               |  | (In thousands)  
|Net income, as reported                                                                                        |  | $                | 2,523 |      |  | $ | 2,693 | 
|Less: Total stock-based compensation expense determined under the
fair value method for all awards, net of tax |  |                  | 16    |      |  |   | 10    | 
|                                                                                                               |  |                  |       |      |  |   |       | 
|Pro forma net income                                                                                           |  | $                | 2,507 |      |  | $ | 2,683 | 
|                                                                                                               |  |                  |       |      |  |   |       | 

7



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##### 



|                    |                       |  |                  |      |      |  |   |      | 
|------------------- | --------------------- |  | ---------------- | ---- | ---- |  | - | ---- | 
|                    |                       |  | Six Months Ended
|                    |                       |  | June 30,        
|                    |                       |  |                 
|                    |                       |  | 2003             |      | 2002
|                    |                       |  |                  |      |     
|Earnings per share: |                       |  |                  |      |      |  |   |     
|                    | Basic  as reported   |  | $                | 0.95 |      |  | $ | 1.08 | 
|                    | Basic  pro forma     |  |                  | 0.95 |      |  |   | 1.07 | 
|                    | Diluted  as reported |  |                  | 0.92 |      |  |   | 1.03 | 
|                    | Diluted  pro forma   |  |                  | 0.91 |      |  |   | 1.03 | 



|5. |  | ACCOUNTING CHANGES
|-- |  | ------------------

In November 2002, Financial Accounting Standards Interpretation No. 45
(FIN 45), Guarantors Accounting and Disclosure Requirement for Guarantees,
Including Indirect Guarantees of Indebtedness of Others was released. FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions for FIN 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
45 are effective for financial statements of interim or annual periods ending
after December 15, 2002, and were included in the Companys financial
statements for the year ended December 31, 2002. Implementation of the
provisions of FIN 45 did not have an impact on the Companys financial
statements.

Financial
Accounting Standards Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51 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 46, VIE 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
46 were effective immediately for all arrangements entered after January 31,
2003, and are otherwise effective at the beginning of the first interim period
beginning after June 15, 2003.

In its current form, FIN 46 may require the Company to de-consolidate its
investment in TXUI Statutory Trust I in future financial statements. The
potential de-consolidation of subsidiary trusts of bank holding companies
formed in connection with the issuance of trust preferred securities, like TXUI
Statutory Trust I, appears to be an unintended consequence of FIN 46. It is
currently unknown if, or when, the Financial Accounting Standards Board will
address this issue. In July 2003, the Board of Governors of the Federal Reserve
System issued a supervisory letter instructing bank holding companies to
continue to include the trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the contrary. The Federal
Reserve intends to review the regulatory implications of any accounting
treatment changes and, if warranted, provide appropriate guidance. If the trust
preferred securities were no longer allowed to be included in Tier 1 capital,
the Company would be permitted to redeem the capital securities without
penalty.

In
May 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures in
its financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with
this standard, financial instruments that embody obligations for the
issuer are required to be classified as liabilities. SFAS
No. 150 is effective for all financial instruments entered into
on or modified after May 31, 2003. For existing financial
instruments, SFAS No. 150 is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company
does not expect a material impact on its financial position, results of
operations or cash flows from adoption of SFAS No. 150.



|6. |  | OFF BALANCE SHEET CREDIT COMMITMENTS
|-- |  | ------------------------------------

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

The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or

8



---



##### 



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 $44.4 million at June 30, 2003 and $38.9 million at
December 31, 2002.

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 $714,000 at June 30, 2003 and $787,000 at December 31, 2002. As of June
30, 2003 and December 31, 2002, no liability for the fair value of the
Companys potential obligations under these guarantees has been recorded since
the amount is deemed immaterial.



|7. |  | CRITICAL ACCOUNTING POLICIES
|-- |  | ----------------------------

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

Allowance for Loan Losses  The allowance for loan losses is a valuation
allowance for probable losses incurred on loans. Loans are charged to the
allowance when the loss actually occurs or when a determination is made that a
probable loss has occurred. 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.
Because the values of these assets are sensitive to changes in assumptions, the
valuation of mortgage servicing rights is considered a critical accounting
estimate. Please refer to Note 3 to the Condensed Consolidated Financial
Statements above and discussion of Non Interest 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.

9



---



##### 








|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 we expected;                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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;                                                                                                   
|
| |  |  | 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. We will not update these statements unless the
securities laws require us to do so.
10General.The Company is a bank holding company formed in June 1998 as a
result of the merger of South Central Texas Bancshares, Inc. with and into
Premier Bancshares, Inc. At the effective date of the merger, the resulting
company changed its name to Texas United Bancshares, Inc. The Company derives
substantially all of its net income from its wholly-owned subsidiary State
Bank. At June 30, 2003, State Bank had eighteen full service banking centers
serving eleven counties in central and south central Texas.Net income for the three months ended June 30, 2003 was $1.4 million, an
increase of 7.7% compared with $1.3 million for the same period in 2002. The
increase in net income was a combined result of higher net interest income and
increased non-interest income, partially offset by higher non-interest expense
and provisions for loan loss. Net income for the six months ended June 30,
2003 was $2.5 million, representing a decrease of 7.4% compared with the $2.7
million for the same period in 2002. Basic and diluted earnings per share (EPS)
for the three months ended June 30, 2003 and 2002 were $0.52 and $0.50,
respectively. For the six months ended June 30, 2003, basic and diluted EPS
were $0.95 and $0.92, respectively, compared with $1.08 and $1.03,
respectively, for the same period in 2002.At June 30, 2003, total assets were $614.4 million compared with $587.1
million at December 31, 2002. The $27.3 million or 4.6% increase in total
assets over December 31, 2002 was primarily attributable to increases in
investment securities and net loans partially offset by a decrease in loans
held for sale. At June 30, 2003, net loans, including loans held for sale, were
$365.9 million compared with $383.0 million at December 31, 2002. Total
deposits at June 30, 2003 were $495.6 million compared to $452.9 million at
December 31, 2002. The $42.7 million or 9.4% increase in deposits over
their level at December 31, 2002 is attributed to internal
growth. Shareholders equity at June 30, 2003 was $38.6 million compared to $35.4 million at December 31, 2002. The
$3.2 million or 9.0% increase is attributed to earnings retention and
improvement on the fair market value on available-for-sale securities included
in accumulated other comprehensive income. The Companys return on average
assets was 0.84% for the six months ended June 30, 2003, compared with 1.27%
for the same period in 2002. The return on average shareholders equity was
13.5% for the six months ended June 30, 2003, down from 19.3% for the same
period in 2002.Net Interest Income.For the three months ended June 30, 2003, net
interest income, before the provision for loan losses, increased by 30.8% to
$6.8 million from $5.2 million in the same period in 2002. The increase was
primarily due to the increased volumes in loans and investment securities and
the strategic lowering of the cost of funds in relation to the decrease in
rates on earning assets. This has resulted in slightly lower yields on earning
assets offset by lower rates paid for interest-bearing liabilities. For the
three months ended June 30, 2003 compared with 2002, the net interest margin decreased by
13 basis points to 5.16% from 5.29% and the net interest spread decreased by 12
basis points to 4.85% from 4.97%, respectively.For the six months ended June 30, 2003, net interest income, before the
provision for loan losses, increased by 35.7% to $13.3 million compared with
$9.8 million for the same period in 2002. For the six months ended June 30,
2003 and 2002, the net interest margins and spreads widened by 9 basis points
to 5.17% from 5.08% and by 15 basis points to 4.87% from 4.72%, respectively.
The widening of the net interest margin was a combined result of increased
volumes in investments and loan balances, and a decrease in the cost of funds.Interest income for the three months ended June 30, 2003 was $9.5 million
compared with $7.5 million for the same period in 2002. As compared to the
three months ended June 30, 2002, the average total loan volumes for the three
months ended June 30, 2003 increased by $93.8 million or 34.2%, while the
average yields on average total loan volumes increased 5 basis points to 8.67%.
Average total investment volumes for the three months ended June 30, 2003
increased by $39.0 million or 33.0% compared with the same period in 2002,
while the average yields on average investments decreased by 153 basis points.
For the three months ended June 30, 2003 compared to the same period in 2002,
the yield on total average earning assets decreased by 42 basis points to
7.23%.Interest income for the six months ended June 30, 2003 was $18.7 million
compared with $14.8 million for the same period in 2002. In a period of
decreasing interest rates, this increase was achieved through growth in
average earning assets. As compared to the six months ended June 30, 2002, the
average total loan volumes for the six month period ended June 30, 2003
increased by $98.6 million or 35.9%, while the average yields on average total
loans decreased by 8 basis points to 8.52%. As compared with the six months
ended June 30, 2002, average total investment volumes for the six months ended
June 30, 2003 increased by $29.7 million or 26.2%, while the
average yields on average investments decreased by 128 basis points. For
the six months ended June 30, 2003 compared to11

the same period in 2002, the
yield on total average earning assets decreased by 36 basis points to 7.29%.

Interest expense increased for the three months ended June 30, 2003 by
$400,000 or 17.4% to $2.7 million, compared with $2.3 million for the same
period in 2002. The increased interest expense was the result of higher
average interest bearing deposit volumes coupled with lower interest rates paid
on those deposits. As compared to the three month period ended June 30, 2002,
average interest bearing deposit volumes increased by $79.2 million or 26.1%
while the average rates paid on interest bearing deposits decreased by 36 basis
points to 2.05%.

For the six months ended June 30, 2003, interest expense increased by
$500,000 or 10.0% to $5.5 million compared with $5.0 million for the same
period in 2002. The increased interest expense was mainly the result of higher
interest bearing deposit volumes coupled with lower interest rates paid on
those deposits. As compared to the six months ended June 30, 2002, average
interest bearing deposit volumes increased by $71.9 million or 23.8% while the
average rates paid on deposits decreased by 60 basis points or 2.10%.
12The 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 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. Nonaccruing loans have been
included in the table as loans carrying a zero yield.

|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |      |      |      |   | 
|------------------------------------------------------------------------------- | -------------------------------------------------- | ----------------------------------- | --------------------------------- | ----------------- | ------- | ----------------------------------- | ------- | -------- | ----- | -------- | ----- | ----------- | ---- | -------- | ------- | -------- | ------- | ------- | ------- | -- | ----- | ----- | ----- | ---- | ---- | ---- | - | 
|                                                                                |                                                    |                                     |                                   |                   |         | For the three months ended June 30,
|                                                                                |                                                    |                                     |                                   |                   |         |                                    
|                                                                                |                                                    |                                     |                                   |                   |         | 2003                                |         | 2002    
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |         
|                                                                                |                                                    |                                     |                                   |                   |         | Average                             |         | Interest |       | Average  |       | Average     |      | Interest |         | Average 
|                                                                                |                                                    |                                     |                                   |                   |         | Outstanding                         |         | Earned/  |       | Yield/   |       | Outstanding |      | Earned/  |         | Yield/  
|                                                                                |                                                    |                                     |                                   |                   |         | Balance                             |         | Paid     |       | Rate (1) |       | Balance     |      | Paid     |         | Rate (1)
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |         
|                                                                                |                                                    |                                     |                                   |                   |         | (Dollars in thousands)             
|Assets                                                                          |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|Interest-earning assets:                                                        |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|                                                                                |                                                    | Total loans                         |                                   | $                 | 367,909 |                                     |         | $        | 7,957 |          |       |             | 8.67 | %        |         | $        | 274,134 |         |         | $  | 5,896 |       |       |      | 8.62 | %   
|                                                                                |                                                    | Taxable securities                  |                                   |                   | 144,075 |                                     |         |          | 1,366 |          |       |             | 3.80 |          |         |          | 95,808  |         |         |    | 1,342 |       |       |      | 5.62 |     
|                                                                                |                                                    | Tax-exempt securities               |                                   |                   | 13,223  |                                     |         |          | 147   |          |       |             | 4.46 |          |         |          | 22,459  |         |         |    | 248   |       |       |      | 4.43 |     
|                                                                                | Federal funds sold and
other temporary investments |                                     |                                   | 2,402             |         |                                     |         | 44       |       |          |       | 7.35        |      |          |         | 901      |         |         |         | 15 |       |       |       | 6.68 |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|                                                                                |                                                    | Total interest earning assets       |                                   |                   | 527,609 |                                     |         |          | 9,514 |          |       |             | 7.23 |          |         |          | 393,302 |         |         |    | 7,501 |       |       |      | 7.65 |     
|                                                                                |                                                    | Less allowance for loan losses      |                                   |                   | 3,541   |                                     |         |          |       |          |       |             |      |          |         |          | 2,182   |         |         |    |       |       |       |      |      |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|Total interest-earning assets, net of
allowance for loan losses                 |                                                    |                                     | 524,068                           |                   |         |                                     |         |          |       |          |       |             |      |          | 391,120 |          |         |         |         |    |       |       |       |     
|Noninterest-earning assets                                                      |                                                    |                                     | 77,541                            |                   |         |                                     |         |          |       |          |       |             |      |          | 54,873  |          |         |         |         |    |       |       |       |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|                                                                                |                                                    |                                     |                                   | Total assets      |         | $                                   | 601,609 |          |       |          |       |             |      |          |         |          |         | $       | 445,993 |    |       |       |       |      |      |      |   | 
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|Liabilities and shareholders equity                                            |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|Interest-bearing liabilities:                                                   |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|                                                                                |                                                    |                                     | Interest-bearing demand deposits  |                   | $       | 121,524                             |         |          | $     | 330      |       |             |      | 1.08     | %       |          | $       | 97,781  |         |    | $     | 377   |       |      |      | 1.55 | %
|                                                                                |                                                    |                                     | Savings and money market
accounts |                   |         | 75,047                              |         |          |       | 226      |       |             |      | 1.21     |         |          |         | 58,537  |         |    |       | 217   |       |      |      | 1.49 |  
|                                                                                |                                                    |                                     | Time deposits                     |                   |         | 185,481                             |         |          |       | 1,400    |       |             |      | 3.03     |         |          |         | 146,559 |         |    |       | 1,223 |       |      |      | 3.35 |  
|                                                                                |                                                    |                                     | Federal funds
purchased           |                   |         | 11,783                              |         |          |       | 45       |       |             |      | 1.53     |         |          |         | 14,367  |         |    |       | 100   |       |      |      | 2.79 |  
|Company obligated manditorily
redeemable capital securities of
subsidiary
trust |                                                    |                                     | 7,000                             |                   |         |                                     | 186     |          |       |          | 10.66 |             |      |          | 7,000   |          |         |         | 200     |    |       |       | 11.46 |     
|Subordinated notes and debentures                                               |                                                    |                                     |                                  |                   |         |                                     |        |          |       |          |      |             |      |          |        |          |         |         |        |    |       |       |      |     
|Other borrowings                                                                |                                                    |                                     | 57,818                            |                   |         |                                     | 534     |          |       |          | 3.70  |             |      |          | 21,552  |          |         |         | 196     |    |       |       | 3.65  |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|Total interest-bearing liabilities                                              |                                                    |                                     | 458,653                           |                   |         |                                     | 2,721   |          |       |          | 2.38  |             |      |          | 345,796 |          |         |         | 2,313   |    |       |       | 2.68  |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|Noninterest-bearing liabilities:                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|                                                                                |                                                    | Noninterest-bearing demand
deposits |                                   |                   | 94,126  |                                     |         |          |       |          |       |             |      |          |         |          | 67,433  |         |         |    |       |       |       |      |      |     
|                                                                                |                                                    | Other liabilities                   |                                   |                   | 10,102  |                                     |         |          |       |          |       |             |      |          |         |          | 3,434   |         |         |    |       |       |       |      |      |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|                                                                                |                                                    |                                     |                                   | Total liabilities |         |                                     | 562,881 |          |       |          |       |             |      |          |         |          |         |         | 416,663 |    |       |       |       |      |      |      |   | 
|Shareholders equity                                                            |                                                    |                                     | 38,728                            |                   |         |                                     |         |          |       |          |       |             |      |          | 29,330  |          |         |         |         |    |       |       |       |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|Total liabilities and shareholders
equity                                      |                                                    | $                                   | 601,609                           |                   |         |                                     |         |          |       |          |       |             |      | $        | 445,993 |          |         |         |         |    |       |       |       |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|Net interest income                                                             |                                                    |                                     |                                   |                   |         | $                                   | 6,793   |          |       |          |       |             |      |          |         |          |         | $       | 5,188   |    |       |       |       |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          |       |             |      |          |         |          |         |         |         |    |       |       |       |     
|Net interest spread                                                             |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          | 4.85  | %           |      |          |         |          |         |         |         |    |       |       | 4.97  | %   
|Net interest margin                                                             |                                                    |                                     |                                   |                   |         |                                     |         |          |       |          | 5.16  | %           |      |          |         |          |         |         |         |    |       |       | 5.29  | %   



| |  | 
| |  | 

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

13



---



##### 



|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |      |      |      |   | 
|------------------------------------------------------------------------------- | -------------------------------------------------- | ----------------------------------- | --------------------------------- | ----------------- | ------- | --------------------------------- | ------- | -------- | ------ | -------- | ----- | ----------- | ---- | ---------------------- | ------- | -------- | ------- | ------- | ------- | -- | ------ | ----- | ----- | ---- | ---- | ---- | - | 
|                                                                                |                                                    |                                     |                                   |                   |         | For the six months ended June 30,
|                                                                                |                                                    |                                     |                                   |                   |         |                                  
|                                                                                |                                                    |                                     |                                   |                   |         | 2003                              |         | 2002    
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |         
|                                                                                |                                                    |                                     |                                   |                   |         | Average                           |         | Interest |        | Average  |       | Average     |      | Interest               |         | Average 
|                                                                                |                                                    |                                     |                                   |                   |         | Outstanding                       |         | Earned/  |        | Yield/   |       | Outstanding |      | Earned/                |         | Yield/  
|                                                                                |                                                    |                                     |                                   |                   |         | Balance                           |         | Paid     |        | Rate (1) |       | Balance     |      | Paid                   |         | Rate (1)
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |         
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      | (Dollars in thousands) |         |          |         |         |         |    |        |      
|Assets                                                                          |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|Interest-earning assets:                                                        |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|                                                                                |                                                    | Total loans                         |                                   | $                 | 373,139 |                                   |         | $        | 15,764 |          |       |             | 8.52 | %                      |         | $        | 274,587 |         |         | $  | 11,714 |       |       |      | 8.60 | %   
|                                                                                |                                                    | Taxable securities                  |                                   |                   | 129,590 |                                   |         |          | 2,630  |          |       |             | 4.09 |                        |         |          | 89,447  |         |         |    | 2,504  |       |       |      | 5.65 |     
|                                                                                |                                                    | Tax-exempt securities               |                                   |                   | 13,364  |                                   |         |          | 298    |          |       |             | 4.50 |                        |         |          | 23,806  |         |         |    | 537    |       |       |      | 4.55 |     
|                                                                                | Federal funds sold and
other temporary investments |                                     |                                   | 2,197             |         |                                   |         | 53       |        |          |       | 4.86        |      |                        |         | 2,351    |         |         |         | 53 |        |       |       | 4.55 |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|                                                                                |                                                    | Total interest earning assets       |                                   |                   | 518,290 |                                   |         |          | 18,745 |          |       |             | 7.29 |                        |         |          | 390,191 |         |         |    | 14,808 |       |       |      | 7.65 |     
|                                                                                |                                                    | Less allowance for loan losses      |                                   |                   | 3,495   |                                   |         |          |        |          |       |             |      |                        |         |          | 2,189   |         |         |    |        |       |       |      |      |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|Total interest-earning assets, net of
allowance for loan losses                 |                                                    |                                     | 514,795                           |                   |         |                                   |         |          |        |          |       |             |      |                        | 388,002 |          |         |         |         |    |        |       |       |     
|Noninterest-earning assets                                                      |                                                    |                                     | 76,653                            |                   |         |                                   |         |          |        |          |       |             |      |                        | 53,645  |          |         |         |         |    |        |       |       |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|                                                                                |                                                    |                                     |                                   | Total assets      |         | $                                 | 591,448 |          |        |          |       |             |      |                        |         |          |         | $       | 441,647 |    |        |       |       |      |      |      |   | 
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|Liabilities and shareholders equity                                            |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|Interest-bearing liabilities:                                                   |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|                                                                                |                                                    |                                     | Interest-bearing demand deposits  |                   | $       | 120,865                           |         |          | $      | 655      |       |             |      | 1.09                   | %       |          | $       | 97,737  |         |    | $      | 861   |       |      |      | 1.78 | %
|                                                                                |                                                    |                                     | Savings and money market accounts |                   |         | 69,894                            |         |          |        | 406      |       |             |      | 1.17                   |         |          |         | 57,975  |         |    |        | 485   |       |      |      | 1.69 |  
|                                                                                |                                                    |                                     | Time deposits                     |                   |         | 183,497                           |         |          |        | 2,828    |       |             |      | 3.11                   |         |          |         | 146,647 |         |    |        | 2,708 |       |      |      | 3.72 |  
|                                                                                |                                                    |                                     | Federal funds purchased           |                   |         | 10,725                            |         |          |        | 85       |       |             |      | 1.60                   |         |          |         | 11,274  |         |    |        | 169   |       |      |      | 3.02 |  
|Company obligated manditorily redeemable
capital securities of subsidiary trust |                                                    |                                     | 7,000                             |                   |         |                                   | 369     |          |        |          | 10.63 |             |      |                        | 7,000   |          |         |         | 383     |    |        |       | 11.03 |     
|Subordinated notes and debentures                                               |                                                    |                                     | 1,525                             |                   |         |                                   | 87      |          |        |          | 11.50 |             |      |                        |        |          |         |         |        |    |        |       |      |     
|Other borrowings                                                                |                                                    |                                     | 60,196                            |                   |         |                                   | 1,024   |          |        |          | 3.43  |             |      |                        | 21,288  |          |         |         | 366     |    |        |       | 3.47  |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|Total interest-bearing liabilities                                              |                                                    |                                     | 453,702                           |                   |         |                                   | 5,454   |          |        |          | 2.42  |             |      |                        | 341,921 |          |         |         | 4,972   |    |        |       | 2.93  |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|Noninterest-bearing liabilities:                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|                                                                                |                                                    | Noninterest-bearing demand deposits |                                   |                   | 89,542  |                                   |         |          |        |          |       |             |      |                        |         |          | 67,154  |         |         |    |        |       |       |      |      |     
|                                                                                |                                                    | Other liabilities                   |                                   |                   | 10,776  |                                   |         |          |        |          |       |             |      |                        |         |          | 3,605   |         |         |    |        |       |       |      |      |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|                                                                                |                                                    |                                     |                                   | Total liabilities |         |                                   | 554,020 |          |        |          |       |             |      |                        |         |          |         |         | 412,680 |    |        |       |       |      |      |      |   | 
|Shareholders equity                                                            |                                                    |                                     | 37,428                            |                   |         |                                   |         |          |        |          |       |             |      |                        | 28,967  |          |         |         |         |    |        |       |       |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|Total liabilities and shareholders equity                                      |                                                    | $                                   | 591,448                           |                   |         |                                   |         |          |        |          |       |             |      | $                      | 441,647 |          |         |         |         |    |        |       |       |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|Net interest income                                                             |                                                    |                                     |                                   |                   |         | $                                 | 13,291  |          |        |          |       |             |      |                        |         |          |         | $       | 9,836   |    |        |       |       |     
|                                                                                |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          |       |             |      |                        |         |          |         |         |         |    |        |       |       |     
|Net interest spread                                                             |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          | 4.87  | %           |      |                        |         |          |         |         |         |    |        |       | 4.72  | %   
|Net interest margin                                                             |                                                    |                                     |                                   |                   |         |                                   |         |          |        |          | 5.17  | %           |      |                        |         |          |         |         |         |    |        |       | 5.08  | %   



| |  | 
| |  | 

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

14



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##### 



The following tables present the dollar amount of changes in
interest income and interest expense for the major components of
interest-earning assets and interest-bearing liabilities and
distinguishes between the increase (decrease) related to outstanding
balances and changes in interest rates for the three and six month
periods ended June 30, 2003 compared with the same periods in 2002.
For purposes of these tables, changes attributable to both volume and
rate have been allocated proportionately to the change due to volume
and rate.

|                                           |                                                                                 |                                               |       |                             |       |      |      |       |      |   |       |       |       | 
|------------------------------------------ | ------------------------------------------------------------------------------- | --------------------------------------------- | ----- | --------------------------- | ----- | ---- | ---- | ----- | ---- | - | ----- | ----- | ----- | 
|                                           |                                                                                 |                                               |       | Three months ended June 30,
|                                           |                                                                                 |                                               |       |                            
|                                           |                                                                                 |                                               |       | 2003 vs. 2002              
|                                           |                                                                                 |                                               |       |                            
|                                           |                                                                                 |                                               |       | Increase (Decrease)         |       |      |      |      
|                                           |                                                                                 |                                               |       | Due to                      |       |      |      |      
|                                           |                                                                                 |                                               |       |                             |       |      |      |      
|                                           |                                                                                 |                                               |       | Volume                      |       | Rate |      | Total
|                                           |                                                                                 |                                               |       |                             |       |      |      |      
|                                           |                                                                                 |                                               |       | (Dollars in thousands)     
|Interest-earning assets:                   |                                                                                 |                                               |       |                             |       |      |      |       |      |   |       |      
|                                           | Total loans                                                                     |                                               | $     | 2,033                       |       |      | $    | 28    |      |   | $     | 2,061 |      
|                                           | Securities                                                                      |                                               |       | 381                         |       |      |      | (458  | )    |   |       | (77   | )    
|                                           | Federal funds sold and other temporary investments                              |                                               |       | 28                          |       |      |      | 1     |      |   |       | 29    |      
|                                           |                                                                                 |                                               |       |                             |       |      |      |       |      |   |       |      
|                                           |                                                                                 | Total increase (decrease) in interest income  |       |                             | 2,442 |      |      |       | (429 | ) |       |       | 2,013 | 
|Interest-bearing liabilities:              |                                                                                 |                                               |       |                             |       |      |      |       |      |   |       |      
|                                           | Interest-bearing demand deposits                                                |                                               |       | 64                          |       |      |      | (111  | )    |   |       | (47   | )    
|                                           | Savings and money market accounts                                               |                                               |       | 50                          |       |      |      | (41   | )    |   |       | 9     |      
|                                           | Time deposits                                                                   |                                               |       | 295                         |       |      |      | (118  | )    |   |       | 177   |      
|                                           | Federal funds purchased                                                         |                                               |       | (10                         | )     |      |      | (45   | )    |   |       | (55   | )    
|                                           | Company obligated manditorily redeemable capital securities of
subsidiary trust |                                               |       |                            |       |      |      | (14   | )    |   |       | (14   | )    
|                                           | Subordinated notes and debentures                                               |                                               |       |                            |       |      |      |      |      |   |       |      |      
|                                           | Other borrowings                                                                |                                               |       | 335                         |       |      |      | 3     |      |   |       | 338   |      
|                                           |                                                                                 |                                               |       |                             |       |      |      |       |      |   |       |      
|                                           |                                                                                 | Total increase (decrease) in interest expense |       |                             | 734   |      |      |       | (326 | ) |       |       | 408   | 
|                                           |                                                                                 |                                               |       |                             |       |      |      |       |      |   |       |      
|Increase (decrease) in net interest income |                                                                                 | $                                             | 1,708 |                             |       | $    | (103 | )     |      | $ | 1,605 |      
|                                           |                                                                                 |                                               |       |                             |       |      |      |       |      |   |       |      

|                                |                                                                                 |                                               |       |                           |       |      |    |       |      |   |       |       |       | 
|------------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------- | ----- | ------------------------- | ----- | ---- | -- | ----- | ---- | - | ----- | ----- | ----- | 
|                                |                                                                                 |                                               |       | Six months ended June 30,
|                                |                                                                                 |                                               |       |                          
|                                |                                                                                 |                                               |       | 2003 vs. 2002            
|                                |                                                                                 |                                               |       |                          
|                                |                                                                                 |                                               |       | Increase (Decrease)       |       |      |    |      
|                                |                                                                                 |                                               |       | Due to                    |       |      |    |      
|                                |                                                                                 |                                               |       |                           |       |      |    |      
|                                |                                                                                 |                                               |       | Volume                    |       | Rate |    | Total
|                                |                                                                                 |                                               |       |                           |       |      |    |      
|                                |                                                                                 |                                               |       | (Dollars in thousands)   
|Interest-earning assets:        |                                                                                 |                                               |       |                           |       |      |    |       |      |   |       |      
|                                | Total loans                                                                     |                                               | $     | 4,193                     |       |      | $  | (143  | )    |   | $     | 4,050 |      
|                                | Securities                                                                      |                                               |       | 616                       |       |      |    | (729  | )    |   |       | (113  | )    
|                                | Federal funds sold and other temporary investments                              |                                               |       | (4                        | )     |      |    | 4     |      |   |       |      |      
|                                |                                                                                 |                                               |       |                           |       |      |    |       |      |   |       |      
|                                |                                                                                 | Total increase (decrease) in interest income  |       |                           | 4,805 |      |    |       | (868 | ) |       |       | 3,937 | 
|Interest-bearing liabilities:   |                                                                                 |                                               |       |                           |       |      |    |       |      |   |       |      
|                                | Interest-bearing demand deposits                                                |                                               |       | 126                       |       |      |    | (332  | )    |   |       | (206  | )    
|                                | Savings and money market accounts                                               |                                               |       | 70                        |       |      |    | (149  | )    |   |       | (79   | )    
|                                | Time deposits                                                                   |                                               |       | 573                       |       |      |    | (453  | )    |   |       | 120   |      
|                                | Federal funds purchased                                                         |                                               |       | (4                        | )     |      |    | (80   | )    |   |       | (84   | )    
|                                | Company obligated manditorily redeemable capital securities of
subsidiary trust |                                               |       |                          |       |      |    | (14   | )    |   |       | (14   | )    
|                                | Subordinated notes and debentures                                               |                                               |       |                          |       |      |    | 87    |      |   |       | 87    |      
|                                | Other borrowings                                                                |                                               |       | 667                       |       |      |    | (9    | )    |   |       | 658   |      
|                                |                                                                                 |                                               |       |                           |       |      |    |       |      |   |       |      
|                                |                                                                                 | Total increase (decrease) in interest expense |       |                           | 1,432 |      |    |       | (950 | ) |       |       | 482   | 
|                                |                                                                                 |                                               |       |                           |       |      |    |       |      |   |       |      
|Increase in net interest income |                                                                                 | $                                             | 3,373 |                           |       | $    | 82 |       |      | $ | 3,455 |      
|                                |                                                                                 |                                               |       |                           |       |      |    |       |      |   |       |      

Provision for Loan Losses.Provisions for loan losses are charged to
income to bring the Companys allowance for loan losses to a level deemed
appropriate by management. For the three and six month periods ended June 30,
2003 compared to the same periods in 2002, the provision increased by $100,000 or 25.0% to
$500,000, and increased by $450,000 or 52.9% to $1.3 million, respectively.
The allowance for loan losses at June 30, 2003 was $3.6 million, compared with
$3.3 million at December 31, 2002. During the latter part of 2002 and the
first six months of

15



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##### 



2003, management increased its provisions primarily due to
growth in the loan portfolio and changes in the Central Texas economy. At June
30, 2003, the ratio of the loan loss allowance to total loans was 0.97%
compared with 0.85% at December 31, 2002.

Noninterest Income.Noninterest income for the three months ended June
30, 2003 and 2002 was $3.4 million and $2.6 million, respectively, an increase
of $800,000 or 30.8%. For the six months ended June 30, 2003 and 2002,
noninterest income was $6.0 million and $5.6 million, respectively, an increase
of $400,000 or 7.1%. The increase in noninterest income for both periods is
primarily attributed to an increase in service charges on deposit accounts and
gains on the sale of investment securities partially offset by the impairment in mortgage
servicing rights.

Mortgage servicing fees, net of amortization and impairment, were $132,000
for the three months ended June 30, 2003 as compared with $463,000 for the same
period in 2002. For the six months ended June 30, 2003, net mortgage servicing
fees were $150,000 as compared with $1.4 million for the same period in 2002.
The Company recorded an $855,000 impairment charge for the first six months
of 2003 to reflect a decrease in the fair value of the mortgage servicing
rights asset. The decrease in fair value of capitalized mortgage servicing
rights is a result of the decline in the 10-year Treasury rate, which produced
historically low mortgage rates and caused an increase in prepayments of
mortgages serviced by the Company.

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

|                                    |                          |   |                            |       |                          |   |       |       |      |   |       |       |  |   |       |       | 
|----------------------------------- | ------------------------ | - | -------------------------- | ----- | ------------------------ | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                    |                          |   | For the three months ended |       | For the six months ended
|                                    |                          |   | June 30,                   |       | June 30,                
|                                    |                          |   |                            |       |                         
|                                    |                          |   | 2003                       |       | 2002                     |   | 2003  |       | 2002
|                                    |                          |   |                            |       |                          |   |       |       |     
|                                    |                          |   | (Dollars in thousands)    
|Service charges on deposit accounts |                          | $ | 1,689                      |       |                          | $ | 1,266 |       |      | $ | 3,298 |       |  | $ | 2,409 |      
|Net servicing fees                  |                          |   | 132                        |       |                          |   | 463   |       |      |   | 150   |       |  |   | 1,402 |      
|Gain on sale of securities, net     |                          |   | 684                        |       |                          |   | 252   |       |      |   | 915   |       |  |   | 552   |      
|Other noninterest income            |                          |   | 884                        |       |                          |   | 590   |       |      |   | 1,605 |       |  |   | 1,243 |      
|                                    |                          |   |                            |       |                          |   |       |       |      |   |       |       |  |   |       |      
|                                    | Total noninterest income |   | $                          | 3,389 |                          |   | $     | 2,571 |      |   | $     | 5,968 |  |   | $     | 5,606 | 
|                                    |                          |   |                            |       |                          |   |       |       |      |   |       |       |  |   |       |      

Noninterest Expense.For the three months ended June 30, 2003,
noninterest expense increased by $2.1 million or 37.5% to $7.7 million,
compared to the same period in 2002. For the six months ended June 30, 2003,
noninterest expense increased by $3.5 million or 32.1% to $14.4 million,
compared to the same period in 2002. The increase in noninterest expense for
both periods was mainly due to costs associated with the acquisition
of Bryan-College Station in July 2002. Employee compensation and
benefits also increased due to mortgage commissions and higher benefit
costs.

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

|                                   |                                                    |                           |       |                        |       |                    |       |      |       |      |       |       |        |   |       |       |        | 
|---------------------------------- | -------------------------------------------------- | ------------------------- | ----- | ---------------------- | ----- | ------------------ | ----- | ---- | ----- | ---- | ----- | ----- | ------ | - | ----- | ----- | ------ | 
|                                   |                                                    |                           |       | For the three months   |       | For the six months
|                                   |                                                    |                           |       | ended June 30,         |       | ended June 30,    
|                                   |                                                    |                           |       |                        |       |                   
|                                   |                                                    |                           |       | 2003                   |       | 2002               |       | 2003 |       | 2002
|                                   |                                                    |                           |       |                        |       |                    |       |      |       |     
|                                   |                                                    |                           |       | (Dollars in thousands)
|Employee compensation and benefits |                                                    | $                         | 4,349 |                        |       | $                  | 2,941 |      |       | $    | 7,805 |       |        | $ | 5,934 |      
|Non-staff expenses:                |                                                    |                           |       |                        |       |                    |       |      |       |      |       |       |        |   |       |      
|                                   | Occupancy                                          |                           |       | 1,144                  |       |                    |       | 824  |       |      |       | 2,265 |        |   |       | 1,543 |       
|                                   | Depreciation and amortization                      |                           |       | 721                    |       |                    |       | 429  |       |      |       | 1,512 |        |   |       | 835   |       
|                                   | Data processing                                    |                           |       | 263                    |       |                    |       | 187  |       |      |       | 500   |        |   |       | 345   |       
|                                   | Professional fees, consultants, and contract labor |                           |       | 298                    |       |                    |       | 152  |       |      |       | 535   |        |   |       | 345   |       
|                                   | Advertising                                        |                           |       | 151                    |       |                    |       | 226  |       |      |       | 287   |        |   |       | 321   |       
|                                   | Printing and supplies                              |                           |       | 152                    |       |                    |       | 125  |       |      |       | 286   |        |   |       | 237   |       
|                                   | Telecommunications                                 |                           |       | 129                    |       |                    |       | 73   |       |      |       | 257   |        |   |       | 194   |       
|                                   | Other noninterest expense                          |                           |       | 452                    |       |                    |       | 608  |       |      |       | 928   |        |   |       | 1,124 |       
|                                   |                                                    |                           |       |                        |       |                    |       |      |       |      |       |       |        |   |       |      
|                                   |                                                    | Total non-staff expenses  |       |                        | 3,310 |                    |       |      | 2,624 |      |       |       | 6,570  |   |       |       | 4,944  | 
|                                   |                                                    |                           |       |                        |       |                    |       |      |       |      |       |       |        |   |       |      
|                                   |                                                    | Total noninterest expense |       | $                      | 7,659 |                    |       | $    | 5,565 |      |       | $     | 14,375 |   |       | $     | 10,878 | 
|                                   |                                                    |                           |       |                        |       |                    |       |      |       |      |       |       |        |   |       |      

16



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##### 



Employee compensation and benefits expense represents 56.8% and 54.3% of
total noninterest expense for the three and six months periods ended June 30,
2003, respectively. Employee compensation and benefits expense for the three
months ended June 30, 2003 and 2002 were $4.3 million and $2.9 million,
respectively, an increase of $1.4 million or 48.3%. For the six months ended
June 30, 2003 and 2002, employee compensation and benefits expenses was $7.8
million and $5.9 million, respectively, reflecting an increase of $1.9 million
or 32.2%. The increases for both periods resulted primarily from higher mortgage commissions and the costs
associated with the additional staff to meet loan growth, the addition of one
banking center in December 2002, the addition of three banking centers as a
result of the Bryan-College Station acquisition and the addition of two loan
production offices. Total full-time equivalent (FTE) employees at June 30, 2003
and 2002 were 319 and 258, respectively.

For the three months ended June 30, 2003, non-staff expenses increased by
$700,000 or 26.9% compared with the same period in 2002. For the six months
ended June 30, 2003, non-staff expenses increased by $1.7 million or 34.7%
compared with the same period in 2002. The increased non-staff expense, for
both periods was due to higher occupancy expense from the addition of the three
former Bryan-College Station banking centers, the addition of one new banking
center and two loan production offices, the upgrade of technology systems,
increased printing costs, as well as other operating systems improvements.

Financial Condition

Loan Portfolio.Total loans, including loans held for sale, decreased by
$16.8 million or 4.3%, from $386.3 million at December 31, 2002 to $369.5
million at June 30, 2003. The decrease is primarily due to the $25.2 million
and the $10.1 million decrease in loans held for sale and other real estate
loans, respectively, partially offset by a $10.7 million and a $6.0 million
increase in commercial mortgages and consumer loans, respectively. At June 30,
2003 and December 31, 2002, the ratio of total loans to total deposits was
74.6% and 85.3%, respectively. For the same periods, total loans represented
60.1% and 65.8% of total assets, respectively.

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

|                          |                 |           |         |                        |         |                   |       |        |  |         |         |         |         |  |       |      |  | 
|------------------------- | --------------- | --------- | ------- | ---------------------- | ------- | ----------------- | ----- | ------ |  | ------- | ------- | ------- | ------- |  | ----- | ---- |  | 
|                          |                 |           |         | June 30, 2003          |         | December 31, 2002
|                          |                 |           |         |                        |         |                  
|                          |                 |           |         | Amount                 |         | Percent           |       | Amount |  | Percent
|                          |                 |           |         |                        |         |                   |       |        |  |        
|                          |                 |           |         | (Dollars in thousands)
|Commercial and industrial |                 | $         | 60,387  |                        |         |                   | 16.3  | %      |  | $       | 62,391  |         |         |  | 16.2  | %   
|Real estate mortgage      |                 |           |         |                        |         |                   |       |        |  |         |         |         |         |  |       |     
|                          | 1-4 residential |           |         | 143,991                |         |                   |       | 39.0   |  |         |         | 149,471 |         |  |       | 38.7 | 
|                          | Commercial      |           |         | 72,711                 |         |                   |       | 19.7   |  |         |         | 62,014  |         |  |       | 16.0 | 
|                          | Held for sale   |           |         | 8,469                  |         |                   |       | 2.3    |  |         |         | 33,674  |         |  |       | 8.7  | 
|                          | Other           |           |         | 17,432                 |         |                   |       | 4.7    |  |         |         | 18,269  |         |  |       | 4.7  | 
|Consumer and other, net   |                 |           | 66,524  |                        |         |                   | 18.0  |        |  |         | 60,496  |         |         |  | 15.7  |     
|                          |                 |           |         |                        |         |                   |       |        |  |         |         |         |         |  |       |     
|Total loans               |                 | $         | 369,514 |                        |         |                   | 100.0 | %      |  | $       | 386,315 |         |         |  | 100.0 | %   
|                          |                 |           |         |                        |         |                   |       |        |  |         |         |         |         |  |       |     
|Allowance for loan losses |                 |           | 3,584   |                        |         |                   |       |        |  |         | 3,296   |         |         |  |       |     
|                          |                 |           |         |                        |         |                   |       |        |  |         |         |         |         |  |       |     
|                          |                 | Net loans |         | $                      | 365,930 |                   |       |        |  |         |         | $       | 383,019 |  |       |      |  | 
|                          |                 |           |         |                        |         |                   |       |        |  |         |         |         |         |  |       |     

Nonperforming Assets.Nonperforming assets at June 30, 2003 and December
31, 2002 were $1.8 million and $2.0 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.

17



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##### 



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

|                                                          |                            |   |                        |       |                   |   |      |       | 
|--------------------------------------------------------- | -------------------------- | - | ---------------------- | ----- | ----------------- | - | ---- | ----- | 
|                                                          |                            |   | June 30, 2003          |       | December 31, 2002
|                                                          |                            |   |                        |       |                  
|                                                          |                            |   | (Dollars in thousands)
|Nonaccrual loans                                          |                            | $ | 402                    |       |                   | $ | 709  |      
|Accruing loans 90 days or more past due                   |                            |   | 1,043                  |       |                   |   | 960  |      
|Other real estate                                         |                            |   | 369                    |       |                   |   | 356  |      
|                                                          |                            |   |                        |       |                   |   |      |      
|                                                          | Total nonperforming assets |   | $                      | 1,814 |                   |   | $    | 2,025 | 
|                                                          |                            |   |                        |       |                   |   |      |      
|Nonperforming assets to total assets                      |                            |   | 0.30                   | %     |                   |   | 0.34 | %    
|Nonperforming assets to total loans and other real estate |                            |   | 0.49                   | %     |                   |   | 0.52 | %    

Allowance for Loan Losses.The Company has several systems in place to
assist in maintaining the overall quality of its loan portfolio. The Company
has established underwriting guidelines to be followed 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.

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 condition, historical loan loss
experience, loan growth within a category, amount of past due loans and peer
averages. Management maintains the allowance based on the amounts determined
using the procedures set forth above.

For the six months ended June 30, 2003, net loan charge-offs were $1.0
million or 0.27% of average loans outstanding compared with $1.1 million or
0.34% for the year ended December 31, 2002. At June 30, 2003 and December 31,
2002, the allowance for loan losses aggregated $3.6 million and $3.3 million,
or 0.97% and 0.85% of total loans, respectively. At June 30, 2003, the
allowance for loan losses as a percentage of nonperforming loans was 248.0%
compared with 197.5% at December 31, 2002.

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

|                                                          |                           |                   |         |                        |        |                   |         |        |        |  
|--------------------------------------------------------- | ------------------------- | ----------------- | ------- | ---------------------- | ------ | ----------------- | ------- | ------ | ------ | -
|                                                          |                           |                   |         | Six Months Ended       |        | Year Ended       
|                                                          |                           |                   |         | June 30, 2003          |        | December 31, 2002
|                                                          |                           |                   |         |                        |        |                  
|                                                          |                           |                   |         | (Dollars in thousands)
|Average total loans outstanding                           |                           | $                 | 373,139 |                        |        | $                 | 319,151 |       
|                                                          |                           |                   |         |                        |        |                   |         |       
|Total loans outstanding at end of period                  |                           | $                 | 369,514 |                        |        | $                 | 386,315 |       
|                                                          |                           |                   |         |                        |        |                   |         |       
|Allowance for loan losses at beginning of period          |                           | $                 | 3,296   |                        |        | $                 | 1,754   |       
|Provision for loan losses                                 |                           |                   | 1,300   |                        |        |                   | 1,900   |       
|Balance acquired in the Bryan-College Station acquisition |                           |                   |        |                        |        |                   | 740     |       
|Charge-offs:                                              |                           |                   |         |                        |        |                   |         |       
|                                                          | Commercial and industrial |                   |         | (393                   | )      |                   |         | (401   | )     
|                                                          | Real estate               |                   |         | (190                   | )      |                   |         | (117   | )     
|                                                          | Consumer                  |                   |         | (979                   | )      |                   |         | (1,528 | )     
|                                                          | Other                     |                   |         |                       |        |                   |         | (6     | )     
|                                                          |                           |                   |         |                        |        |                   |         |       
|                                                          |                           | Total charge-offs |         |                        | (1,562 | )                 |         |        | (2,052 | )
|                                                          |                           |                   |         |                        |        |                   |         |       
|Recoveries:                                               |                           |                   |         |                        |        |                   |         |       
|                                                          | Commercial and industrial |                   |         | 65                     |        |                   |         | 261    |       
|                                                          | Real estate               |                   |         | 60                     |        |                   |         | 36     |       
|                                                          | Consumer                  |                   |         | 422                    |        |                   |         | 603    |       
|                                                          | Other                     |                   |         | 3                      |        |                   |         | 54     |       
|                                                          |                           |                   |         |                        |        |                   |         |       
|                                                          |                           | Total recoveries  |         |                        | 550    |                   |         |        | 954    |  
|                                                          |                           |                   |         |                        |        |                   |         |       
|Net loan charge-offs                                      |                           |                   | (1,012  | )                      |        |                   | (1,098  | )     
|                                                          |                           |                   |         |                        |        |                   |         |       
|Allowance for loan losses at end of period                |                           | $                 | 3,584   |                        |        | $                 | 3,296   |       
|                                                          |                           |                   |         |                        |        |                   |         |       
|Ratio of allowance to end of period total loans           |                           |                   | 0.97    | %                      |        |                   | 0.85    | %     
|Ratio of net loan charge-offs to average total loans      |                           |                   | 0.27    | %                      |        |                   | 0.34    | %     
|Ratio of allowance to end of period nonperforming loans   |                           |                   | 248.03  | %                      |        |                   | 197.48  | %     

18



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##### 



Securities.At June 30, 2003, the securities portfolio totaled $174.3
million, reflecting an increase of $42.2 million or 31.9% from $132.1 million
at December 31, 2002. During the six months ended June 30, 2003, the Company
purchased $116.9 million in investment securities. Included in this amount were
$87.1 million in mortgage loans originated by the Company that were sold to
Fannie Mae in various mortgage pools and reacquired by the Company as
investment securities. Additionally, the Company sold $57.2 million of
securities in an effort to reposition the portfolio for current economic
conditions and to provide funding for loan growth. The Company also received
$18.3 million in maturities and paydowns on investment securities.

Deposits. At June 30, 2003, total deposits were $495.6 million, an
increase of $42.7 million or 9.4% from $452.9 million at December 31, 2002.
Noninterest-bearing deposits at June 30, 2003 increased by $15.2 million or
18.5% to $97.5 million from $82.3 million at December 31, 2002.
Interest-bearing deposits at June 30, 2003 increased by $27.5 million or 7.4%
to $398.1 million from $370.6 million at December 31, 2002. The Companys
ratios of noninterest-bearing demand deposits to total deposits for June 30,
2003 and December 31, 2002 were 19.7% and 18.2%, respectively.

Borrowings.Borrowings consist of short-term and long-term advances from
the Federal Home Loan Bank (FHLB) and advances on the revolving credit line
with a bank. Federal funds purchased decreased $7.4 million to $12.3 million at
June 30, 2003 from $19.7 million at December 31, 2002. Borrowings decreased
$8.9 million to $54.0 million at June 30, 2003 from $62.9 million at December
31, 2002. The maturity dates for the FHLB borrowings range from the years 2003
to 2013 and have interest rates from 2.65% to 5.91%. Additionally, the Company
had three unused, unsecured federal funds lines of credit with correspondent banks totaling
$17.7 million at June 30, 2003 and $10.3 million at December 31, 2002.

As of June 30, 2003, the Companys subsidiary trust had $7.0 million
outstanding in trust preferred securities.

In connection with the acquisition of Bryan-College Station, the Company
assumed $3.6 million in subordinated debentures. The debentures carried an
interest rate of 11.5% and were redeemed on March 31, 2003.

At June 30, 2003, the Company also had $5.0 million borrowed on its $10.0
million revolving credit line with a bank. The funds were used to redeem the
outstanding shares of Series A preferred stock issued by Bryan-College Station,
costs associated with becoming a public reporting company, a capital injection
into State Bank, and the redemption of the subordinated debentures.

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. 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 loan collections,
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.

For the six months ended June 30, 2003, the Company's source of funds
was derived from the sale and maturity of investment securities and
an increase in deposits. These funds were used primarily to support
loan growth, including mortgage originations and to repay $8.9 million of FHLB borrowings.

19



---



##### 



Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future. At June 30, 2003, the
Company has cash and cash equivalents of $21.4 million, up from $20.6 million
at December 31, 2002. The increase is mainly attributed to the increase in
deposits partially offset by the reduction in federal funds purchased and
borrowings.

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

Capital Resources.Shareholders equity increased from $35.4 million at
December 31, 2002 to $38.6 million at June 30, 2003, an increase of $3.2
million or 9.0%. The increase was primarily due to a net addition to undivided
profits of $2.5 million as a result of net income for the period and a $1.0
million improvement in unrealized securities gains, partially offset by cash
dividends paid of $531,000.

The following table provides a comparison of the Companys and the State
Banks leverage and risk-weighted capital ratios as of June 30, 2003 to the
minimum and well-capitalized regulatory standards.

|            |                                 |  |                  |      |            |  |                 |       |   |  |  |       |  
|----------- | ------------------------------- |  | ---------------- | ---- | ---------- |  | --------------- | ----- | - |  |  | ----- | -
|            |                                 |  |                  |      |            |  | To be Well      |       |   |  | 
|            |                                 |  |                  |      |            |  | Capitalized     |       |   |  | 
|            |                                 |  |                  |      |            |  | Under Prompt    |       |   |  | 
|            |                                 |  | Minimum          |      | Corrective |  |                 |       |  
|            |                                 |  | Required for     |      | Action     |  | Actual Ratio at
|            |                                 |  | Capital Purposes |      | Provisions |  | June 30, 2003  
|            |                                 |  |                  |      |            |  |                
|The Company |                                 |  |                  |      |            |  |                 |       |   |  |  |      
|            | Leverage ratio                  |  |                  | 4.00 | %(1)       |  |                 | N/A   |   |  |  | 5.56  | %
|            | Tier 1 risk-based capital ratio |  |                  | 4.00 | %          |  |                 | N/A   |   |  |  | 8.35  | %
|            | Risk-based capital ratio        |  |                  | 8.00 | %          |  |                 | N/A   |   |  |  | 9.26  | %
|The Bank    |                                 |  |                  |      |            |  |                 |       |   |  |  |      
|            | Leverage ratio                  |  |                  | 4.00 | %(2)       |  |                 | 5.00  | % |  |  | 6.16  | %
|            | Tier 1 risk-based capital ratio |  |                  | 4.00 | %          |  |                 | 6.00  | % |  |  | 9.23  | %
|            | Risk-based capital ratio        |  |                  | 8.00 | %          |  |                 | 10.00 | % |  |  | 10.14 | %



---



|(1) |  | The Federal Reserve Board may require the Company to maintain a leverage
ratio above the required minimum.
|--- |  | ----------------------------------------------------------------------------------------------------------
|   
|(2) |  | The FDIC may require the Bank 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, 2002. For more
information regarding quantitative and qualitative disclosures about market
risk, please refer to the Companys Annual Report on Form 10-K as of and for
the year ended December 31, 2002, 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.
|------- |  | ------------------------

Evaluation of disclosure controls and procedures.The Company carried out
an evaluation, under the supervision and with the participation of our
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 as of the end of the period covered by this report.
Based on this evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the Exchange Act)) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
to the Companys management within the time periods specified in the Securities
and Exchange
Commissions rules and forms.

Changes in internal controls. Subsequent to the date of the Companys
most recent evaluation, there have

20



---



##### 



been no significant changes in the Companys
internal controls or in other factors known to the Company that could
significantly affect these disclosure controls and procedures, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.




PART II

OTHER INFORMATION






|Item 1. |  | Legal Proceedings
|------- |  | -----------------
|       
|        |  | Not applicable   






|Item 2. |  | Changes in 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
|------- |  | ---------------------------------------------------

The Companys Annual Meeting of Shareholders was held on May 15, 2003. At
the meeting, the shareholders of the Company considered and acted upon the
following proposals:

1. Lee D. Mueller, Jr. was elected as Class II director to serve on the
Companys Board of Directors until the Companys 2006 Annual Meeting of
Shareholders and until his successor is duly elected and qualified. A total of
1,746,658 shares were voted in favor of Mr. Mueller and 71,850 shares were
withheld from voting.

2. Michael Steinhauser, Jr. was elected as Class II director to serve on
the Companys Board of Directors until the Companys 2006 Annual Meeting of
Shareholders and until his successor is duly elected and qualified. A total of
1,748,701 shares were voted in favor of Mr. Steinhauser and 69,807 shares were
withheld from voting.

3. The appointment of Grant Thornton, LLP as independent auditors of the
Company for the fiscal year ending December 31, 2003 was ratified. A total of
1,797,606 shares voted in favor of the appointment and 20,902 shares abstained
from voting on the proposal.






|Item 5. |  | Other Information
|------- |  | -----------------
|       
|        |  | Not applicable   

21



---



##### 








|Item 6. |  | (a) Exhibits
|------- |  | ------------

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






| |  | (b) Reports on Form 8-K
| |  | -----------------------

The Company filed a Current Report on Form 8-K under Item 7 and Item 9 on
May 2, 2003 to announce the release of its earnings for the first quarter of
2003.




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.

|                      |     |                                      
|--------------------- | --- | -------------------------------------
|                      | By: | /s/ L. Don Stricklin                 
|                      |     |                                      
|Date: August 12, 2003 |     | L. Don Stricklin                     
|                      |     | President and Chief Executive Officer
|                      |     | (principal executive officer)        
|                      |     |                                      
|Date: August 12, 2003 | By: | /s/ Thomas N. Adams                  
|                      |     |                                      
|                      |     | Thomas N. Adams                      
|                      |     | Executive Vice President and         
|                      |     | Chief Financial Officer              
|                      |     | (principal financial officer/        
|                      |     | principal accounting officer)        

22