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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 MARCH 31, 2004
|- | -------------------------------------------------------------------------------------------------------------------------------------



| ̈ | 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 incorporation or organization) |  | (I.R.S. Employer Identification No.)



202 W. COLORADO

LA GRANGE, TEXAS 78945

(Address of principal executive offices, including zip code)



(979) 968-8451

(Registrants telephone number, including area code)



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

None



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

Common Stock, par value $1.00 per share

(Title of class)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act).

Yes ̈No x.



As of April 30, 2004, the number of outstanding shares of Common Stock, par
value $1.00 per share, was 4,016,736.



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PART I



FINANCIAL INFORMATION



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



TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES



Consolidated Balance Sheets



(In thousands, except share data)



|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                |  | March 31,2004 |         |   | December 31,2003 |  
|                                                                                                                                                                                                                                |  | (Unaudited)   |         |   |                  |  
|ASSETS                                                                                                                                                                                                                          |  |               |         |   |                  |   |         |  
|Cash and cash equivalents:                                                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|Cash and due from banks                                                                                                                                                                                                         |  | $             | 17,572  |   |                  | $ | 17,268  |  
|Federal funds sold and other temporary investments                                                                                                                                                                              |  |               | 1,913   |   |                  |   |        |  
|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Total cash and cash equivalents                                                                                                                                                                                                 |  |               | 19,485  |   |                  |   | 17,268  |  
|Investment securities available-for-sale, at fair value                                                                                                                                                                         |  |               | 180,318 |   |                  |   | 184,547 |  
|Loans, net                                                                                                                                                                                                                      |  |               | 384,252 |   |                  |   | 376,628 |  
|Loans held for sale                                                                                                                                                                                                             |  |               | 18,495  |   |                  |   | 3,810   |  
|Premises and equipment, net                                                                                                                                                                                                     |  |               | 26,397  |   |                  |   | 25,802  |  
|Accrued interest receivable                                                                                                                                                                                                     |  |               | 2,871   |   |                  |   | 2,984   |  
|Goodwill                                                                                                                                                                                                                        |  |               | 9,528   |   |                  |   | 9,073   |  
|Core deposit intangibles                                                                                                                                                                                                        |  |               | 367     |   |                  |   | 393     |  
|Mortgage servicing rights                                                                                                                                                                                                       |  |               | 4,470   |   |                  |   | 4,475   |  
|Other assets                                                                                                                                                                                                                    |  |               | 12,537  |   |                  |   | 12,704  |  
|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                                                    |  | $             | 658,720 |   |                  | $ | 637,684 |  
|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Deposits:                                                                                                                                                                                                                       |  |               |         |   |                  |   |         |  
|Noninterest-bearing                                                                                                                                                                                                             |  | $             | 96,457  |   |                  | $ | 96,337  |  
|Interest-bearing                                                                                                                                                                                                                |  |               | 440,292 |   |                  |   | 404,799 |  
|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Total deposits                                                                                                                                                                                                                  |  |               | 536,749 |   |                  |   | 501,136 |  
|Federal funds purchased                                                                                                                                                                                                         |  |               |        |   |                  |   | 6,891   |  
|Other liabilities                                                                                                                                                                                                               |  |               | 7,131   |   |                  |   | 6,646   |  
|Borrowings                                                                                                                                                                                                                      |  |               | 57,837  |   |                  |   | 71,875  |  
|Securities sold under repurchase agreements                                                                                                                                                                                     |  |               | 3,793   |   |                  |   | 784     |  
|Junior subordinated deferrable interest debentures                                                                                                                                                                              |  |               | 12,365  |   |                  |   | 12,365  |  
|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                                               |  |               | 617,875 |   |                  |   | 599,697 |  
|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Commitments and contingencies                                                                                                                                                                                                   |  |               |        |   |                  |   |        |  
|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 shares authorized; 4,022,831 shares issued and 4,016,736 shares outstanding as of March 31, 2004 and
4,008,192 shares issued and 4,002,097 shares outstanding as of December 31, 2003 |  |               | 4,023   |   |                  |   | 4,008   |  
|Additional paid-in capital                                                                                                                                                                                                      |  |               | 17,118  |   |                  |   | 16,911  |  
|Retained earnings                                                                                                                                                                                                               |  |               | 18,705  |   |                  |   | 17,422  |  
|Accumulated other comprehensive income                                                                                                                                                                                          |  |               | 1,116   |   |                  |   | (237    | )
|Less treasury stock, at cost                                                                                                                                                                                                    |  |               | (117    | ) |                  |   | (117    | )
|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Total shareholders equity                                                                                                                                                                                                      |  |               | 40,845  |   |                  |   | 37,987  |  
|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                                                                                                                      |  | $             | 658,720 |   |                  | $ | 637,684 |  
|                                                                                                                                                                                                                                |  |               |         |   |                  |   |         |  



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 threemonths endedMarch 31,
|                                                    |  | 2004                               |       |   | 2003
|Interest income:                                    |  |                                    |       |   |      |   |      
|Loans                                               |  | $                                  | 7,517 |   |      | $ | 7,807
|Investment securities:                              |  |                                    |       |   |      |   |      
|Taxable                                             |  |                                    | 1,587 |   |      |   | 1,264
|Tax-exempt                                          |  |                                    | 98    |   |      |   | 151  
|Federal funds sold and other temporary investments  |  |                                    | 4     |   |      |   | 9    
|                                                    |  |                                    |       |   |      |   |      
|Total interest income                               |  |                                    | 9,206 |   |      |   | 9,231
|                                                    |  |                                    |       |   |      |   |      
|Interest expense:                                   |  |                                    |       |   |      |   |      
|Deposits                                            |  |                                    | 1,789 |   |      |   | 1,933
|Federal funds purchased                             |  |                                    | 14    |   |      |   | 40   
|Borrowings                                          |  |                                    | 473   |   |      |   | 490  
|Subordinated notes and debentures                   |  |                                    |      |   |      |   | 87   
|Junior subordinated deferrable interest debentures  |  |                                    | 266   |   |      |   | 183  
|                                                    |  |                                    |       |   |      |   |      
|Total interest expense                              |  |                                    | 2,542 |   |      |   | 2,733
|                                                    |  |                                    |       |   |      |   |      
|Net interest income                                 |  |                                    | 6,664 |   |      |   | 6,498
|Provision for loan losses                           |  |                                    | 150   |   |      |   | 800  
|                                                    |  |                                    |       |   |      |   |      
|Net interest income after provision for loan losses |  |                                    | 6,514 |   |      |   | 5,698
|                                                    |  |                                    |       |   |      |   |      
|Non-interest income:                                |  |                                    |       |   |      |   |      
|Service charges on deposit accounts                 |  |                                    | 1,597 |   |      |   | 1,609
|Net servicing fees                                  |  |                                    | (5    | ) |      |   | 18   
|Gain on sale of investment securities, net          |  |                                    | 77    |   |      |   | 231  
|Other non-interest income                           |  |                                    | 2,022 |   |      |   | 721  
|                                                    |  |                                    |       |   |      |   |      
|Total non-interest income                           |  |                                    | 3,691 |   |      |   | 2,579
|                                                    |  |                                    |       |   |      |   |      
|Non-interest expense:                               |  |                                    |       |   |      |   |      
|Employee compensation and benefits                  |  |                                    | 4,274 |   |      |   | 3,456
|Occupancy                                           |  |                                    | 1,088 |   |      |   | 1,121
|Other non-interest expense                          |  |                                    | 2,575 |   |      |   | 2,139
|                                                    |  |                                    |       |   |      |   |      
|Total non-interest expense                          |  |                                    | 7,937 |   |      |   | 6,716
|                                                    |  |                                    |       |   |      |   |      
|Income before provision for income taxes            |  |                                    | 2,268 |   |      |   | 1,561
|Provision for income taxes                          |  |                                    | 703   |   |      |   | 430  
|                                                    |  |                                    |       |   |      |   |      
|Net income                                          |  | $                                  | 1,565 |   |      | $ | 1,131
|                                                    |  |                                    |       |   |      |   |      
|Earnings per common share:                          |  |                                    |       |   |      |   |      
|Basic                                               |  | $                                  | 0.39  |   |      | $ | 0.29 
|Diluted                                             |  | $                                  | 0.37  |   |      | $ | 0.27 
|Dividends declared per common share:                |  |                                    |       |   |      |   |      
|Basic                                               |  | $                                  | 0.07  |   |      | $ | 0.07 
|Diluted                                             |  | $                                  | 0.07  |   |      | $ | 0.07 
|Weighted average shares outstanding:                |  |                                    |       |   |      |   |      
|Basic                                               |  |                                    | 4,010 |   |      |   | 3,965
|Diluted                                             |  |                                    | 4,193 |   |      |   | 4,120



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 threemonths endedMarch 31,
|                                                                            |  | 2004                               |       | 2003
|Net income                                                                  |  | $                                  | 1,565 |      | $ | 1,131
|Other comprehensive income, net of tax:                                     |  |                                    |       |      |   |      
|Unrealized holding gains on investment securities arising during the period |  |                                    | 1,404 |      |   | 646  
|Less: reclassification adjustment for gains included in net income          |  |                                    | 51    |      |   | 152  
|                                                                            |  |                                    |       |      |   |      
|Other comprehensive income                                                  |  |                                    | 1,353 |      |   | 494  
|                                                                            |  |                                    |       |      |   |      
|Total comprehensive income                                                  |  | $                                  | 2,918 |      | $ | 1,625
|                                                                            |  |                                    |       |      |   |      



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, 2003 and

Three Months Ended March 31, 2004

(In thousands, except share amounts)



|                                                                          |  |              |  |                           |       |  |                   |        |   |                                              |   |        |                        |  |   |        |   |  |   |      |   |  |   |        |  
|------------------------------------------------------------------------- |  | ------------ |  | ------------------------- | ----- |  | ----------------- | ------ | - | -------------------------------------------- | - | ------ | ---------------------- |  | - | ------ | - |  | - | ---- | - |  | - | ------ | -
|                                                                          |  | Common Stock |  | AdditionalPaid-in Capital |       |  | Retained Earnings |        |   | Accumulated OtherComprehensive Income (loss) |   |        | Treasury Stock at Cost |  |   | Total  |  
|                                                                          |  | Shares       |  | Amount                    |       |  |                   |        |  
|Balance at January 1, 2003                                                |  | 2,646,139    |  | $                         | 2,646 |  | $                 | 16,683 |   |                                              | $ | 14,594 |                        |  | $ | 1,612  |   |  | $ | (117 | ) |  | $ | 35,418 |  
|Net income                                                                |  |             |  |                           |      |  |                   |       |   |                                              |   | 5,241  |                        |  |   |       |   |  |   |     |   |  |   | 5,241  |  
|Unrealized loss on securities, net of tax and reclassification adjustment |  |             |  |                           |      |  |                   |       |   |                                              |   |       |                        |  |   | (1,849 | ) |  |   |     |   |  |   | (1,849 | )
|                                                                          |  |              |  |                           |       |  |                   |        |   |                                              |   |        |                        |  |   |        |   |  |   |      |   |  |   |        |  
|Other comprehensive income                                                |  |             |  |                           |      |  |                   |       |   |                                              |   |       |                        |  |   |       |   |  |   |     |   |  |   | 3,392  |  
|Three-for-two stock split                                                 |  | 1,331,403    |  |                           | 1,331 |  |                   |       |   |                                              |   | (1,331 | )                      |  |   |       |   |  |   |     |   |  |   |       |  
|Issuance of common stock upon exercise of employee stock options          |  | 30,650       |  |                           | 31    |  |                   | 234    |   |                                              |   |       |                        |  |   |       |   |  |   |     |   |  |   | 265    |  
|Cash paid in lieu of fractional shares                                    |  |             |  |                           |      |  |                   | (6     | ) |                                              |   |       |                        |  |   |       |   |  |   |     |   |  |   | (6     | )
|Dividends                                                                 |  |             |  |                           |      |  |                   |       |   |                                              |   | (1,082 | )                      |  |   |       |   |  |   |     |   |  |   | (1,082 | )
|                                                                          |  |              |  |                           |       |  |                   |        |   |                                              |   |        |                        |  |   |        |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2003                                              |  | 4,008,192    |  | $                         | 4,008 |  | $                 | 16,911 |   |                                              | $ | 17,422 |                        |  | $ | (237   | ) |  | $ | (117 | ) |  | $ | 37,987 |  
|                                                                          |  |              |  |                           |       |  |                   |        |   |                                              |   |        |                        |  |   |        |   |  |   |      |   |  |   |        |  



|                                                                                         |        |              |        |                           |       |                   |   |        |                                               |   |        |                        |  |   |       |   |  |   |      |   |  |   |        |  
|---------------------------------------------------------------------------------------- | ------ | ------------ | ------ | ------------------------- | ----- | ----------------- | - | ------ | --------------------------------------------- | - | ------ | ---------------------- |  | - | ----- | - |  | - | ---- | - |  | - | ------ | -
|Unaudited                                                                                |        | Common Stock |        | AdditionalPaid-in Capital |       | Retained Earnings |   |        | Accumulated Other Comprehensive Income (loss) |   |        | Treasury Stock at Cost |  |   | Total |  
|                                                                                         | Shares |              | Amount |                           |       |                   |   |       
|Balance at January 1, 2004                                                               |        | 4,008,192    |        | $                         | 4,008 |                   | $ | 16,911 |                                               | $ | 17,422 |                        |  | $ | (237  | ) |  | $ | (117 | ) |  | $ | 37,987 |  
|Net income                                                                               |        |             |        |                           |      |                   |   |       |                                               |   | 1,565  |                        |  |   |      |   |  |   |     |   |  |   | 1,565  |  
|Unrealized gain on securities, net of tax and reclassification adjustment                |        |             |        |                           |      |                   |   |       |                                               |   |       |                        |  |   | 1,353 |   |  |   |     |   |  |   | 1,353  |  
|                                                                                         |        |              |        |                           |       |                   |   |        |                                               |   |        |                        |  |   |       |   |  |   |      |   |  |   |        |  
|Other comprehensive income                                                               |        |             |        |                           |      |                   |   |       |                                               |   |       |                        |  |   |      |   |  |   |     |   |  |   | 2,918  |  
|Issuance of common stock upon exercise of employee stock options                         |        | 2,874        |        |                           | 3     |                   |   | 19     |                                               |   |       |                        |  |   |      |   |  |   |     |   |  |   | 22     |  
|Issuance of common stock in connection with the acquisition of Community Home Loan, Inc. |        | 11,765       |        |                           | 12    |                   |   | 188    |                                               |   |       |                        |  |   |      |   |  |   |     |   |  |   | 200    |  
|Dividends                                                                                |        |             |        |                           |      |                   |   |       |                                               |   | (282   | )                      |  |   |      |   |  |   |     |   |  |   | (282   | )
|                                                                                         |        |              |        |                           |       |                   |   |        |                                               |   |        |                        |  |   |       |   |  |   |      |   |  |   |        |  
|Balance at March 31, 2004                                                                |        | 4,022,831    |        | $                         | 4,023 |                   | $ | 17,118 |                                               | $ | 18,705 |                        |  | $ | 1,116 |   |  | $ | (117 | ) |  | $ | 40,845 |  
|                                                                                         |        |              |        |                           |       |                   |   |        |                                               |   |        |                        |  |   |       |   |  |   |      |   |  |   |        |  



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 three months ended March 31, |        
|                                                                                                                       |  | 2004                                 |         |   | 2003 |  
|Cash flows from operating activities:                                                                                  |  |                                      |         |   |      |   |         |  
|Net income                                                                                                             |  | $                                    | 1,565   |   |      | $ | 1,131   |  
|Adjustments to reconcile net income to net cash (used) provided by operating activities net of effects of acquisition: |  |                                      |         |   |      |   |         |  
|Depreciation and amortization                                                                                          |  |                                      | 750     |   |      |   | 791     |  
|Impairment on mortgage servicing rights                                                                                |  |                                      |        |   |      |   | 817     |  
|Provision for loan losses                                                                                              |  |                                      | 150     |   |      |   | 800     |  
|Gain on sales of securities, net                                                                                       |  |                                      | (77     | ) |      |   | (231    | )
|Loss on sale of other real estate and premises and equipment                                                           |  |                                      | 13      |   |      |   | 21      |  
|Gain on sale of loans                                                                                                  |  |                                      | (293    | ) |      |   | (135    | )
|Amortization of premium, net of discounts on securities                                                                |  |                                      | 303     |   |      |   | 329     |  
|Changes in:                                                                                                            |  |                                      |         |   |      |   |         |  
|Loans held for sale                                                                                                    |  |                                      | (5,169  | ) |      |   | 29,661  |  
|Other assets                                                                                                           |  |                                      | 270     |   |      |   | (815    | )
|Other liabilities                                                                                                      |  |                                      | (288    | ) |      |   | (927    | )
|                                                                                                                       |  |                                      |         |   |      |   |         |  
|Net cash (used) provided by operating activities                                                                       |  |                                      | (2,776  | ) |      |   | 31,442  |  
|                                                                                                                       |  |                                      |         |   |      |   |         |  
|Cash flows from investing activities net of effects of acquisition:                                                    |  |                                      |         |   |      |   |         |  
|Purchases of securities available-for-sale                                                                             |  |                                      | (22,304 | ) |      |   | (76,460 | )
|Proceeds from sales, maturities, and principal paydowns of securities available-for-sale                               |  |                                      | 27,659  |   |      |   | 45,682  |  
|Net change in loans                                                                                                    |  |                                      | (7,485  | ) |      |   | (1,711  | )
|Proceeds from sale of other real estate, loans and premises and equipment                                              |  |                                      | 306     |   |      |   | 135     |  
|Acquisition of Community Home Loan, Inc. (net of cash acquired of $762)                                                |  |                                      | (255    | ) |      |   |        |  
|Purchases of premises and equipment                                                                                    |  |                                      | (999    | ) |      |   | (1,045  | )
|                                                                                                                       |  |                                      |         |   |      |   |         |  
|Net cash used by investing activities                                                                                  |  |                                      | (3,078  | ) |      |   | (33,399 | )
|                                                                                                                       |  |                                      |         |   |      |   |         |  
|Cash flows from financing activities net of effects of acquisition:                                                    |  |                                      |         |   |      |   |         |  
|Net change in:                                                                                                         |  |                                      |         |   |      |   |         |  
|Deposits                                                                                                               |  |                                      | 35,613  |   |      |   | 21,680  |  
|Other borrowings                                                                                                       |  |                                      | (23,402 | ) |      |   | (1,856  | )
|Federal funds purchased                                                                                                |  |                                      | (6,891  | ) |      |   | (12,715 | )
|Subordinated notes and debentures                                                                                      |  |                                      |        |   |      |   | (3,241  | )
|Securities sold under repurchase agreements                                                                            |  |                                      | 3,009   |   |      |   |        |  
|Net proceeds from issuance of common stock upon exercise of employee stock options                                     |  |                                      | 22      |   |      |   | 43      |  
|Dividends paid                                                                                                         |  |                                      | (280    | ) |      |   | (264    | )
|                                                                                                                       |  |                                      |         |   |      |   |         |  
|Net cash provided by financing activities                                                                              |  |                                      | 8,071   |   |      |   | 3,647   |  
|                                                                                                                       |  |                                      |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                                                              |  |                                      | 2,217   |   |      |   | 1,690   |  
|Cash and cash equivalents at beginning of period                                                                       |  |                                      | 17,268  |   |      |   | 20,574  |  
|                                                                                                                       |  |                                      |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                                             |  | $                                    | 19,485  |   |      | $ | 22,264  |  
|                                                                                                                       |  |                                      |         |   |      |   |         |  



See accompanying notes
to condensed consolidated financial statements



5



---

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), and Community Home Loan, Inc. (CHL). All material intercompany accounts and transactions have been eliminated in the consolidated
report of the Company.



The accompanying unaudited condensed
consolidated financial statements were prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the Companys consolidated financial position at March 31, 2004, the Companys consolidated results of
operations for the three months ended March 31, 2004 and 2003, consolidated cash flows for the three months ended March 31, 2004 and 2003, and consolidated changes in shareholders equity for the three months ended March 31, 2004 and the year
ended December 31, 2003. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. The 2003 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, 2003 appearing in the Companys Annual Report on Form 10-K.



|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. Basic and diluted earnings per share have been adjusted for the three for two stock split in the form of a 50% stock dividend issued effective October 15, 2003.



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



The gross carrying amount of intangible assets and associated amortization at March 31, 2004 is presented in the following table:



|                             |  |                        |       |                                       |   |      
|---------------------------- |  | ---------------------- | ----- | ------------------------------------- | - | -----
|                             |  | GrossCarryingAmount    |       | AccumulatedAmortizationand Impairment
|                             |  | (dollars in thousands)
|Amortized intangible assets: |  |                        |       |                                       |   |      
|Mortgage servicing rights    |  | $                      | 6,481 |                                       | $ | 2,011
|Core deposit intangibles     |  | $                      | 564   |                                       | $ | 197  



The projections of
amortization expense shown below for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of March 31, 2004. Future amortization expense may be significantly different depending upon changes in
the mortgage servicing portfolio, mortgage interest rates and market conditions.



6



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



|                                               |  |                         |     |                         |   |       |  |   |    
|---------------------------------------------- |  | ----------------------- | --- | ----------------------- | - | ----- |  | - | ---
|                                               |  | MortgageServicingRights |     | Core DepositIntangibles |   | Total
|                                               |  | (dollars in thousands) 
|Three months ended March 31, 2004 (actual)     |  | $                       | 216 |                         | $ | 26    |  | $ | 242
|Nine months ended December 31, 2004 (estimate) |  |                         | 664 |                         |   | 77    |  |   | 741
|Estimate for the year ended December 31,       |  |                         |     |                         |   |       |  |   |    
|2005                                           |  |                         | 832 |                         |   | 88    |  |   | 920
|2006                                           |  |                         | 785 |                         |   | 72    |  |   | 857
|2007                                           |  |                         | 785 |                         |   | 56    |  |   | 841
|2008                                           |  |                         | 709 |                         |   | 40    |  |   | 749
|2009                                           |  |                         | 707 |                         |   | 25    |  |   | 732



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



|                                                                                                               |  |                                             |       |      |   |      
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ----- | ---- | - | -----
|                                                                                                               |  | Three MonthsEnded March 31,                
|                                                                                                               |  | 2004                                        |       | 2003
|                                                                                                               |  | (dollars inthousands, exceptper share data)
|Net income, as reported                                                                                        |  | $                                           | 1,565 |      | $ | 1,131
|Less: Total stock-based compensation expense determined under the fair value method for all awards, net of tax |  |                                             | 7     |      |   | 8    
|                                                                                                               |  |                                             |       |      |   |      
|Pro forma net income                                                                                           |  | $                                           | 1,558 |      | $ | 1,123
|                                                                                                               |  |                                             |       |      |   |      
|Earnings per share:                                                                                            |  |                                             |       |      |   |      
|Basic  as reported                                                                                            |  | $                                           | 0.39  |      | $ | 0.29 
|Basic  pro forma                                                                                              |  |                                             | 0.39  |      |   | 0.28 
|Diluted  as reported                                                                                          |  |                                             | 0.37  |      |   | 0.27 
|Diluted  pro forma                                                                                            |  |                                             | 0.37  |      |   | 0.27 



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



Variable Interest Entities



FIN No. 46 (FIN 46), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (Revised December 2003) establishes accounting guidance for consolidation
of variable interest entities (VIE) that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE is the entity that absorbs a majority of the VIEs expected losses, receives a majority of the VIEs
expected residual returns, or both,



7



---

as a result of ownership, controlling interest, contractual relationship or other business relationship with the VIE. Prior to the implementation of FIN 46,
VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all
arrangements entered after January 31, 2003, and are otherwise effective at the beginning of the first interim or annual period ending after December 15, 2003.



The Company has identified TXUI Statutory Trust I (Trust I) and TXUI Statutory Trust II (Trust II) as VIEs. The Company adopted FIN 46, as
revised, in connection with its consolidated financial statements as of and for the year ended December 31, 2003. The adoption of FIN 46, as revised, required the Company to deconsolidate its investment in Trust I because the Company was not the
primary beneficiary. Also, the Company recognized as debt the payable to Trust I.



Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity



SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.SFAS 150
establishes standards for how an issuer classifies, measures and discloses in its financial statements certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify financial instruments
that are within its scope as liabilities, in most circumstances. Such financial instruments include (i) financial instruments that are issued in the form of shares that are mandatorily redeemable; (ii) financial instruments that embody an obligation
to repurchase the issuers equity shares, or are indexed to such an obligation, and that require the issuer to settle the obligation by transferring assets; (iii) financial instruments that embody an obligation that the issuer may settle by
issuing a variable number of its equity shares if, at inception, the monetary value of the obligation is predominantly based on a fixed amount, variations in something other than the fair value of the issuers equity shares or variations
inversely related to changes in the fair value of the issuers equity shares; and (iv) certain freestanding financial instruments. SFAS 150 was effective for contracts entered into or modified after May 31, 2003, and was otherwise effective at
the beginning of the first interim period beginning after June 15, 2003, however in October 2003, the FASB indefinitely deferred the application of certain provisions of SFAS 150 as they apply to mandatorily redeemable minority interests. Adoption
of SFAS 150 on July 1, 2003, did not have a significant impact on the Companys financial statements.



Mortgage Loan Interest Rate Lock Commitments



The Securities and Exchange Commission staff recently released Staff Accounting Bulletin (SAB) 105, Loan Commitments Accounted for as Derivative Instruments. SAB 105 requires that a lender should
not consider the expected future cash flows related to loan servicing or include any internally developed intangible assets, such as customer-related intangible assets, in determining the fair value of loan commitments accounted for as derivatives.
Companies will be required to adopt SAB 105 effective no later than for commitments entered into after March 31, 2004. The requirements of SAB 105 will apply to the Companys mortgage loan interest rate lock commitments related to loans held
for sale. At March 31, 2004, such commitments with a notional amount of approximately $12.5 million were outstanding at the Bank. At March 31, 2004, such commitments could not be readily determined at CHL. The fair value of these commitments is
insignificant. The Company adopted SAB 105 as of April 1, 2004, and anticipates that application of its guidance will have no significant impact on the Companys results of operations and financial position.



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



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



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



8



---

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 $84.2 million at March 31, 2004 and $58.0 million at December 31, 2003.



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 $3.1 million at March 31, 2004 and $695,000 at December 31, 2003. As of March 31, 2004 and December 31,
2003, no liability for the fair value of the Companys potential obligations under these guarantees has been recorded since the amount is deemed immaterial.



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



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



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



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.



|8. | SEGMENT INFORMATION
|-- | -------------------



Beginning in 2004, the Company has two reportable operating segments; commercial banking and mortgage banking. The Bank owns 100 percent of CHL and
operates CHL as a subsidiary of the Bank (refer to Recent Developments included in Managements Discussion and Analysis of Financial Condition and Results of Operations). The Company reports the financial position and
the results of operations on a consolidated basis. The commercial banking and the mortgage banking segments are managed separately because each business requires different marketing strategies and each offers different products and services.



9



---

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



|                             |  |                    |         |   |                  |   |        |       |  |   |         |  
|---------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------ | ----- |  | - | ------- | -
|                             |  | Commercial Banking |         |   | Mortgage Banking |   |        | Total | 
|Net interest income          |  | $                  | 5,115   |   |                  | $ | 1,549  |       |  | $ | 6,664   |  
|Noninterest income           |  |                    | 2,372   |   |                  |   | 1,319  |       |  |   | 3,691   |  
|                             |  |                    |         |   |                  |   |        |       |  |   |         |  
|Total revenue                |  |                    | 7,487   |   |                  |   | 2,868  |       |  |   | 10,355  |  
|Provision for loan losses    |  |                    | (150    | ) |                  |   | 0      |       |  |   | (150    | )
|Noninterest expense          |  |                    | (6,130  | ) |                  |   | (1,807 | )     |  |   | (7,937  | )
|                             |  |                    |         |   |                  |   |        |       |  |   |         |  
|Income before income taxes   |  |                    | 1,207   |   |                  |   | 1,061  |       |  |   | 2,268   |  
|Provision for income taxes   |  |                    | (371    | ) |                  |   | (332   | )     |  |   | (703    | )
|                             |  |                    |         |   |                  |   |        |       |  |   |         |  
|Net income                   |  | $                  | 836     |   |                  | $ | 729    |       |  | $ | 1,565   |  
|                             |  |                    |         |   |                  |   |        |       |  |   |         |  
|Total assets, March 31, 2004 |  | $                  | 591,700 |   |                  | $ | 67,020 |       |  | $ | 658,720 |  
|                             |  |                    |         |   |                  |   |        |       |  |   |         |  



|9. | ACQUISITION
|-- | -----------



On February 5, 2004, the Bank acquired 100% of CHL, a mortgage company domiciled in Houston, Texas, and operates it as a subsidiary. Based upon financial
information as of December 31, 2003, the Bank acquired $10.9 million in assets and assumed $9.9 million in liabilities. Initial consideration paid was $1.3 million in cash and $200,000 in Company common stock. Additional consideration will be paid
annually through 2007 based upon the achievement of performance objectives. If all objectives are obtained, the Bank would pay an additional $1.3 million. The size of the acquisition and the amount of assets acquired were not material in relation to
the Companys overall business. Goodwill of $455,000 was recognized with this transaction.



|10. | SUBSEQUENT EVENTS
|--- | -----------------



On April 29, 2004, the Company entered into a definitive agreement to acquire GNB Bancshares, Inc., Gainesville, Texas. Pursuant to the terms of the
agreement, in exchange for all outstanding shares of GNB capital stock, the Company will issue $18.4 million in cash and approximately 1,415,384 shares of our common stock, subject to adjustment in the event that the 20 day average trading price of
our common stock exceeds or falls below certain pre-agreed levels. GNBs wholly-owned subsidiary bank, GNB Financial, n.a., will be operated as a separate subsidiary. As of March 31, 2004, on a consolidated basis, GNB had total assets of $224.4
million, total loans of $161.7 million, total deposits of $190.6 million and shareholders equity of $19.5 million.



On May 3, 2004, the Company entered into a definitive agreement to purchase the deposits and assume the liabilities of the Caldwell, Texas and Lexington,
Texas branches of Central Bank, Houston, Texas. Under the terms of the agreement, we will pay a premium of 8.0% of total deposits and $800,000 for the related real property. As of March 31, 2004, deposits at both branches totaled $102.4 million and
loans totaled $33.8 million. Caldwell is located approximately 20 miles from Bryan-College Station and Lexington is located approximately 40 miles north of LaGrange.



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



Special Cautionary Notice Regarding Forward-looking Statements



Statements and financial discussion and analysis
contained in the Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include information about
possible or assumed future results of the Companys operations or performance. The use of any of the words believe, expect, anticipate, estimate,



10



---

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 expect;
| | - | -----------------------------------------------------------------------------------------------------



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



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



| |  | changes in the interest rate environment 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;
| | - | --------------------------------------------------------------------------



| |  | 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.



Recent Developments.On February 5, 2004, the Bank acquired 100% of CHL, a mortgage company domiciled in Houston, Texas, and operates CHL as a
subsidiary. Based upon financial information as of December 31, 2003, the Bank acquired $10.9 million in assets and assumed $9.9 million in liabilities. Initial consideration paid was $1.3 million in cash and $200,000 in Company common stock.
Additional consideration will be paid annually through 2007 based upon the achievement of performance objectives. If all objectives are obtained, the Bank would pay an additional $1.3 million. The size of the acquisition and the amount of assets
acquired were not material in relation to the Companys overall business. Goodwill of $455,000 was recognized with this transaction.



Subsequent Events.On April 29, 2004, the Company entered into a definitive agreement to acquire GNB Bancshares, Inc., Gainesville, Texas. Pursuant
to the terms of the agreement, in exchange for all outstanding shares of GNB capital stock, the Company will issue $18.4 million in cash and approximately 1,415,384 shares of our common stock, subject to adjustment in the event that the 20 day
average trading price of our common stock exceeds or falls below certain pre-agreed levels. GNBs wholly-owned subsidiary bank, GNB Financial, n.a., will be operated as a separate subsidiary. As of March 31, 2004, on a consolidated basis, GNB
had total assets of $224.4 million, total loans of $161.7 million, total deposits of $190.6 million and shareholders equity of $19.5 million.



On May 3, 2004, the Company entered into a definitive agreement to purchase the deposits and assume the liabilities of the Caldwell, Texas and Lexington,
Texas branches of Central Bank, Houston, Texas. Under the terms of the agreement, we will pay a premium of 8.0% of total deposits and $800,000 for the related real property. As of March 31, 2004, deposits at both branches totaled $102.4 million and
loans totaled $33.8 million. Caldwell is



11



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located approximately 20 miles from Bryan-College Station and Lexington is located approximately 40 miles north of LaGrange.



General.The Company is a financial 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 March 31, 2004, the Company had eighteen full service banking centers and three loan production offices of the Bank located in the greater central and south central
Texas area. In addition, the Company has seven loan production offices of CHL located in Houston and San Antonio.



Net income for the three months ended March 31, 2004 was $1.6 million, an increase of 45.5% compared with net income of $1.1 million for the same period
in 2003. The increase in net income was primarily due to the higher non-interest income and lower provision for loan losses partially offset by increased non-interest expense. Basic and diluted EPS for the three months ended March 31, 2004 were
$0.39 and $0.37 compared with $0.29 and $0.27 for the same period in 2003.



At March 31, 2004, total assets were $658.7 million compared with $637.7 million at December 31, 2003. The $21.0 million or 3.3% increase in total assets over December 31, 2003 was attributable to the increase in net
loans and loans held for sale. At March 31, 2004, net loans, including loans held for sale, were $402.7 million compared with $380.4 million at December 31, 2003. Total deposits at March 31, 2004 were $536.7 million compared with $501.1 million at
December 31, 2003. The $35.6 million or 7.1% increase in deposits over December 31, 2003 is attributed to internal growth. Shareholders equity at March 31, 2004 was $40.8 million compared with $38.0 million at December 31, 2003. The $2.8
million or 7.4% increase is attributable to earnings retention and improvement on the fair market value on available-for-sale securities included in accumulated other comprehensive income. The Companys annualized return on average assets was
0.96% for the three months ended March 31, 2004, up from the 0.79% for the same period in 2003. The annualized return on average shareholders equity was 15.3% for the three months ended March 31, 2004, up from 12.7% for the same period in
2003.



Net Interest Income.For the three months ended
March 31, 2004, net interest income, before the provision for loan losses, increased by 3.1% to $6.7 million from $6.5 million in the same period in 2003. 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 lower yields on earning assets partially offset by lower rates paid for interest-bearing liabilities. For the three months ended
March 31, 2004 and 2003, the net interest margins and spreads decreased by 55 basis points to 4.63% from 5.18% and by 50 basis points to 4.38% from 4.88%, respectively.



Interest income for the three months ended March 31, 2004 and 2003 was $9.2 million. As compared with the three months ended
March 31, 2003, the average total loan volume for the three months ended March 31, 2004 increased by $13.1 million or 3.5%, and the average yield on average total loan volume decreased 64 basis points to 7.72%. As compared with the three months
ended March 31, 2003, average total investment volume for the three months ended March 31, 2004 increased by $56.8 million or 44.2%, and the average yield on average investments decreased by 75 basis points. For the three months ended March 31,
2004, as compared with the same period in 2003, the yield on total average earning assets decreased by 95 basis points to 6.40%.



Interest expense decreased for the three months ended March 31, 2004 by $191,000 or 7.0% compared with the same period in 2003. As compared to the three
month period ended March 31, 2003, average interest bearing deposit volumes increased by $54.9 million or 15.0% while the average rates paid on interest bearing deposits decreased by 71 basis points to 1.71%.



12



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The following tables set forth, for the periods indicated, an analysis of net interest income by each
major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The tables also set forth the average 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. Non accruing loans have been included in the table as loans carrying a zero yield.



|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|--------------------------------------------------------------- |  | ------------------------------------ | ------- | --------------------- | ---- | --------------------- |  | ---- | --------------------------- |  | --------------------- | ------- | ----------------------- | - | ----- |  | ----- | -
|                                                                |  | For the three months ended March 31, |        
|                                                                |  | 2004                                 |         |                       | 2003 |                      
|                                                                |  | AverageOutstandingBalance            |         | Interest Earned/ Paid |      | AverageYield/Rate (1) |  |      | Average Outstanding Balance |  | Interest Earned/ Paid |         | Average Yield/ Rate (1) |  
|                                                                |  | (Dollars in thousands)               |        
|Assets                                                          |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Interest-earning assets:                                        |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Total loans                                                     |  | $                                    | 391,820 |                       | $    | 7,517                 |  | 7.72 | %                           |  | $                     | 378,671 |                         | $ | 7,807 |  | 8.36  | %
|Taxable securities                                              |  |                                      | 176,593 |                       |      | 1,587                 |  | 3.61 |                             |  |                       | 115,105 |                         |   | 1,264 |  | 4.45  |  
|Tax-exempt securities                                           |  |                                      | 8,815   |                       |      | 98                    |  | 4.47 |                             |  |                       | 13,504  |                         |   | 151   |  | 4.53  |  
|Federal funds sold                                              |  |                                      | 1,502   |                       |      | 4                     |  | 1.07 |                             |  |                       | 1,917   |                         |   | 9     |  | 1.90  |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Total interest earning assets                                   |  |                                      | 578,730 |                       |      | 9,206                 |  | 6.40 |                             |  |                       | 509,197 |                         |   | 9,231 |  | 7.35  |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Less allowance for loan losses                                  |  |                                      | 3,894   |                       |      |                       |  |      |                             |  |                       | 3,593   |                         |   |       |  |       |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Total interest-earning assets, net of allowance for loan losses |  |                                      | 574,836 |                       |      |                       |  |      |                             |  |                       | 505,604 |                         |   |       |  |       |  
|Noninterest-earning assets                                      |  |                                      | 75,774  |                       |      |                       |  |      |                             |  |                       | 75,683  |                         |   |       |  |       |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Total Assets                                                    |  | $                                    | 650,610 |                       |      |                       |  |      |                             |  | $                     | 581,287 |                         |   |       |  |       |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Liabilities and shareholders equity                            |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Interest-bearing liabilities:                                   |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Interest-bearing demand deposits                                |  | $                                    | 151,712 |                       | $    | 441                   |  | 1.17 | %                           |  | $                     | 120,205 |                         | $ | 325   |  | 1.10  | %
|Savings and money market accounts                               |  |                                      | 87,184  |                       |      | 237                   |  | 1.09 |                             |  |                       | 64,742  |                         |   | 180   |  | 1.13  |  
|Time deposits                                                   |  |                                      | 182,444 |                       |      | 1,111                 |  | 2.45 |                             |  |                       | 181,512 |                         |   | 1,428 |  | 3.19  |  
|Federal funds purchased                                         |  |                                      | 5,195   |                       |      | 14                    |  | 1.08 |                             |  |                       | 9,668   |                         |   | 40    |  | 1.68  |  
|Junior subordinated deferrable interest debentures              |  |                                      | 12,365  |                       |      | 266                   |  | 8.65 |                             |  |                       | 7,000   |                         |   | 183   |  | 10.60 |  
|Other borrowings                                                |  |                                      | 67,786  |                       |      | 473                   |  | 2.81 |                             |  |                       | 62,002  |                         |   | 490   |  | 3.21  |  
|Subordinated notes and debenture                                |  |                                      |        |                       |      |                      |  |     |                             |  |                       | 3,241   |                         |   | 87    |  | 10.89 |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Total interest-bearing liabilities                              |  |                                      | 506,686 |                       |      | 2,542                 |  | 2.02 |                             |  |                       | 448,370 |                         |   | 2,733 |  | 2.47  |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Noninterest-bearing liabilities:                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Noninterest-bearing demand deposits                             |  |                                      | 95,980  |                       |      |                       |  |      |                             |  |                       | 89,557  |                         |   |       |  |       |  
|Other liabilities                                               |  |                                      | 7,099   |                       |      |                       |  |      |                             |  |                       | 7,232   |                         |   |       |  |       |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Total liabilities                                               |  |                                      | 609,765 |                       |      |                       |  |      |                             |  |                       | 545,159 |                         |   |       |  |       |  
|Shareholders equity                                            |  |                                      | 40,845  |                       |      |                       |  |      |                             |  |                       | 36,128  |                         |   |       |  |       |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Total liabilities and shareholders equity                      |  | $                                    | 650,610 |                       |      |                       |  |      |                             |  | $                     | 581,287 |                         |   |       |  |       |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Net interest income                                             |  |                                      |         |                       | $    | 6,664                 |  |      |                             |  |                       |         |                         | $ | 6,498 |  |       |  
|                                                                |  |                                      |         |                       |      |                       |  |      |                             |  |                       |         |                         |   |       |  |       |  
|Net interest spread                                             |  |                                      |         |                       |      |                       |  | 4.38 | %                           |  |                       |         |                         |   |       |  | 4.88  | %
|Net interest margin                                             |  |                                      |         |                       |      |                       |  | 4.63 | %                           |  |                       |         |                         |   |       |  | 5.18  | %

---

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



13



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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 changes in outstanding balances and changes in interest rates for the three month period ended March 31, 2004
compared with the same period ended March 31, 2003. For purposes of these tables, changes attributable to both rate and volume have been allocated proportionately to the change due to volume and rate.



|                                                   |  |                                            |     |   |      |   |      |       |  |   |      |  
|-------------------------------------------------- |  | ------------------------------------------ | --- | - | ---- | - | ---- | ----- |  | - | ---- | -
|                                                   |  | Three months ended March 31, 2004 vs. 2003 |    
|                                                   |  | Increase (Decrease) Due to                 |     |   |      |  
|                                                   |  | Volume                                     |     |   | Rate |   |      | Total | 
|                                                   |  | (Dollars in thousands)                     |    
|Interest-earning assets:                           |  |                                            |     |   |      |   |      |       |  |   |      |  
|Total loans                                        |  | $                                          | 252 |   |      | $ | (542 | )     |  | $ | (290 | )
|Securities                                         |  |                                            | 531 |   |      |   | (261 | )     |  |   | 270  |  
|Federal funds sold                                 |  |                                            | (1  | ) |      |   | (4   | )     |  |   | (5   | )
|                                                   |  |                                            |     |   |      |   |      |       |  |   |      |  
|Total increase (decrease) in interest income       |  |                                            | 782 |   |      |   | (807 | )     |  |   | (25  | )
|Interest-bearing liabilities:                      |  |                                            |     |   |      |   |      |       |  |   |      |  
|Interest-bearing demand deposits                   |  |                                            | 92  |   |      |   | 24   |       |  |   | 116  |  
|Savings and money market accounts                  |  |                                            | 61  |   |      |   | (4   | )     |  |   | 57   |  
|Time deposits                                      |  |                                            | 6   |   |      |   | (323 | )     |  |   | (317 | )
|Federal funds purchased                            |  |                                            | (12 | ) |      |   | (14  | )     |  |   | (26  | )
|Junior subordinated deferrable interest debentures |  |                                            | 115 |   |      |   | (32  | )     |  |   | 83   |  
|Other borrowings                                   |  |                                            | 40  |   |      |   | (57  | )     |  |   | (17  | )
|Subordinated notes and debentures                  |  |                                            | (87 | ) |      |   |     |       |  |   | (87  | )
|                                                   |  |                                            |     |   |      |   |      |       |  |   |      |  
|Total increase (decrease) in interest expense      |  |                                            | 215 |   |      |   | (406 | )     |  |   | (191 | )
|                                                   |  |                                            |     |   |      |   |      |       |  |   |      |  
|Increase (decrease) in net interest income         |  | $                                          | 567 |   |      | $ | (401 | )     |  | $ | 166  |  
|                                                   |  |                                            |     |   |      |   |      |       |  |   |      |  



Provision for Loan
Losses.Provisions for loan losses are charged to income to bring the Companys allowance for loan losses to a level deemed adequate by management. For the three months ended March 31, 2004 compared with the same period in 2003, the
provision decreased by $650,000 or 81.3% to $150,000. The decrease in provisions for loans losses is attributed to a net recovery position of $50,000 at March 31, 2004 compared to a net charge-off of $500,000 for the same period in 2003.



The allowance for loan losses at March 31, 2004 was $4.1 million, compared
with $3.9 million at December 31, 2003. During 2003, management increased the provisions made primarily due to growth in the loan portfolio and changes in the Central Texas economy. At March 31, 2004 and December 31, 2003, the ratio of loan loss
allowance to total loans was 1.01%.



Non-interest
Income. Non-interest income for the three months ended March 31, 2004 and 2003 was $3.7 million and $2.6 million, respectively, an increase of $1.1 million or 42.3%. The increase is primarily attributed to mortgage fees generated by CHL.



14



---

The following table presents, for the periods indicated, the major categories of non-interest income:



|                                          |  |                                     |       |   |      |   |      
|----------------------------------------- |  | ----------------------------------- | ----- | - | ---- | - | -----
|                                          |  | For the three months endedMarch 31,
|                                          |  | 2004                                |       |   | 2003
|                                          |  | (Dollars in thousands)             
|Service charges on deposit accounts       |  | $                                   | 1,597 |   |      | $ | 1,609
|Net servicing fees                        |  |                                     | (5    | ) |      |   | 18   
|Net gain on sale of investment securities |  |                                     | 77    |   |      |   | 231  
|Mortgage fees on loans held for sale      |  |                                     | 1,238 |   |      |   |     
|Other non-interest income                 |  |                                     | 784   |   |      |   | 721  
|                                          |  |                                     |       |   |      |   |      
|Total non-interest income                 |  | $                                   | 3,691 |   |      | $ | 2,579
|                                          |  |                                     |       |   |      |   |      



Non-interest
Expense. For the three months ended March 31, 2004, non-interest expense increased by $1.5 million or 22.4% to $8.1 million compared with the same period in 2003. The increase in non-interest expense was due to additional employee compensation
and benefits and other operating expenses related to CHL and increased occupancy, data processing and technology costs, as more fully discussed below.



The following table presents, for the periods indicated, the major categories in non-interest expense:



|                                   |  |                                     |       |      |   |      
|---------------------------------- |  | ----------------------------------- | ----- | ---- | - | -----
|                                   |  | For the three monthsended March 31,
|                                   |  | 2004                                |       | 2003
|                                   |  | (Dollars in thousands)             
|Employee compensation and benefits |  | $                                   | 4,274 |      | $ | 3,456
|Non-staff expenses:                |  |                                     |       |      |   |      
|Net occupancy                      |  |                                     | 583   |      |   | 330  
|Depreciation and amortization      |  |                                     | 750   |      |   | 791  
|Data processing                    |  |                                     | 312   |      |   | 237  
|Legal and professional fees        |  |                                     | 357   |      |   | 237  
|Advertising                        |  |                                     | 83    |      |   | 136  
|Printing and supplies              |  |                                     | 116   |      |   | 134  
|Telecommunications                 |  |                                     | 134   |      |   | 128  
|Other non-interest expense         |  |                                     | 1,328 |      |   | 1,267
|                                   |  |                                     |       |      |   |      
|Total non-staff expenses           |  |                                     | 3,663 |      |   | 3,260
|                                   |  |                                     |       |      |   |      
|Total non-interest expense         |  | $                                   | 7,937 |      | $ | 6,716
|                                   |  |                                     |       |      |   |      



Employee compensation
and benefits expense represents 53.8% of total non-interest expense for the three months ended March 31, 2004. Employee compensation and benefits expense for the three months ended March 31, 2004 and 2003 was $4.3 million and $3.5 million,
respectively, an increase of $800,000 or 22.9%. The increase for the three month period ended March 31, 2004 was primarily due to costs associated with the additional staff to meet loan growth and additional staff acquired with CHL. Total full-time
equivalent (FTE) employees at March 31, 2004 and 2003 were 369 and 316, respectively.



For the three months ended March 31, 2004, non-staff expenses increased by $403,000 or 12.4% compared with the same period in 2003. The increased non-staff expense is attributed to higher occupancy expense,
professional fees, the upgrade of technology systems, the inclusion of CHL, and other operating system improvements.



Financial Condition



Loan Portfolio.Total loans, including loans held for sale, increased by $22.5 million or 5.9%, from $384.3 million at December 31, 2003 to $406.8
million at March 31, 2004. The increase is primarily attributed to an increase in commercial real estate loans and real estate loans held for sale. Commercial real estate loans were $123.0 million at March 31, 2004, an increase of $8.0 million or
7.0%, compared with $115.0 million at December 31, 2003. Real estate loans held for sale were $18.5 million at March 31, 2004, an increase of $14.7 million or 386.8%, compared with $3.8 million at December 31, 2003.



15



---

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



|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|------------------------- |  | ---------------------- | ------- | - | ----------------- | ----- | - | ------ | - | ------- | ------- |  | ----- | -
|                          |  | March 31, 2004         |         |   | December 31, 2003 |      
|                          |  | Amount                 |         |   | Percent           |       |   | Amount |   |         | Percent | 
|                          |  | (Dollars in thousands) |        
|Commercial and industrial |  | $                      | 67,548  |   |                   | 16.6  | % |        | $ | 63,793  |         |  | 16.6  | %
|Real estate:              |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|1-4 residential           |  |                        | 137,908 |   |                   | 33.9  |   |        |   | 140,020 |         |  | 36.4  |  
|Commercial                |  |                        | 123,023 |   |                   | 30.2  |   |        |   | 115,033 |         |  | 29.9  |  
|Held for sale             |  |                        | 18,495  |   |                   | 4.5   |   |        |   | 3,810   |         |  | 1.0   |  
|Other                     |  |                        | 9,210   |   |                   | 2.3   |   |        |   | 8,488   |         |  | 2.2   |  
|Consumer and other, net   |  |                        | 50,656  |   |                   | 12.5  |   |        |   | 53,187  |         |  | 13.9  |  
|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|Total loans               |  | $                      | 406,840 |   |                   | 100.0 | % |        | $ | 384,331 |         |  | 100.0 | %
|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|Allowance for loan losses |  |                        | (4,093  | ) |                   |       |   |        |   | (3,893  | )       |  |       |  
|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|Net loans                 |  | $                      | 402,747 |   |                   |       |   |        | $ | 380,438 |         |  |       |  
|                          |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  



Nonperforming
Assets.Nonperforming assets were $2.4 million at March 31, 2004 and $2.3 million at December 31, 2003.



The Company generally places a loan on nonaccrual status and ceases to accrue interest when loan payment performance is deemed unsatisfactory, unless the
loan is both well-secured and in the process of collection. Cash payments received while a loan is classified as nonaccrual is recorded as a reduction of principal as long as doubt exists as to collection.



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



|                                                          |  |                        |       |   |                  |   |       |  
|--------------------------------------------------------- |  | ---------------------- | ----- | - | ---------------- | - | ----- | -
|                                                          |  | March 31,2004          |       |   | December 31,2003 |  
|                                                          |  | (Dollars in thousands) |      
|Nonaccrual loans                                          |  | $                      | 1,349 |   |                  | $ | 1,255 |  
|Accruing loans 90 days or more past due                   |  |                        | 724   |   |                  |   | 733   |  
|Other real estate                                         |  |                        | 333   |   |                  |   | 273   |  
|                                                          |  |                        |       |   |                  |   |       |  
|Total nonperforming assets                                |  | $                      | 2,406 |   |                  | $ | 2,261 |  
|                                                          |  |                        |       |   |                  |   |       |  
|Nonperforming assets to total assets                      |  |                        | 0.37  | % |                  |   | 0.35  | %
|Nonperforming assets to total loans and other real estate |  |                        | 0.59  | % |                  |   | 0.59  | %



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



For the three months ended March 31, 2004, net loan recoveries were $50,000. Net loan charge-offs were $2.3 million or 0.61% of average loans outstanding
for the year ended December 31, 2003. At March 31, 2004 and December 31, 2003, the allowance for loan losses aggregated $4.1 million and $3.9 million, respectively, or 1.01%



16



---

of total loans for both periods. At March 31, 2004, the allowance for loan losses as a percentage of nonperforming loans was 197.4% compared with 195.8% at
December 31, 2003.



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



|                                                        |  |                                   |         |   |                              |   |         |  
|------------------------------------------------------- |  | --------------------------------- | ------- | - | ---------------------------- | - | ------- | -
|                                                        |  | Three Months Ended March 31, 2004 |         |   | Year Ended December 31, 2003 |  
|                                                        |  | (Dollars in thousands)            |        
|Average total loans outstanding                         |  | $                                 | 391,820 |   |                              | $ | 376,988 |  
|                                                        |  |                                   |         |   |                              |   |         |  
|Total loans outstanding at end of period                |  | $                                 | 406,840 |   |                              | $ | 384,331 |  
|                                                        |  |                                   |         |   |                              |   |         |  
|Allowance for loan losses at beginning of period        |  |                                   | 3,893   |   |                              |   | 3,296   |  
|Provision for loan losses                               |  |                                   | 150     |   |                              |   | 2,900   |  
|Charge-offs:                                            |  |                                   |         |   |                              |   |         |  
|Commercial and industrial                               |  |                                   | (      | ) |                              |   | (916    | )
|Real estate                                             |  |                                   | (46     | ) |                              |   | (321    | )
|Consumer                                                |  |                                   | (173    | ) |                              |   | (2,001  | )
|Other                                                   |  |                                   | (25     | ) |                              |   | (      | )
|                                                        |  |                                   |         |   |                              |   |         |  
|Total charge-offs                                       |  |                                   | (244    | ) |                              |   | (3,238  | )
|                                                        |  |                                   |         |   |                              |   |         |  
|Recoveries:                                             |  |                                   |         |   |                              |   |         |  
|Commercial and industrial                               |  |                                   | 88      |   |                              |   | 153     |  
|Real estate                                             |  |                                   | 3       |   |                              |   | 82      |  
|Consumer                                                |  |                                   | 202     |   |                              |   | 683     |  
|Other                                                   |  |                                   | 1       |   |                              |   | 17      |  
|                                                        |  |                                   |         |   |                              |   |         |  
|Total recoveries                                        |  |                                   | 294     |   |                              |   | 935     |  
|                                                        |  |                                   |         |   |                              |   |         |  
|Net loan recoveries (charge-offs)                       |  |                                   | 50      |   |                              |   | (2,303  | )
|                                                        |  |                                   |         |   |                              |   |         |  
|Allowance for loan losses at end of period              |  | $                                 | 4,093   |   |                              | $ | 3,893   |  
|                                                        |  |                                   |         |   |                              |   |         |  
|Ratio of allowance to end of period total loans         |  |                                   | 1.01    | % |                              |   | 1.01    | %
|Ratio of net loan charge-offs to average total loans    |  |                                   |        |   |                              |   | 0.61    | %
|Ratio of allowance to end of period nonperforming loans |  |                                   | 197.44  | % |                              |   | 195.82  | %



Securities.At
March 31, 2004, the securities portfolio totaled $180.3 million, reflecting a decrease of $4.2 million or 2.3% from $184.5 million at December 31, 2003. During the three months ended March 31, 2004, the Company purchased $22.3 million in investment
securities. Additionally, the Company sold $23.8 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 $3.9 million in maturities and
principal paydowns on investment securities.



Deposits.
At March 31, 2004, total deposits were $536.7 million, an increase of $35.6 million or 7.1% from $501.1 million at December 31, 2003. The increase is primarily due to internal growth. Non-interest-bearing deposits at March 31, 2004 increased by
$200,000 or 0.2% to $96.5 million from $96.3 million at December 31, 2003. Interest-bearing deposits at March 31, 2004 increased by $35.5 million or 8.8% to $440.3 million from $404.8 million at December 31, 2003. The Companys ratios of
non-interest-bearing demand deposits to total deposits as of March 31, 2004 and December 31, 2003 were 18.0% and 19.2%, respectively.



Borrowings.The Company utilizes borrowings to supplement deposits to fund its lending and investing activities. Borrowings consist of short-term
and long-term advances from FHLB and advances on the revolving credit line with a bank. Federal funds purchased decreased $6.9 million to $0 at March 31, 2004 from December 31, 2003. Borrowings decreased $14.1 million to $57.8 million at March 31,
2004 from $71.9 million at December 31,



17



---

2003. The maturity dates for the FHLB borrowings range from the years 2004 to 2013 and have interest rates from 1.17% to 5.91%. Additionally, the Company had
three unsecured lines of credit with correspondent banks totaling $30.0 million at March 31, 2004 and $23.1 million at December 31, 2003.



At March 31, 2003, the Company has $2.8 million borrowed on its $10.0 million revolving credit line with a bank. Any borrowings under the line of credit
bear interest at Federal Funds rate plus 2.25%. The line of credit expires in March 2005.



At March 31, 2004, the Companys had $12.4 million outstanding in junior subordinated deferrable interest debentures issued to its subsidiary trusts.



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 sale of investment securities, increasing deposit marketing activities, and borrowing from the FHLB or correspondent banks. The cash and federal funds sold position, supplemented by amortizing investments along with
payments and maturities within the loan portfolio, have historically created an adequate liquidity position.



Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. At March 31, 2004, the Company had
cash and cash equivalents of $19.5 million, up $2.2 million or 12.7%, from $17.3 million at December 31, 2003. 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 $38.0 million at December 31, 2003 to $40.8 million at March 31, 2004, an increase of $2.8 million or 7.4%. The increase was primarily due to a net addition to undivided profits of $1.6
million, $200,000 in common stock issued in connection with the CHL acquisition, and a $1.4 million improvement in unrealized securities gains, partially offset by dividends of $282,000.



The following table provides a comparison of the Companys and State Banks leverage and risk-weighted capital
ratios as of March 31, 2004 to the minimum and well-capitalized regulatory standards:



|                                |  |                                              |      |  |                                                             |   |  |                               |  
|------------------------------- |  | -------------------------------------------- | ---- |  | ----------------------------------------------------------- | - |  | ----------------------------- | -
|                                |  | Minimum Required forCapitalAdequacy Purposes |      |  | To be WellCapitalizedUnder PromptCorrectiveActionProvisions |   |  | Actual Ratio at March 31,2004 |  
|The Company                     |  |                                              |      |  |                                                             |   |  |                               |  
|Leverage ratio                  |  | 4.00                                         | %(1) |  | N/A                                                         |   |  | 6.46                          | %
|Tier 1 risk-based capital ratio |  | 4.00                                         | %    |  | N/A                                                         |   |  | 9.61                          | %
|Risk-based capital ratio        |  | 8.00                                         | %    |  | N/A                                                         |   |  | 10.56                         | %
|The Bank                        |  |                                              |      |  |                                                             |   |  |                               |  
|Leverage ratio                  |  | 4.00                                         | %(2) |  | 5.00                                                        | % |  | 6.71                          | %
|Tier 1 risk-based capital ratio |  | 4.00                                         | %    |  | 6.00                                                        | % |  | 9.94                          | %
|Risk-based capital ratio        |  | 8.00                                         | %    |  | 10.00                                                       | % |  | 10.89                         | %

---



|(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.
|--- | --------------------------------------------------------------------------------------



18



---

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



There have been no material changes since December 31, 2003. 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, 2003, 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. Based on this evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are effective to ensure
that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported to the Companys management within the time periods specified in the Securities
and Exchange Commissions rules and forms.



Changes in
internal controls over financial reporting. There were no changes in the Companys internal control over financial reporting that occurred during the Companys most recent fiscal quarter that have a materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.



PART II



OTHER INFORMATION



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



Not applicable



|Item 2. | Changes in Securities, Use of Proceed, and Issuer Purchases of Equity Securities
|------- | --------------------------------------------------------------------------------



| | (a) | Not applicable
| | --- | --------------



| | (b) | No applicable
| | --- | -------------



| | (c) | Recent Sales of Unregistered Securities
| | --- | ---------------------------------------



In February 2004, the Company issued 11,765 shares of Common Stock to three shareholders in connection with the acquisition of Community Home Loan, Inc.
in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended.



| | (d) | Not applicable
| | --- | --------------



| | (e) | Not applicable
| | --- | --------------



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



Not applicable



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



19



---

Not applicable



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



Not applicable



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



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



|Item 6B. | Reports on Form 8-K
|-------- | -------------------



The Company filed a Current Report on Form 8-K under Items 7 and 12 on January 31, 2004 to announce the release of its earnings for the fourth quarter and
year ended December 31, 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.



| |  |                    |  |  |  |     |  |                                                                                     
| |  | ------------------ |  |  |  | --- |  | ------------------------------------------------------------------------------------
| |  |                    |  | 
| |  | Date: May 13, 2004 |  |  |  | By: |  | /s/ L. Don Stricklin                                                                
| |  |                    |  |  |  |     |  |                                                                                     
| |  |                    |  |  |  |     |  | L. Don Stricklin President and Chief Executive
Officer (principal executive officer)



| |  |                    |  |  |  |     |  |                                                                                                                                 
| |  | ------------------ |  |  |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------
| |  |                    |  | 
| |  | Date: May 13, 2004 |  |  |  | By: |  | /s/ Thomas N. Adams                                                                                                             
| |  |                    |  |  |  |     |  |                                                                                                                                 
| |  |                    |  |  |  |     |  | Thomas N. Adams Executive Vice President and Chief Financial Officer (principal financial officer/ principal accounting officer)



20