##### Table of Contents



---

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549







FORM 10-K

(Mark One)

|  |  |                                                                                                                                 
|- |  | --------------------------------------------------------------------------------------------------------------------------------
|x |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For
the Fiscal Year ended December 31, 2002
|  |  |                                                                                                                                 
|o |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                                        

Commission file number 000-49928



---

TEXAS UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


|                                                                     |  |                                                
|-------------------------------------------------------------------- |  | -----------------------------------------------
|Texas
(State or other jurisdiction of
Incorporation or organization) |  | 75-2768656
(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)



---

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of class)



---

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

As of March 18, 2003, the number of outstanding shares of Common Stock, par
value $1.00 per share, was 2,645,044. The aggregate market value of the shares
of Common Stock held by non-affiliates as of June 28, 2002, the last business
day of the registrants most recently completed second fiscal quarter, was
$35,884,939 based on the most recent price known to management at
which the Common
Stock traded.



---

---





---



##### Table of Contents



Special Cautionary Notice Regarding Forward-looking Statements

Statements and financial discussion and analysis contained in this Annual Report on
Form 10-K 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 Texas Uniteds operations or performance. The use of
any of the words believe, expect, anticipate, estimate, continue,
intend, may, will, should, or similar expressions, identifies these
forward-looking statements. Many possible factors or events could affect the
future financial results and performance of Texas United 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 Texas United expects;                                
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | competitive factors including product and pricing pressures among
financial services organizations may increase;                                
|
| |  |  | Texas United 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 Texas
United serves change or are less favorable than it expects;                       
|
| |  |  | legislative or regulatory changes adversely affect Texas United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 Texas United anticipates.                                                  

A forward-looking statement may include a statement of the assumptions or
bases underlying the forward-looking statement. Texas United believes it has
chosen the assumptions or bases in good faith and that they are reasonable.
However, Texas United 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.

-2-





---

TABLE OF CONTENTS



|                                             |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                             | Item 1. Business                                                                             
|                                             | Item 2. Facilities                                                                           
|                                             | Item 3. Legal Proceedings                                                                    
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II.                                    
|                                             | Item 5. Market for Common Equity and Related Stockholder Matters                             
|                                             | Item 6. Selected Consolidated Financial Data                                                 
|                                             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                           
|                                             | Item 8. Financial Statements and Supplementary Data                                          
|                                             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III.                                   
|                                             | Item 10. Directors and Executive Officers of Texas United                                    
|                                             | Item 11. Executive Compensation                                                              
|                                             | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                             | Item 13. Certain Relationships and Related Transactions                                      
|                                             | Item 14. Controls and Procedures                                                             
|PART IV.                                    
|                                             | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                  
|CERTIFICATIONS                              
|Exhibit Index                               
|Consent of Grant Thornton LLP               
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906



---



##### Table of Contents






Item 1. Business

General

Texas
United Bancshares, Inc. (Texas United) 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. and was the parent to three separately chartered state banking
institutions: State Bank, La Grange, Texas; Central Texas Bank, Flatonia,
Texas; and Central Texas Bank, Gonzales, Texas. In December 1999, Central
Texas Bank of Gonzales was merged into Central Texas Bank of Flatonia and in
December 2001, Central Texas Bank of Flatonia was merged into State Bank of La
Grange. Texas United derives substantially all of its income from State Bank
which has eighteen full service banking locations serving eleven counties
within central and south central Texas.

The principal executive office of Texas United is located at 202 W.
Colorado in La Grange, Texas and its telephone number is (979) 968-8451.

Texas United operates under a community bank philosophy emphasizing
long-term customer relationships and providing practical financial solutions,
convenience, consistent service and reasonably priced, useable products. Texas
United has grown through a combination of internal growth, acquisitions and the
opening of new banking locations.

In July 1999, Texas United acquired First State Bank, Dime Box, Texas and
in December 1999, Texas United acquired certain assets and assumed certain
liabilities of a branch in Pleasanton, Texas from First National Bank of South
Texas. In September 2000, Texas United acquired the investment advisory company
of Pamela Krueger and Associates located in Austin, Texas. That company now
operates under the name Third Coast Wealth Advisors as a subsidiary of Texas
United. In October 2000, Texas United acquired certain assets and assumed
certain liabilities of two branches in Hempstead and Waller from Texas Guaranty
Bank in Houston.

On July 31, 2002, Texas United completed the acquisition of The
Bryan-College Station Financial Holding Company and its subsidiaries
(Bryan-College Station). In exchange for all of the issued and outstanding
stock of Bryan-College Station, Texas United issued 137,703 shares of its
common stock and assumed $3.6 million in outstanding debentures. The three
locations of First Federal Savings Bank (First Federal), Bryan-College
Stations wholly owned subsidiary, became banking centers of State Bank.
Goodwill of $2.5 million was recorded related to this acquisition. In
connection with the acquisition, Texas Uniteds Common Stock was listed on the
Nasdaq National Market beginning August 1, 2002 under the symbol TXUI.

In addition to these acquisitions, Texas United has opened six de novo
banking centers since May 1999 in Schulenburg, Tomball, Cedar Park, Austin,
Lexington, and Liberty Hill, Texas.

Lines of Business

Texas United offers a variety of traditional loan and deposit products to
its customers that consist primarily of consumers and small to medium-sized
businesses. Texas United tailors its products to the needs of customers within
a specific market area. At December 31, 2002, Texas United maintained
approximately 31,000 separate deposit accounts and 9,000 separate loan accounts
and approximately 18.2% of Texas Uniteds total deposits were non-interest
bearing demand deposits. For the period ended December 31, 2002, Texas Uniteds
average cost of funds was 2.25%.

Texas United has been an active mortgage lender, with 1-4 family
residential (including loans held for sale) and commercial mortgage loans
comprising 63.5% of the Texas Uniteds total loans outstanding as of December
31, 2002. For consumer customers, Texas United offers loans for automobiles and
other consumer durables, home equity loans, debit and credit cards, personal
computer banking, and other cash flow management services and telebanking. By
offering certificates of deposit, NOW accounts, savings and
money market accounts, and overdraft protection at competitive rates, the
Company gives its depositors a full range of traditional deposit products.
Texas United successfully introduced Platinum Reward Checking, which for a
monthly fee provides consumers with a package of benefits including free
personalized checks and overdraft protection. In addition, Texas United
facilitates

-3-





---



##### Table of Contents



sales of brokerage, mutual funds, annuities, and other insurance
products through third party vendors.

The businesses targeted by the Company in its lending efforts are
primarily those that require loans in the $250,000 to $750,000 range. The
Company offers these businesses a broad array of loan products including term
loans, lines of credit and working capital loans, business expansion and
equipment loans, interim construction loans for builders, and owner-occupied
commercial real estate loans.

Market Area

Texas Uniteds primary market consists of the communities served by its
eighteen locations within eleven counties of central and south central Texas.
Texas Uniteds growth strategy is to increase its presence in central and south
central Texas by acquiring small community banks and to branch into higher
growth suburban areas of Austin, Houston and San Antonio, Texas.

The diverse nature of the economies at each location served by Texas
United provides a varied customer base and allows Texas United to spread its
lending risk throughout a number of different industries. Texas Uniteds market
area is comprised of smaller community banks or branches of large regional
banks. Management believes that as a mid-sized financial institution it can
combine the philosophies of a community bank with the sophistication of a large
regional bank to enhance its competitive advantage within the markets served
and provide for excellent growth opportunities through acquisitions, new
branching locations and additional business development.

Texas Uniteds directors and officers are important to the overall success
of Texas United and play a key role in business development by serving in
various public and civic activities. Texas United has invested heavily in
recruiting top talent and providing them with economic incentives in the form
of competitive pay, incentive plans and stock ownership. Each banking center
is administered by a local President with knowledge of the community and
lending expertise in the specific industries found within the community. Texas
United entrusts its banking center Presidents with the authority and
flexibility within general parameters with respect to product pricing and
decision making in order to avoid the bureaucratic structure of larger banks.
Each banking center is operated as a separate profit unit with respect to
maintaining separate data on net interest margin, loan and deposit growth,
efficiency, asset quality and overall profitability. The banking center
Presidents are accountable for these areas and are compensated accordingly.

Competition

The banking business is highly competitive, and the profitability of Texas
United depends primarily on its ability to compete in its market areas. Texas
United experiences substantial competition in attracting and retaining savings
deposits and in lending funds. Texas United competes with other commercial
banks, savings banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
firms, asset-based nonbank lenders and certain other nonfinancial entities,
including retail stores which may maintain their own credit programs and
certain governmental organizations which may offer more favorable financing
than Texas United. Texas United has been able to compete effectively with
other financial institutions by emphasizing customer service, technology and
responsive decision-making; by establishing long-term customer relationships
and building customer loyalty; and by providing products and services designed
to address the specific needs of its customers.

Employees

As of December 31, 2002, Texas United and State Bank had 315 full-time
equivalent employees, 100 of whom were officers of State Bank. Texas United
provides medical and hospitalization insurance to its full-time employees.
Texas United considers its relations with its employees to be good. Neither
Texas United nor State Bank is a party to any collective bargaining agreement.

-4-





---



##### Table of Contents



Supervision and Regulation

The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the
deposit insurance funds of the FDIC and the banking system as a whole, and not
for the protection of the bank holding company shareholders or creditors. The
banking agencies have broad enforcement power over bank holding companies and
banks including the power to impose substantial fines and other penalties for
violations of laws and regulations.

The following description summarizes some of the laws to which Texas
United and State Bank are subject. References in the following description to
applicable statutes and regulations are brief summaries of these statutes and
regulations, do not purport to be complete, and are qualified in their entirety
by reference to such statutes and regulations. Texas United believes that it is
in compliance in all material respects with these laws and regulations.

Texas United

Texas United is a financial holding company registered under the
Gramm-Leach-Bliley Act and a bank holding company registered under the Bank
Holding Company Act of 1956, as amended (BHCA). Accordingly, Texas United is
subject to supervision, regulation and examination by the Board of Governors of
the Federal Reserve System (Federal Reserve Board). The Gramm-Leach-Bliley Act,
the BHCA and other federal laws subject financial and bank holding companies to
particular restrictions on the types of activities in which they may engage,
and to a range of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations.

Regulatory Restrictions on Dividends; Source of Strength. It is the
policy of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organizations
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding companys ability to serve as a source of strength to its
banking subsidiaries.

Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be inclined
to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.

In the event of a bank holding companys bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution. Any claim for breach of such obligation
will generally have priority over most other unsecured claims.

Scope of Permissible Activities. Under the BHCA, bank holding companies
generally may not acquire a direct or indirect interest in or control of more
than 5% of the voting shares of any company that is not a bank or bank holding
company or from engaging in activities other than those of banking, managing or
controlling banks or furnishing services to or performing services for its
subsidiaries, except that it may engage in, directly or indirectly, certain
activities that the Federal Reserve Board determined to be closely related to
banking or managing and controlling banks as to be a proper incident thereto.
In approving acquisitions or the addition of activities, the Federal Reserve
considers whether the acquisition or the additional activities can reasonably
be expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh such possible
adverse effects as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.

-5-





---



##### Table of Contents



However, the Gramm-Leach-Bliley Act, effective March 11, 2000, eliminated
the barriers to affiliations among banks, securities firms, insurance companies
and other financial service providers and permits bank holding companies to
become financial holding companies and thereby affiliate with securities firms
and insurance companies and engage in other activities that are financial in
nature. The Gramm-Leach-Bliley Act defines financial in nature to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Federal Reserve Board has determined to be
closely related to banking. No regulatory approval will be required for a
financial holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental
to activities that are financial in nature, as determined by the Federal
Reserve Board.

Under the Gramm-Leach-Bliley Act, a bank holding company may become a
financial holding company by filing a declaration with the Federal Reserve
Board if each of its subsidiary banks is well capitalized under the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) prompt
corrective action provisions, is well managed, and has at least a satisfactory
rating under the Community Reinvestment Act of 1977 (CRA).

While the Federal Reserve Board will serve as the umbrella regulator for
financial holding companies and has the power to examine banking organizations
engaged in new activities, regulation and supervision of activities which are
financial in nature or determined to be incidental to such financial activities
will be handled along functional lines. Accordingly, activities of
subsidiaries of a financial holding company will be regulated by the agency or
authorities with the most experience regulating that activity as it is
conducted in a financial holding company.

Safe and Sound Banking Practices. Bank holding companies are not
permitted to engage in unsafe and unsound banking practices. The Federal
Reserve Boards Regulation Y, for example, generally requires a holding company
to give the Federal Reserve Board prior notice of any redemption or repurchase
of its own equity securities, if the consideration to be paid, together with
the consideration paid for any repurchases or redemptions in the preceding
year, is equal to 10% or more of the holding companys consolidated net worth.
The Federal Reserve Board may oppose the transaction if it believes
that the transaction would constitute an unsafe or unsound practice or would
violate any law or regulation. Depending upon the circumstances, the Federal
Reserve Board could take the position that paying a dividend would constitute
an unsafe or unsound banking practice.

The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their nonbanking subsidiaries which represent unsafe
and unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1.0 million for each day the activity continues.

Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.

Capital Adequacy Requirements. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk
of the asset. These risk weights are multiplied by corresponding asset
balances to determine a risk-weighted asset base. The guidelines require a
minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is
required to consist of Tier 1 capital elements). Total capital is the sum of
Tier 1 and Tier 2 capital. As of December 31, 2002, Texas Uniteds ratio of
Tier 1 capital to total risk-weighted assets was 7.97% and its ratio of total
capital to total risk-weighted assets was 8.83%.

In addition to the risk-based capital guidelines, the Federal Reserve
Board uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is a companys Tier 1
capital divided by its average total consolidated assets. Certain highly rated
bank holding companies may maintain a minimum leverage ratio of 3.0%, but other
bank holding companies are be required to maintain a leverage ratio of 4.0%. As
of December 31, 2002, Texas Uniteds leverage ratio was 5.49%.

-6-





---



##### Table of Contents



The federal banking agencies risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to
operate with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances
warrant. Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.

Imposition of Liability for Undercapitalized Subsidiaries. Bank
regulators are required to take prompt corrective action to resolve problems
associated with insured depository institutions whose capital declines below
certain levels. In the event an institution becomes undercapitalized, it must
submit a capital restoration plan. The capital restoration plan will not be
accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiarys compliance with the
capital restoration plan up to a certain specified amount. Any such guarantee
from a depository institutions holding company is entitled to a priority of
payment in bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institutions assets at the time it
became undercapitalized or the amount necessary to cause the institution to be
adequately capitalized. The bank regulators have greater power in situations
where an institution becomes significantly or critically undercapitalized
or fails to submit a capital restoration plan. For example, a bank holding
company controlling such an institution can be required to obtain prior Federal
Reserve Board approval of proposed dividends, or might be required to consent
to a consolidation or to divest the troubled institution or other affiliates.

Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board
before it may acquire all or substantially all of the assets of any bank, or
ownership or control of any voting shares of any bank, if after such
acquisition it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank. In approving bank acquisitions by bank holding
companies, the Federal Reserve Board is required to consider the financial and
managerial resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be served, and
various competitive factors.

Control Acquisitions. The Change in Bank Control Act prohibits a person
or group of persons from acquiring control of a bank holding company unless
the Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act, such as Texas United, would, under the circumstances set forth in
the presumption, constitute acquisition of control of Texas United.

In addition, any entity is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding Common
Stock of Texas United, or otherwise obtaining control or a controlling
influence over Texas United.

State Bank

State Bank is a Texas-chartered banking association, the deposits of which
are insured by the Bank Insurance Fund (BIF) of the FDIC. State Bank is not a member of
the Federal Reserve System; therefore, State Bank is subject to supervision and
regulation by the FDIC and the Texas Banking Department. Such supervision and
regulation subject State Bank to special restrictions, requirements, potential
enforcement actions and periodic examination by the FDIC and the Texas Banking
Department. Because the Federal Reserve Board regulates the bank holding
company parent of State Bank, the Federal Reserve Board also has supervisory
authority which directly affects State Bank.

Equivalence to National Bank Powers. The Texas Constitution, as amended
in 1986, provides that a Texas-chartered bank has the same rights and
privileges that are or may be granted to national banks domiciled in

-7-





---



##### Table of Contents



Texas. To the extent that the Texas laws and regulations may have allowed state-chartered
banks to engage in a broader range of activities than national banks, the
FDICIA has operated to limit this authority. FDICIA provides that no state bank
or subsidiary thereof may engage as principal in any activity not permitted for
national banks, unless the institution complies with applicable capital
requirements and the FDIC determines that the activity poses no significant
risk to the insurance fund. In general, statutory restrictions on the
activities of banks are aimed at protecting the safety and soundness of
depository institutions.

Financial Modernization. Under the Gramm-Leach-Bliley Act, a national
bank may establish a financial subsidiary and engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting as principal, insurance company portfolio investment, real estate
development, real estate investment and annuity issuance. To do so, a bank
must be well capitalized, well managed and have a CRA rating of satisfactory or
better. Subsidiary banks of a financial holding company or national banks with
financial subsidiaries must remain well capitalized and well managed in order
to continue to engage in activities that are financial in nature without
regulatory actions or restrictions. Such actions or restrictions could include
divestiture of the financial in nature subsidiary or subsidiaries. In
addition, a financial holding company or a bank may not acquire a company that
is engaged in activities that are financial in nature unless each of the
subsidiary banks of the financial holding company or the bank has a CRA rating
of satisfactory of better.

Although the powers of state chartered banks are not specifically
addressed in the Gramm-Leach-Bliley Act, Texas-chartered banks such as State
Bank, will have the same if not greater powers as national banks through the
parity provision contained in the Texas Constitution.

Branching. Texas law provides that a Texas-chartered bank can establish a
branch anywhere in Texas provided that the branch is approved in advance by the
Texas Banking Department. The branch must also be approved by the FDIC, which
considers a number of factors, including financial history, capital adequacy,
earnings prospects, character of management, needs of the community and
consistency with corporate powers.

Restrictions on Transactions with Affiliates and Insiders. Transactions
between State Bank and its nonbanking subsidiaries and/or affiliates, including
Texas United, are subject to Section 23A of the Federal Reserve Act. In
general, Section 23A imposes limits on the amount of such transactions, and
also requires certain levels of collateral for loans to affiliated parties. It
also limits the amount of advances to third parties which are collateralized by
the securities or obligations of Texas United or its subsidiaries.

Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between State
Bank and its affiliates be on terms substantially the same, or
at least as favorable to State Bank, as those prevailing at the time for
comparable transactions with or involving other nonaffiliated persons.

The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
insiders) contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must
be met before such a loan can be made. There is also an aggregate limitation on
all loans to insiders and their related interests. These loans cannot exceed
the institutions total unimpaired capital and surplus, and the FDIC may
determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions.

Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
Dividends paid by State Bank have provided Texas Uniteds operating funds and
for the foreseeable future it is anticipated that dividends paid by State Bank
to Texas United will continue to be Texas Uniteds source of operating funds.
Capital adequacy requirements serve to limit the amount of dividends that may
be paid by State Bank. Under federal law, State Bank cannot pay a dividend if,
after paying the dividend, State Bank will be undercapitalized. The FDIC may
declare a dividend payment to be unsafe and unsound even though State Bank
would continue to meet its capital requirements after the dividend. Because
Texas United is a legal entity separate and distinct from its subsidiaries, its
right to participate in the distribution of assets of any subsidiary upon the
subsidiarys liquidation or reorganization will be subject to the prior claims
of the subsidiarys creditors. In the event of a liquidation or other
resolution of an insured depository institution, the claims of depositors
and other general or subordinated creditors are entitled to a priority

-8-





---



##### Table of Contents



of payment over the claims of holders of any obligation of the institution to its
shareholders, including any depository institution holding company (such as
Texas United) or any shareholder or creditor thereof.

Examinations. The FDIC periodically examines and evaluates insured banks.
Based on such an evaluation, the FDIC may revalue the assets of the institution
and require that it establish specific reserves to compensate for the
difference between the FDIC-determined value and the book value of such assets.
The Texas Banking Department also conducts examinations of state banks but may
accept the results of a federal examination in lieu of conducting an
independent examination.

Audit Reports. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institutions holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, managements certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation
by the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. FDICIA requires that independent audit committees be formed,
consisting of outside directors only. The committees of such institutions must
include members with experience in banking or financial management, must have
access to outside counsel, and must not include representatives of large
customers.

Capital Adequacy Requirements. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.

The FDICs risk-based capital guidelines generally require state banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0%
and a ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for State Bank as for Texas United. As of
December 31, 2002, State Banks ratio of Tier 1 capital to total risk-weighted
assets was 9.57% and its ratio of total capital to total risk-weighted assets
was 10.43%.

The FDICs leverage guidelines require state banks to maintain Tier 1
capital of no less than 4.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets. The Texas Banking Department has issued a policy that generally
requires state chartered banks to maintain a leverage ratio (defined in
accordance with federal capital guidelines) of 6.0%. As of December 31, 2002,
State Banks ratio of Tier 1 capital to average total assets (leverage ratio)
was 6.69%.

Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take prompt corrective action with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are well capitalized, adequately
capitalized, under capitalized, significantly under capitalized and
critically under capitalized. A well capitalized bank has a total
risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio
of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to
any written agreement, order or directive requiring it to maintain a specific
capital level for any capital measure. An adequately capitalized bank has a
total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital
ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if
the bank was rated a composite 1 in its most recent examination report and is
not experiencing significant growth); and does not meet the criteria for a well
capitalized bank. A bank is under capitalized if it fails to meet any one of
the ratios required to be adequately capitalized. State Bank is classified as
well capitalized for purposes of the FDICs prompt corrective action
regulations.

In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from
paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.

-9-





---



##### Table of Contents



As an institutions capital decreases, the FDICs enforcement powers
become more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other restrictions. The
FDIC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver or
conservator.

Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.

Deposit Insurance Assessments.State Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institutions risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to
the regulators. In addition, the FDIC can impose special assessments in certain
instances. The current range of BIF assessments is between 0% and 0.27% of
deposits.

The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for
public comment.

In addition to BIF assessments, banks insured under the BIF are required
to pay a portion of the interest due on bonds that were issued by the Financing
Corporation (FICO) to help shore up the ailing Federal Savings and Loan
Insurance Corporation in 1987. With regard to the assessment for the FICO
obligation, for the first quarter 2003, both the BIF and SAIF rates were
0.0168% of deposits.

Enforcement Powers. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations
and supervisory agreements could subject Texas United or its banking
subsidiaries, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and potentially
substantial civil money penalties. The appropriate federal banking agency may
appoint the FDIC as conservator or receiver for a banking institution (or the
FDIC may appoint itself, under certain circumstances) if any one or more of a
number of circumstances exist, including, without limitation, the fact that the
banking institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized; fails to become adequately capitalized when
required to do so; fails to submit a timely and acceptable capital restoration
plan; or materially fails to implement an accepted capital restoration plan.
The Texas Banking Department also has broad enforcement powers over State Bank,
including the power to impose orders, remove officers and directors, impose
fines and appoint supervisors and conservators.

Brokered Deposit Restrictions. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the
FDIC, and are subject to restrictions on the interest rates that can be paid on
such deposits. Undercapitalized institutions may not accept, renew, or roll
over brokered deposits.

Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 (FIRREA) contains a cross-guarantee provision
which generally makes commonly controlled insured depository institutions
liable to the FDIC for any losses incurred in connection with the failure of a
commonly controlled depository institution.

Community Reinvestment Act. The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their service
area, including low and moderate income neighborhoods, consistent with the safe
and sound operations of the banks. These regulations also provide for
regulatory assessment of a banks record in meeting the needs of its service
area when considering applications to establish branches,

-10-





---



##### Table of Contents



merger applications and applications to acquire the assets and assume the liabilities of another
bank. FIRREA requires federal banking agencies to make public a rating of a
banks performance under the CRA. In the case of a bank holding company, the
CRA performance record of the banks involved in the transaction are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction.

Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, State Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic
Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, and the Fair Housing Act, among others. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers. State Bank must comply with the applicable
provisions of these consumer protection laws and regulations as part of their
ongoing customer relations.

Privacy. In addition to expanding the activities in which banks and bank
holding companies may engage, the Gramm-Leach-Bliley Act also imposed new
requirements on financial institutions with respect to customer privacy. The
Gramm-Leach-Bliley Act generally prohibits disclosure of customer information
to non-affiliated third parties unless the customer has been given the
opportunity to object and has not objected to such disclosure. Financial
institutions are further required to disclose their privacy policies to
customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
Gramm-Leach-Bliley Act.

USA Patriot Act of 2001.The Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
Patriot) Act of 2001 was enacted in October 2001. The USA Patriot Act is
intended to strengthen the ability of U.S. law enforcement and the intelligence
communities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the USA Patriot Act on financial institutions of all kinds
is significant and wide ranging. The USA Patriot Act contains a broad range of
anti-money laundering and financial transparency laws and requires various
regulations, including: (i) due diligence requirements for financial
institutions that administer, maintain, or manage private bank accounts or
correspondent accounts for non-U.S. persons; (ii) standards for verifying
customer identification at account opening; (iii) rules to promote cooperation
among financial institutions, regulators and law enforcement entities in
identifying parties that may be involved in terrorism or money laundering; (iv)
reports by nonfinancial trades and business filed with the Treasury
Departments Financial Crimes Enforcement Network for transactions exceeding
$10,000; and (v) filing of suspicious activities reports involving securities
by brokers and dealers if they believe a customer may be violating U.S. laws
and regulations.

Instability and Regulatory Structure

Various legislation, such as the Gramm-Leach-Bliley Act which expanded the
powers of banking institutions and bank holding companies, and proposals to
overhaul the bank regulatory system and limit the investments that a depository
institution may make with insured funds, is from time to time introduced in
Congress. Such legislation may change banking statutes and the operating
environment of Texas United and its banking subsidiaries in substantial and
unpredictable ways. Texas United cannot determine the ultimate effect that the
Gramm-Leach-Bliley Act will have, or the effect that any potential legislation,
if enacted, or implemented regulations with respect thereto, would have, upon
the financial condition or results of operations of Texas United or its
subsidiaries.

Expanding Enforcement Authority

One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve Board
and FDIC are possessed of extensive authority to police unsafe or unsound
practices and violations of applicable laws and regulations by depository
institutions and their holding companies. For example, the FDIC may terminate
the deposit insurance of any institution which it determines has engaged in an
unsafe or unsound practice. The agencies can also assess civil money
penalties, issue cease and desist or removal orders, seek injunctions, and

-11-





---



##### Table of Contents



publicly disclose such actions. FDICIA, FIRREA and other laws have expanded
the agencies authority in recent years, and the agencies have not yet fully
tested the limits of their powers.

Effect on Economic Environment

The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results
of bank holding companies and their subsidiaries. Among the means available to
the Federal Reserve Board to affect the money supply are open market operations
in U.S. government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.

Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect
of such policies on the business and earnings of Texas United and its
subsidiaries cannot be predicted.

-12-





---



##### Table of Contents






Item 2. Facilities

Texas United conducts business at eighteen full service banking locations
and four loan production offices (LPOs). Texas Uniteds headquarters are
located at 202 W. Colorado Street, La Grange, Texas. Texas United owns all of
the buildings in which its banking centers are located except for the Tomball
banking center and the four LPOs. The lease for the Tomball location expires
in May 2004, not including the five year renewal option period which is
available. Except for the Austin LPO, the lease for the other three LPOs are on
an annual basis. The lease for the Austin LPO expires in May 2005. The
following table sets forth specific information on each such location:

|              |  |                                                 |  |                        |        | 
|------------- |  | ----------------------------------------------- |  | ---------------------- | ------ | 
|              |  |                                                 |  | Deposits at           
|Location      |  | Address                                         |  | December 31, 2002     
|              |  |                                                 |  |                       
|              |  |                                                 |  | (Dollars in thousands)
|La Grange     |  | 202 W. Colorado
La Grange, Texas 78945          |  | $                      | 80,266 | 
|              |  |                                                 |  |                        |        | 
|Flatonia      |  | 205 East South Main
Flatonia, Texas 78941       |  |                        | 36,944 | 
|              |  |                                                 |  |                        |        | 
|Gonzales      |  | 508 St. Louis
Gonzales, Texas 78629             |  |                        | 38,240 | 
|              |  |                                                 |  |                        |        | 
|Weimar        |  | 201 N. Center Street
Weimar, Texas 78962        |  |                        | 11,740 | 
|              |  |                                                 |  |                        |        | 
|New Braunfels |  | 844 North Loop 37
New Braunfels, Texas 78131    |  |                        | 20,641 | 
|              |  |                                                 |  |                        |        | 
|Schulenburg   |  | 301 Bucek St.
Schulenburg, Texas 78956          |  |                        | 18,261 | 
|              |  |                                                 |  |                        |        | 
|Dime Box      |  | Bowes & Highway 141
Dime Box, Texas 77853       |  |                        | 17,990 | 
|              |  |                                                 |  |                        |        | 
|Tomball       |  | 620 W. Main St.
Tomball, Texas 77377-0170       |  |                        | 13,928 | 
|              |  |                                                 |  |                        |        | 
|Pleasanton    |  | 1112 W. Oaklawn Drive
Pleasanton, Texas 78064   |  |                        | 16,641 | 
|              |  |                                                 |  |                        |        | 
|Hempstead     |  | 1250 Austin Street
Hempstead, Texas 77445       |  |                        | 56,978 | 
|              |  |                                                 |  |                        |        | 
|Waller        |  | 31250 FM 2920
Waller, Texas 77484               |  |                        | 35,615 | 
|              |  |                                                 |  |                        |        | 
|Cedar Park    |  | 650 E. Whitestone Blvd.
Cedar Park, Texas 78613 |  |                        | 15,511 | 
|              |  |                                                 |  |                        |        | 
|Austin        |  | 12730 Research Blvd.
Austin, Texas 78759        |  |                        | 7,166  | 
|              |  |                                                 |  |                        |        | 
|Lexington     |  | 8933 N. Hwy 77
Lexington, Texas 78747           |  |                        | 5,190  | 
|              |  |                                                 |  |                        |        | 
|Bryan Main    |  | 2900 Texas Avenue
Bryan, Texas 77802            |  |                        | 62,045 | 
|              |  |                                                 |  |                        |        | 
|Bryan North   |  | 1500 N. Texas Avenue
Bryan, Texas 77803         |  |                        | 5,703  | 

-13-





---



##### Table of Contents



|                     |  |                                                          |  |                        |       |    
|-------------------- |  | -------------------------------------------------------- |  | ---------------------- | ----- | ---
|                     |  |                                                          |  | Deposits at           
|Location             |  | Address                                                  |  | December 31, 2002     
|                     |  |                                                          |  |                       
|                     |  |                                                          |  | (Dollars in thousands)
|College Station      |  | 2202 Longmire
College Station, Texas 77840               |  | $                      | 9,881 |    
|                     |  |                                                          |  |                        |       |    
|Liberty Hill         |  | 101 Bronco Blvd.
Liberty Hill, Texas 78942               |  |                        | 179   | (1)
|                     |  |                                                          |  |                        |       |    
|Dripping Springs LPO |  | 2050 B East Highway 290
Dripping Springs, Texas 78620    |  |                        |      |    
|                     |  |                                                          |  |                        |       |    
|Houston LPO          |  | 7500 San Felipe
Houston, Texas 77063                     |  |                        |      |    
|                     |  |                                                          |  |                        |       |    
|Kingsland LPO        |  | 240 RR 290
Kingsland, Texas 78639                        |  |                        |      |    
|                     |  |                                                          |  |                        |       |    
|Austin LPO           |  | 11921 N. Mopac Expressway,
Suite 100
Austin, Texas 78759 |  |                        |      |    



(1) Opened for business in
December 2002.





Item 3. Legal Proceedings

Texas United and State Bank from time to time are involved in legal
proceedings arising in the normal course of business. Management believes that
neither Texas United nor State Bank is a party to, nor any of their property
the subject of, any material pending or threatened legal proceedings which, if
determined adversely, would have a material adverse effect upon the
consolidated financial condition, results of operations or cash flows of Texas
United.




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

No matters were submitted to a vote of security holders during the fourth
quarter of 2002.




PART II.




Item 5. Market for Common Equity and Related Stockholder Matters

Texas
Uniteds Common Stock began trading on August 1, 2002 and is listed
on the Nasdaq National Market System under the symbol
TXUI. Prior to August
1, 2002, Texas Uniteds Common Stock was not publicly traded, and there was no
active trading market for the Common Stock. As of December 31, 2002, there
were 2,640,044 shares issued and outstanding. As of March 15, 2003, there were
approximately 850 holders of record of the Texas United Common Stock. The
number of beneficial owners is unknown to Texas United at this time.

Since the Common Stock began trading on the Nasdaq National Market, the
high and low closing prices by quarter for the 2002 fiscal year were as
follows:

|                                     |  |      |       |     |  |   |       | 
|------------------------------------ |  | ---- | ----- | --- |  | - | ----- | 
|                                     |  | High |       | Low
|                                     |  |      |       |    
|Fourth quarter                       |  | $    | 21.00 |     |  | $ | 18.25 | 
|Third
quarter (since August 1, 2002) |  |      | 23.00 |     |  |   | 19.00 | 
|Second quarter                       |  |      | N/A   |     |  |   | N/A   | 
|First quarter                        |  |      | N/A   |     |  |   | N/A   | 

Dividends

Holders of Common Stock are entitled to receive dividends when, as and if
declared by Texas Uniteds Board of Directors out of funds legally available
therefor. While Texas United has declared dividends on its

-14-





---



##### Table of Contents



Common Stock since inception in 1998, and paid quarterly dividends aggregating $0.10 per share in
2002 and $0.09 per share in 2001, there is no assurance that Texas United will
continue to pay dividends in the future.

A primary source of cash revenues to Texas United is dividends paid by
State Bank with respect to the Banks capital stock. There are certain
restrictions on the payment of such dividends imposed by federal and state
banking laws, regulations and authorities. Under federal law, the Bank cannot
pay a dividend if it will cause the Bank to be undercapitalized. The Bank is
also subject to risk-based capital rules that restrict its ability to pay
dividends. The risk-based capital rules set a specific schedule for achieving
minimum capital levels in relation to risk-weighted assets. Regulatory
authorities can impose stricter limitations on the ability of the Bank to pay
dividends if the they consider the payment to be an unsafe or unsound practice.

The cash dividends paid per share by quarter for Texas Uniteds last two
fiscal years were as follows:

|               |  |      |      |      |  |   |      | 
|-------------- |  | ---- | ---- | ---- |  | - | ---- | 
|               |  | 2002 |      | 2001
|               |  |      |      |     
|Fourth quarter |  | $    | 0.10 |      |  | $ | 0.10 | 
|Third quarter  |  |      | 0.10 |      |  |   | 0.10 | 
|Second quarter |  |      | 0.10 |      |  |   | 0.08 | 
|First quarter  |  |      | 0.10 |      |  |   | 0.08 | 

Securities Authorized for Issuance Under Equity Compensation Plans

The Company currently has stock options outstanding. The following table
provides information as of December 31, 2002 regarding the Companys equity
compensation plans under which the Companys equity securities are authorized
for issuance:

EQUITY COMPENSATION PLAN INFORMATION

|                                                           |  |                         |         |                     |  |                      |       |                         |  |  |        | 
|---------------------------------------------------------- |  | ----------------------- | ------- | ------------------- |  | -------------------- | ----- | ----------------------- |  |  | ------ | 
|                                                           |  | (a)                     |         | (b)                 |  | (c)                 
|                                                           |  |                         |         |                     |  |                      |       | Number of
Securities   
|                                                           |  |                         |         |                     |  |                      |       | remaining available for
|                                                           |  |                         |         |                     |  |                      |       | future
issuance under  
|                                                           |  | Number of
securities to |         |                     |  | equity compensation 
|                                                           |  | be issued
upon exercise |         | Weighted-average    |  | plans (excluding    
|                                                           |  | of
outstanding options, |         | exercise price of   |  | securities reflected
|Plan category                                              |  | warrants and rights     |         | outstanding options |  | in column (a))      
|                                                           |  |                         |         |                     |  |                     
|Equity compensation
plans approved by
security
holders     |  |                         | 184,993 | (1)                 |  | $                    | 10.37 |                         |  |  | 11,179 | 
|Equity compensation
plans not approved
by security
holders |  |                         | 33,750  |                     |  |                      | 5.78  |                         |  |  |       | 
|                                                           |  |                         |         |                     |  |                      |       |                         |  |  |        | 
|Total                                                      |  |                         | 218,743 |                     |  | $                    | 9.66  |                         |  |  | 11,179 | 



---

| | (1) |  | Includes 1,599 shares which may be issued upon exercise of options
outstanding assumed by Texas United in connection with the acquisition
of The Bryan-College Station Financial Holding Company at a weighted
average exercise price of $27.39.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The shares included under equity compensation plans not approved by
shareholders consist of shares issuable upon the exercise of nonqualified
stock options granted to the President and Chief Executive Officer of Texas
United in 1996 and to an executive officer of State Bank in 1997. The
options are fully vested and terminate ten years from the date of grant.

-15-





---



##### Table of Contents






Item 6. Selected Consolidated Financial Data

The following table summarizes selected consolidated financial data of
Texas United for each fiscal year of the five-year period ended December 31,
2002. The following selected consolidated financial data should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements, including
the notes thereto, included elsewhere herein. You should not assume that the
results of operations for past periods indicate results for any future period.

|                                                             |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | ------------------------------------------ | ------- | ---- |  | --------------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                             |  | As of and for the Years Ended December 31,
|                                                             |  |                                           
|                                                             |  | 2002                                       |         | 2001 |  | 2000                                          |         | 1999 |  | 1998
|                                                             |  |                                            |         |      |  |                                               |         |      |  |     
|                                                             |  |                                            |         |      |  | (Dollars in thousands, except per share data) |         |      |  |     
|Income Statement Data:                                       |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Interest income                                              |  | $                                          | 32,406  |      |  | $                                             | 29,894  |      |  | $    | 25,355  |   |  | $ | 19,664  |   |  | $ | 13,949  |  
|Interest expense                                             |  |                                            | 10,373  |      |  |                                               | 13,064  |      |  |      | 11,482  |   |  |   | 8,314   |   |  |   | 5,888   |  
|                                                             |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net interest income                                          |  |                                            | 22,033  |      |  |                                               | 16,830  |      |  |      | 13,873  |   |  |   | 11,350  |   |  |   | 8,061   |  
|Provision for loan losses                                    |  |                                            | 1,900   |      |  |                                               | 925     |      |  |      | 293     |   |  |   | 188     |   |  |   | 131     |  
|                                                             |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net interest income after provision
for loan losses          |  |                                            | 20,133  |      |  |                                               | 15,905  |      |  |      | 13,580  |   |  |   | 11,162  |   |  |   | 7,930   |  
|Noninterest income                                           |  |                                            | 11,671  |      |  |                                               | 7,865   |      |  |      | 5,308   |   |  |   | 3,852   |   |  |   | 2,471   |  
|Noninterest expense                                          |  |                                            | 25,888  |      |  |                                               | 19,761  |      |  |      | 15,450  |   |  |   | 11,198  |   |  |   | 8,915   |  
|                                                             |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Income before taxes                                          |  |                                            | 5,916   |      |  |                                               | 4,009   |      |  |      | 3,438   |   |  |   | 3,816   |   |  |   | 1,486   |  
|Provision for income taxes                                   |  |                                            | 1,638   |      |  |                                               | 785     |      |  |      | 401     |   |  |   | 642     |   |  |   | 315     |  
|                                                             |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net income                                                   |  | $                                          | 4,278   |      |  | $                                             | 3,224   |      |  | $    | 3,037   |   |  | $ | 3,174   |   |  | $ | 1,171   |  
|                                                             |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Common Share Data (1):                                       |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic earnings per share                                     |  | $                                          | 1.68    |      |  | $                                             | 1.29    |      |  | $    | 1.25    |   |  | $ | 1.32    |   |  | $ | 0.60    |  
|Diluted earnings per share                                   |  |                                            | 1.60    |      |  |                                               | 1.24    |      |  |      | 1.19    |   |  |   | 1.28    |   |  |   | 0.60    |  
|Book value per share                                         |  |                                            | 13.42   |      |  |                                               | 11.02   |      |  |      | 9.93    |   |  |   | 8.31    |   |  |   | 8.33    |  
|Tangible book value per share(2)                             |  |                                            | 9.73    |      |  |                                               | 8.25    |      |  |      | 6.99    |   |  |   | 6.95    |   |  |   | 7.71    |  
|Cash dividends declared per share                            |  |                                            | 0.40    |      |  |                                               | 0.36    |      |  |      | 0.32    |   |  |   | 0.30    |   |  |   | 0.47    |  
|Dividend payout ratio                                        |  |                                            | 24.0    | %    |  |                                               | 27.9    | %    |  |      | 25.6    | % |  |   | 22.7    | % |  |   | 78.3    | %
|Weighted average shares outstanding
(basic) (in thousands)   |  |                                            | 2,551   |      |  |                                               | 2,495   |      |  |      | 2,435   |   |  |   | 2,404   |   |  |   | 1,942   |  
|Weighted average shares outstanding
(diluted) (in thousands) |  |                                            | 2,666   |      |  |                                               | 2,596   |      |  |      | 2,542   |   |  |   | 2,476   |   |  |   | 1,956   |  
|Shares outstanding at end of
period (in thousands)           |  |                                            | 2,640   |      |  |                                               | 2,483   |      |  |      | 2,478   |   |  |   | 2,389   |   |  |   | 2,409   |  
|Balance Sheet Data (at period end):                          |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total assets                                                 |  | $                                          | 587,062 |      |  | $                                             | 453,629 |      |  | $    | 379,562 |   |  | $ | 313,109 |   |  | $ | 258,118 |  
|Securities                                                   |  |                                            | 132,140 |      |  |                                               | 109,877 |      |  |      | 75,831  |   |  |   | 91,869  |   |  |   | 116,422 |  
|Loans (including loans held for sale)                        |  |                                            | 386,315 |      |  |                                               | 274,945 |      |  |      | 239,641 |   |  |   | 173,797 |   |  |   | 114,029 |  
|Allowance for loan losses                                    |  |                                            | 3,296   |      |  |                                               | 1,754   |      |  |      | 1,590   |   |  |   | 1,737   |   |  |   | 1,278   |  
|Total deposits                                               |  |                                            | 452,919 |      |  |                                               | 375,688 |      |  |      | 336,308 |   |  |   | 259,969 |   |  |   | 213,933 |  
|Borrowings and notes payable                                 |  |                                            | 62,945  |      |  |                                               | 39,232  |      |  |      | 9,127   |   |  |   | 27,364  |   |  |   | 16,431  |  
|Total shareholders equity                                   |  |                                            | 35,418  |      |  |                                               | 27,372  |      |  |      | 24,604  |   |  |   | 19,846  |   |  |   | 20,071  |  
|Selected Financial Ratios and Other
Data:                    |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Performance Ratios and Other Data:                           |  |                                            |         |      |  |                                               |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Return on average assets                                     |  |                                            | 0.86    | %    |  |                                               | 0.77    | %    |  |      | 0.90    | % |  |   | 1.14    | % |  |   | 0.47    | %
|Return on average equity                                     |  |                                            | 13.53   |      |  |                                               | 12.07   |      |  |      | 14.18   |   |  |   | 15.61   |   |  |   | 5.62    |  
|Net interest margin(3)                                       |  |                                            | 5.04    |      |  |                                               | 4.68    |      |  |      | 4.70    |   |  |   | 4.56    |   |  |   | 4.02    |  
|Efficiency ratio(4)                                          |  |                                            | 74.99   |      |  |                                               | 72.70   |      |  |      | 73.40   |   |  |   | 70.50   |   |  |   | 82.40   |  

-16-





---



##### Table of Contents



|                                                          |  |                                               |        |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  
|--------------------------------------------------------- |  | --------------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                                          |  | As of and for the Years Ended December 31,   
|                                                          |  |                                              
|                                                          |  | 2002                                          |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                          |  |                                               |        |      |  |      |        |      |  |     
|                                                          |  | (Dollars in thousands, except per share data)
|Asset Quality Ratios(5):                                  |  |                                               |        |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  
|Nonperforming assets to total loans
and other real estate |  |                                               | 0.52   | %    |  |      | 0.20   | %    |  |      | 0.50   | % |  |  | 0.74   | % |  |  | 0.55   | %
|Net loan charge-offs to average loans                     |  |                                               | 0.34   |      |  |      | 0.29   |      |  |      | 0.22   |   |  |  | 0.16   |   |  |  | 0.32   |  
|Allowance for loan losses to total
loans                  |  |                                               | 0.85   |      |  |      | 0.64   |      |  |      | 0.66   |   |  |  | 1.00   |   |  |  | 1.12   |  
|Allowance for loan losses to
nonperforming loans(6)       |  |                                               | 197.48 |      |  |      | 334.73 |      |  |      | 156.80 |   |  |  | 181.50 |   |  |  | 305.01 |  
|Capital Ratios(7):                                        |  |                                               |        |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  
|Leverage ratio                                            |  |                                               | 5.49   | %    |  |      | 6.49   | %    |  |      | 6.82   | % |  |  | 6.07   | % |  |  | 7.15   | %
|Average shareholders equity to
average total assets      |  |                                               | 6.35   |      |  |      | 6.42   |      |  |      | 6.33   |   |  |  | 7.33   |   |  |  | 8.34   |  
|Tier 1 risk-based capital ratio                           |  |                                               | 7.97   |      |  |      | 10.16  |      |  |      | 10.19  |   |  |  | 9.85   |   |  |  | 13.80  |  
|Total risk-based capital ratio                            |  |                                               | 8.83   |      |  |      | 10.80  |      |  |      | 10.84  |   |  |  | 10.78  |   |  |  | 14.79  |  



---

|(1) |  | Adjusted for a five-for-one stock split effective January 15, 2000.                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Calculated by dividing total assets, less total liabilities, goodwill and
deposit premiums, by shares outstanding at end of period.                                                                                                                                                                                                                                                                                        
|   
|(3) |  | Calculated on a tax-equivalent basis using a 34% federal income tax rate.                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) |  | Calculated by dividing total noninterest expense, excluding securities
losses and credit loss provisions, by net interest income plus noninterest
income. The interest expense related to debentures issued by Texas United
in connection with the issuance by a subsidiary trust of trust preferred
securities, is treated as interest expense for this calculation.
Additionally, taxes are not part of this calculation.
|   
|(5) |  | At period end, except for net loan charge-offs to average loans, which is
for periods ended at such dates.                                                                                                                                                                                                                                                                                                                 
|   
|(6) |  | Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans.                                                                                                                                                                                                                                                                                                      
|   
|(7) |  | At period end, except for average shareholders equity to average total
assets, which is for periods ended at such dates.                                                                                                                                                                                                                                                                                                  

-17-





---



##### Table of Contents






Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Managements Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of Texas Uniteds balance sheets and
statements of earnings. This section should be read in conjunction with Texas
Uniteds Consolidated Financial Statements and accompanying notes and other
detailed information appearing elsewhere in this annual report on Form 10-K.

Overview

Net
earnings available to common shareholders for the year ended December
31, 2002 were $4.3 million or $1.60 per share (diluted) compared with $3.2
million or $1.24 per share (diluted) for the year ended December 31, 2001, an
increase of 34.4%. The increase was primarily due to increased net interest
margin, non-interest income, and the acquisition of Bryan-College Station.

Total assets, loans, deposits and shareholders equity increased in each
comparison period. Total assets at December 31, 2002, 2001 and 2000 were
$587.1 million, $453.6 million, and $379.6 million, respectively. Total loans
at December 31, 2002, 2001 and 2000 were $386.3 million, $274.9 million, and
$239.6 million, respectively. Total deposits at December 31, 2002, 2001 and
2000 were $452.9 million, $375.7 million, and $336.3 million, respectively.
Shareholders equity at December 31, 2002, 2001 and 2000 was $35.4 million,
$27.4 million, and $24.6 million, respectively. The return on average assets
for the years ended December 31, 2002, 2001 and 2000 was 0.86%, 0.77%, and
0.90%, respectively. The return on average equity for the years ended December
31, 2002, 2001, and 2000 was 13.53%, 12.07%, and 14.18%, respectively.

Critical Accounting Policies

Texas Uniteds accounting policies are integral to understanding the
results reported. Accounting policies are described in detail in Note A to the
consolidated financial statements in this annual report. Texas United believes
that of its significant accounting policies, the allowance for loan losses and
mortgage servicing rights assets may involve a higher degree of judgment and
complexity.

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

-18-





---



##### Table of Contents



Results of Operations

Net Interest Income

Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of Texas Uniteds
earnings. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
Texas Uniteds net interest income is affected by changes in the amount and mix
of interest-earning assets and interest-bearing liabilities, referred to as a
volume change. It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds, referred to as a rate change.

2002 versus 2001. Net interest income increased from $16.8 million in 2001
to $22.0 million in 2002, a $5.2 million or 31.0% increase. The net interest
margin was 5.04% and 4.68% and the net interest spread was 4.72% and 4.17% for
2002 and 2001, respectively. Due to a lower interest rate environment in 2002,
cost of funds decreased by 144 basis points on higher volume. This was
partially offset by a decrease in yield on average earning assets of 89 basis
points.

2001 versus 2000. Net interest income increased from $13.9 million in
2000 to $16.8 million in 2001, a $2.9 million or 20.9% increase. The net
interest margin was 4.68% and 4.70% and the net interest spread was 4.17% and
3.97% for 2001 and 2000, respectively. Due to a lower interest rate
environment in 2001, cost of funds decreased by 49 basis points on higher
volume. This was partially offset by a decrease in yield on average earning
assets of 28 basis points.

-19-





---



##### Table of Contents



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

|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      |      | 
|------------------------------------ | ------------------------------------------------------------------------------- | ----------------------------------------------- | ------ | ----------------------- | ------- | -------- | ------ | ------- | ------ | ----------- | ---- | -------- | ---- | ------- | ------ | ----------- | ------- | -------- | ------ | ------- | ------ |  | ---- | ----- | ---- |  | ------ | ------- | ------- | - | ------ | ------ | ------ |  | ---- | ---- | ---- | 
|                                     |                                                                                 |                                                 |        | Year Ended December 31,
|                                     |                                                                                 |                                                 |        |                        
|                                     |                                                                                 |                                                 |        |                         |         |          |        | 2002    |        |             |      |          |      |         |        |             |         | 2001     |        |         |        |  |      |       |      |  |        | 2000    |         |   |        |       
|                                     |                                                                                 |                                                 |        |                         |         |          |        |        
|                                     |                                                                                 |                                                 |        | Average                 |         | Interest |        | Average |        | Average     |      | Interest |      | Average |        | Average     |         | Interest |        | Average
|                                     |                                                                                 |                                                 |        | Outstanding             |         | Earned/  |        | Yield/  |        | Outstanding |      | Earned/  |      | Yield/  |        | Outstanding |         | Earned/  |        | Yield/ 
|                                     |                                                                                 |                                                 |        | Balance                 |         | Paid     |        | Rate    |        | Balance     |      | Paid     |      | Rate    |        | Balance     |         | Paid     |        | Rate   
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |        
|                                     |                                                                                 |                                                 |        | (Dollars in thousands) 
|Assets                               |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|Interest-earning assets:             |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|                                     | Loans                                                                           |                                                 | $      | 319,452                 |         |          | $      | 26,569  |        |             |      | 8.32     | %    |         | $      | 264,129     |         |          | $      | 24,486  |        |  |      | 9.27  | %    |  | $      | 204,058 |         |   | $      | 19,998 |        |  |      | 9.80 | %   
|                                     | Taxable securities                                                              |                                                 |        | 95,629                  |         |          |        | 5,027   |        |             |      | 5.26     |      |         |        | 60,428      |         |          |        | 3,895   |        |  |      | 6.45  |      |  |        | 53,257  |         |   |        | 3,465  |        |  |      | 6.51 |     
|                                     | Non-taxable
securities                                                          |                                                 |        | 18,903                  |         |          |        | 759     |        |             |      | 4.02     |      |         |        | 27,441      |         |          |        | 1,154   |        |  |      | 4.21  |      |  |        | 27,448  |         |   |        | 1,230  |        |  |      | 4.48 |     
|                                     | Federal funds sold                                                              |                                                 |        | 2,974                   |         |          |        | 51      |        |             |      | 1.71     |      |         |        | 7,847       |         |          |        | 359     |        |  |      | 4.57  |      |  |        | 10,370  |         |   |        | 662    |        |  |      | 6.38 |     
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|                                     | Total
interest-earning
assets                                                   |                                                 |        | 436,958                 |         |          |        | 32,406  |        |             |      | 7.42     |      |         |        | 359,845     |         |          |        | 29,894  |        |  |      | 8.31  |      |  |        | 295,133 |         |   |        | 25,355 |        |  |      | 8.59 |     
|                                     | Less allowance for
loan losses                                                  |                                                 |        | 2,759                   |         |          |        |         |        |             |      |          |      |         |        | 1,697       |         |          |        |         |        |  |      |       |      |  |        | 1,709   |         |   |        |        |        |  |      |      |     
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|                                     |                                                                                 | Total
interest-earning
assets, net of
allowance |        |                         | 434,199 |          |        |         |        |             |      |          |      |         |        |             | 358,148 |          |        |         |        |  |      |       |      |  |        |         | 293,424 |   |        |        |        |  |      |      |      | 
|Non-earning assets                   |                                                                                 |                                                 | 63,339 |                         |         |          |        |         |        |             |      |          |      |         | 57,997 |             |         |          |        |         |        |  |      |       |      |  | 44,938 |         |         |   |        |        |        |  |      |     
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|                                     |                                                                                 | Total assets                                    |        | $                       | 497,538 |          |        |         |        |             |      |          |      |         |        | $           | 416,145 |          |        |         |        |  |      |       |      |  |        | $       | 338,362 |   |        |        |        |  |      |      |      | 
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|Liabilities and
shareholders equity |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|Interest-bearing
liabilities:        |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|                                     | Interest-bearing
demand deposits                                                |                                                 | $      | 105,237                 |         |          | $      | 1,564   |        |             |      | 1.49     | %    |         | $      | 82,422      |         |          | $      | 1,943   |        |  |      | 2.36  | %    |  | $      | 50,397  |         |   | $      | 1,644  |        |  |      | 3.26 | %   
|                                     | Savings and money
market accounts                                               |                                                 |        | 61,788                  |         |          |        | 909     |        |             |      | 1.47     |      |         |        | 51,753      |         |          |        | 1,348   |        |  |      | 2.60  |      |  |        | 49,151  |         |   |        | 1,498  |        |  |      | 3.05 |     
|                                     | Time deposits                                                                   |                                                 |        | 167,293                 |         |          |        | 5,.584  |        |             |      | 3.34     |      |         |        | 155,418     |         |          |        | 8,192   |        |  |      | 5.27  |      |  |        | 125,254 |         |   |        | 6,827  |        |  |      | 5.45 |     
|                                     | Federal funds
purchased and other
borrowings                                    |                                                 |        | 43,513                  |         |          |        | 1,574   |        |             |      | 3.62     |      |         |        | 19,342      |         |          |        | 789     |        |  |      | 4.08  |      |  |        | 20,842  |         |   |        | 1,326  |        |  |      | 6.36 |     
|                                     | Company obligated
mandatorily
redeemable capital
securities of
subsidiary trust |                                                 |        | 7,000                   |         |          |        | 742     |        |             |      | 10.60    |      |         |        | 7,000       |         |          |        | 792     |        |  |      | 11.31 |      |  |        | 2,206   |         |   |        | 187    |        |  |      | 8.48 |     
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|                                     |                                                                                 | Total
interest-bearing
liabilities              |        |                         | 384,831 |          |        |         | 10,373 |             |      |          | 2.70 |         |        |             | 315,935 |          |        |         | 13,064 |  |      |       | 4.14 |  |        |         | 247,850 |   |        |        | 11,482 |  |      |      | 4.63 | 
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|Noninterest-bearing
liabilities:     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|                                     | Demand deposits                                                                 |                                                 |        | 75,322                  |         |          |        |         |        |             |      |          |      |         |        | 67,611      |         |          |        |         |        |  |      |       |      |  |        | 61,721  |         |   |        |        |        |  |      |      |     
|                                     | Other liabilities                                                               |                                                 |        | 5,775                   |         |          |        |         |        |             |      |          |      |         |        | 5,887       |         |          |        |         |        |  |      |       |      |  |        | 7,375   |         |   |        |        |        |  |      |      |     
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|                                     | Total liabilities                                                               |                                                 |        | 465,928                 |         |          |        |         |        |             |      |          |      |         |        | 389,433     |         |          |        |         |        |  |      |       |      |  |        | 316,946 |         |   |        |        |        |  |      |      |     
|                                     | Shareholders equity                                                            |                                                 |        | 31,610                  |         |          |        |         |        |             |      |          |      |         |        | 26,712      |         |          |        |         |        |  |      |       |      |  |        | 21,416  |         |   |        |        |        |  |      |      |     
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|                                     |                                                                                 | Total liabilities
and shareholders
equity      |        | $                       | 497,538 |          |        |         |        |             |      |          |      |         |        | $           | 416,145 |          |        |         |        |  |      |       |      |  |        | $       | 338,362 |   |        |        |        |  |      |      |      | 
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|Net interest income                  |                                                                                 |                                                 |        |                         |         | $        | 22,033 |         |        |             |      |          |      |         |        |             |         | $        | 16,830 |         |        |  |      |       |      |  |        |         |         | $ | 13,873 |        |        |  |      |     
|                                     |                                                                                 |                                                 |        |                         |         |          |        |         |        |             |      |          |      |         |        |             |         |          |        |         |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |     
|Net interest spread                  |                                                                                 |                                                 |        |                         |         |          |        |         |        |             | 4.72 | %        |      |         |        |             |         |          |        |         |        |  | 4.17 | %     |      |  |        |         |         |   |        |        |        |  | 3.97 | %   
|Net interest margin                  |                                                                                 |                                                 |        |                         |         |          |        |         |        |             | 5.04 | %        |      |         |        |             |         |          |        |         |        |  | 4.68 | %     |      |  |        |         |         |   |        |        |        |  | 4.70 | %   

-20-





---



##### Table of Contents



The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest
rates. For purposes of these tables, changes attributable to both rate and
volume have been allocated proportionately to the change due to volume and
rate.

|                                              |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |       |   |       |       |   |   |        |        |   |   |       |       |  
|--------------------------------------------- | ------------------------------------------------------------------------------------ | - | -------------------------- | ----- | ---- | - | ------ | ------ | -------------------------- | - | ---------------------- | ------ | ----- | - | ----- | ----- | - | - | ------ | ------ | - | - | ----- | ----- | -
|                                              |                                                                                      |   | Years Ended December 31,  
|                                              |                                                                                      |   |                           
|                                              |                                                                                      |   | 2002 vs. 2001              |       |      |   |        |        | 2001 vs. 2000              |   |                        |        |      
|                                              |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |      
|                                              |                                                                                      |   | Increase (Decrease) Due To |       |      |   |        |        | Increase (Decrease) Due To |   |                        |        |      
|                                              |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |      
|                                              |                                                                                      |   | Volume                     |       | Rate |   | Total  |        | Volume                     |   | Rate                   |        | Total
|                                              |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |      
|                                              |                                                                                      |   |                            |       |      |   |        |        |                            |   | (Dollars in thousands) |        |       |   |       |       |   |   |       
|Interest-earning assets:                      |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |       |   |       |       |   |   |        |        |   |   |       |      
|                                              | Loans                                                                                |   | $                          | 4,602 |      |   | $      | (2,519 | )                          |   | $                      | 2,083  |       |   | $     | 5,569 |   |   | $      | (1,081 | ) |   | $     | 4,488 |  
|                                              | Securities                                                                           |   |                            | 1,203 |      |   |        | (466   | )                          |   |                        | 737    |       |   |       | 412   |   |   |        | (58    | ) |   |       | 354   |  
|                                              | Federal funds sold                                                                   |   |                            | (83   | )    |   |        | (225   | )                          |   |                        | (308   | )     |   |       | (115  | ) |   |        | (188   | ) |   |       | (303  | )
|                                              |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |       |   |       |       |   |   |        |        |   |   |       |      
|Total increase (decrease) in interest income  |                                                                                      |   | 5,722                      |       |      |   | (3,210 | )      |                            |   | 2,512                  |        |       |   | 5,866 |       |   |   | (1,327 | )      |   |   | 4,539 |      
|Interest-bearing liabilities:                 |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |       |   |       |       |   |   |        |        |   |   |       |      
|                                              | Interest-bearing demand deposits                                                     |   |                            | 340   |      |   |        | (719   | )                          |   |                        | (379   | )     |   |       | 756   |   |   |        | (457   | ) |   |       | 299   |  
|                                              | Savings and money market accounts                                                    |   |                            | 148   |      |   |        | (587   | )                          |   |                        | (439   | )     |   |       | 68    |   |   |        | (218   | ) |   |       | (150  | )
|                                              | Time deposits                                                                        |   |                            | 397   |      |   |        | (3,005 | )                          |   |                        | (2,608 | )     |   |       | 1,590 |   |   |        | (225   | ) |   |       | 1,365 |  
|                                              | Company obligated mandatorily redeemable
capital      securities of subsidiary trust |   |                            |      |      |   |        | (50    | )                          |   |                        | (50    | )     |   |       | 605   |   |   |        |       |   |   |       | 605   |  
|                                              | Federal funds purchased and other
borrowings                                         |   |                            | 875   |      |   |        | (90    | )                          |   |                        | 785    |       |   |       | (61   | ) |   |        | (476   | ) |   |       | (537  | )
|                                              |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |       |   |       |       |   |   |        |        |   |   |       |      
|Total increase (decrease) in interest expense |                                                                                      |   | 1,760                      |       |      |   | (4,451 | )      |                            |   | (2,691                 | )      |       |   | 2,958 |       |   |   | (1,376 | )      |   |   | 1,582 |      
|                                              |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |       |   |       |       |   |   |        |        |   |   |       |      
|Increase (decrease) in net interest income    |                                                                                      | $ | 3,962                      |       |      | $ | 1,241  |        |                            | $ | 5,203                  |        |       | $ | 2,908 |       |   | $ | 49     |        |   | $ | 2,957 |      
|                                              |                                                                                      |   |                            |       |      |   |        |        |                            |   |                        |        |       |   |       |       |   |   |        |        |   |   |       |       |  

Provision for Loan Losses

Provisions for loan losses are charged to income to bring the total
allowance for loan losses to a level deemed appropriate by management of Texas
United based on such factors as historical loss experience, the volume and type of
lending conducted by Texas United, the amount of nonperforming assets,
regulatory policies, generally accepted accounting principles, general economic
conditions and other factors related to the collectibility of loans in Texas
Uniteds portfolio.

For the years ended December 31, 2002, 2001 and 2000, Texas United
recorded provisions for loan losses of $1.9 million, $925,000, and $293,000,
respectively. Texas United increased its provisions made in 2002 primarily due
to growth in the loan portfolio, changes in the Central Texas economy and the
increase of $337,000 in net loan charge-offs in 2002 compared with 2001. Texas
United increased its provisions made in 2001 primarily due to growth in the
loan portfolio, changes in the Central Texas economy and the increase of
$321,000 in net loan charge-offs in 2001 compared with 2000.

Noninterest Income

Texas Uniteds primary sources of recurring noninterest income are service
charges and fee income on deposit accounts and mortgage servicing income. Texas
United also has nonrecurring income derived from net gains on the
sale of securities. Noninterest income for the year ended December 31, 2002
was $11.7 million, an increase of $3.8 million or 48.1% from $7.9 million in
2001. The increase was primarily due to an increase in fees resulting from a
larger deposit base over which fees were collected and an increased fee
structure to coincide with competition and increases in mortgage
servicing income and gains on securities sales. For the year ended December 31, 2002,
mortgage servicing income was $2.4 million, an increase of $1.4 million or
140.0% from $1.0 million in 2001. The increase was primarily due to the addition
of $54.2 million in the servicing portfolio as a result of selling mortgage
loans where servicing is retained. Net gains on the sale of securities for the
year ended December 31, 2002 was $1.5 million, an increase of $1.3 million or
507.8% from $256,000 in 2001 primarily due to the
repositioning of the investment portfolio to shorten the duration and take
advantage of holding gains.

-21-





---



##### Table of Contents



Noninterest income was $7.9 million for the year ended December 31, 2001
compared with $5.3 million for the year ended December 31, 2000, an increase of
$2.6 million or 49.1%, which also resulted from a larger deposit base. For the
year ended December 31, 2001, mortgage servicing income was $1.0 million, an
increase of $540,000 or 116.9% from $462,000 in 2000. The increase is primarily
due to the addition of $46.4 million in the servicing portfolio through the
sale of mortgage loans where servicing is retained.

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

|                                      |                          |   |                          |        |      |   |       |       |  |   |       |       | 
|------------------------------------- | ------------------------ | - | ------------------------ | ------ | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                      |                          |   | Years Ended December 31,
|                                      |                          |   |                         
|                                      |                          |   | 2002                     |        | 2001 |   | 2000 
|                                      |                          |   |                          |        |      |   |      
|                                      |                          |   | (Dollars in thousands)  
|Service charges on deposit accounts   |                          | $ | 5,826                    |        |      | $ | 4,555 |       |  | $ | 3,581 |      
|Mortgage servicing income             |                          |   | 2,359                    |        |      |   | 1,002 |       |  |   | 462   |      
|Net gain (loss) on sale of
securities |                          |   | 1,457                    |        |      |   | 340   |       |  |   | (44   | )    
|Other noninterest income              |                          |   | 2,029                    |        |      |   | 1,968 |       |  |   | 1,309 |      
|                                      |                          |   |                          |        |      |   |       |       |  |   |       |      
|                                      | Total noninterest income |   | $                        | 11,671 |      |   | $     | 7,865 |  |   | $     | 5,308 | 
|                                      |                          |   |                          |        |      |   |       |       |  |   |       |      

Noninterest Expense

For the years ended December 31, 2002, 2001 and 2000, noninterest expense
totaled $25.9 million, $19.8 million, and $15.5 million, respectively. The
30.8% increase in 2002 was primarily the result of start-up costs associated
with new lending programs, the opening of the Trust department, conversion
costs and enhancements to the data processing system, increased marketing
costs, and merger related expenses in connection with the Bryan-College Station
acquisition. An impairment charge of $446,000 was recorded in 2002 and
included in mortgage servicing expense. The impairment of mortgage servicing
rights is due to the decline in mortgage interest rates to historically low
levels which resulted in an increase in prepayments of mortgages which are
serviced by Texas United and which led to increased loan refinancing and new
loan activity. The $664,000 increase in data processing costs was due to the
migration of the former Central Texas Banks financial and
operating data onto State Banks platforms and enhancements and upgrades
to the entire data processing system.

The 27.7% increase in 2001 was primarily the result of the opening of
additional banking centers in Lexington in June 2001, Austin in January 2001
and Cedar Park in June 2000. Texas Uniteds efficiency ratios, calculated by
dividing total noninterest expenses (excluding securities losses) by net
interest income plus noninterest income, were 74.99% in 2002, 72.70% in 2001
and 73.40% in 2000.

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

|                                   |  |                               |                            |  |                          |        |       |  |       |        |       |  |       |        | 
|---------------------------------- |  | ----------------------------- | -------------------------- |  | ------------------------ | ------ | ----- |  | ----- | ------ | ----- |  | ----- | ------ | 
|                                   |  |                               |                            |  | Years Ended December 31,
|                                   |  |                               |                            |  |                         
|                                   |  |                               |                            |  | 2002                     |        | 2001  |  | 2000 
|                                   |  |                               |                            |  |                          |        |       |  |      
|                                   |  |                               |                            |  | (Dollars in thousands)  
|Employee compensation and benefits |  | $                             | 12,602                     |  |                          | $      | 9,877 |  |       | $      | 7,940 | 
|Non-staff expenses:                |  |                               |                            |  |                          |        |       |  |       |        |       | 
|                                   |  | Net occupancy expense         |                            |  | 1,744                    |        |       |  | 1,063 |        |       |  | 890   |       
|                                   |  | Depreciation and amortization |                            |  | 1,621                    |        |       |  | 1,330 |        |       |  | 834   |       
|                                   |  | Legal and professional fees   |                            |  | 330                      |        |       |  | 393   |        |       |  | 293   |       
|                                   |  | Data processing               |                            |  | 1,041                    |        |       |  | 377   |        |       |  | 404   |       
|                                   |  | Goodwill amortization         |                            |  |                         |        |       |  | 508   |        |       |  | 287   |       
|                                   |  | Advertising                   |                            |  | 1,159                    |        |       |  | 500   |        |       |  | 320   |       
|                                   |  | Mortgage servicing
expense    |                            |  | 831                      |        |       |  | 120   |        |       |  | 187   |       
|                                   |  | Other                         |                            |  | 6,560                    |        |       |  | 5,593 |        |       |  | 4,295 |       
|                                   |  |                               |                            |  |                          |        |       |  |       |        |       | 
|                                   |  |                               | Total non-staff expenses   |  |                          | 13,286 |       |  |       | 9,884  |       |  |       | 7,510  | 
|                                   |  |                               |                            |  |                          |        |       |  |       |        |       | 
|                                   |  |                               | Total noninterest expenses |  | $                        | 25,888 |       |  | $     | 19,761 |       |  | $     | 15,450 | 
|                                   |  |                               |                            |  |                          |        |       |  |       |        |       | 

Employee compensation and benefits expense for the year ended December 31,
2002 was $12.6 million, an increase of $2.7 million or 27.3% over the $9.9
million for 2001. The increase was primarily due to the staffing of new
business lines, the opening of the Trust department, the opening of the Liberty
Hill, Texas banking center, and

-22-





---



##### Table of Contents



the acquisition of Bryan-College
Station. Employee compensation and benefits expense for the year ended December 31, 2001
was $9.9 million, an increase of $2.0 million or 25.3% over the $7.9 million
for 2000. The increase was due primarily to the opening of banking centers in
Austin and Lexington, Texas and the full-year effect from the banking centers that
were acquired or opened during 2000. The number of full-time equivalent
employees was 315 at December 31, 2002 compared with 233 at December 31, 2001,
an increase of 35.2%.

Non-staff expenses for the year ended December 31, 2002 were $13.3
million, an increase of $3.4 million or 34.3% over the $9.9 million for 2001.
Non-staff expenses for the year ended December 31, 2001 were $9.9 million, an
increase of $2.4 million or 32.0% over $7.5 million for 2000. The increase
during both periods was primarily due to acquisitions, opening new banking
centers and the Trust department, and increased marketing and data processing
costs as discussed above.

The State of Texas imposes a franchise tax. The franchise tax due is
computed based on the greater of net taxable capital or net taxable earned
surplus. In each year, Texas Uniteds franchise tax was paid based upon net
taxable capital. Total franchise tax expense, which was included as part of
other noninterest expense, was $27,800 in 2002, $42,000 in 2001,and $37,000 in
2000.

Income Taxes

Federal income tax is reported as income tax expense and is influenced by
the amount of taxable income, the amount of tax-exempt income, the amount of
nondeductible interest expense and the amount of other non-deductible expense.
Income tax expense increased approximately $853,000 to $1.6 million for the
year ended December 31, 2002 from $785,000 for 2001. The increase was primarily
attributable to increased taxable income derived from service fees and mortgage
servicing rights, and decreased tax-exempt income from municipal securities.
Income tax expense in 2000 was $401,000. The effective tax rates in 2002, 2001
and 2000 were 27.7%, 19.6%, and 11.7%, respectively. Fluctuations in the
effective rate are primarily due to changes in the amount of tax-exempt income.

Since total assets exceeded $500 million as of December 31, 2002, Texas
United was considered a large bank for federal income tax purposes. As a
result, Texas United was required to change its method for determining the tax
allowance for loan losses from the experience method to the direct write-off
method. As a result of this change, Texas United was required to recognize
income on the current allowance for loan losses for tax purposes. Under the
current federal tax law, Texas United will be allowed to recognize the income
incrementally over a four-year period.

Impact of Inflation

The effects of inflation on the local economy and on Texas Uniteds
operating results have been relatively modest for the past several years. Since
substantially all of Texas Uniteds assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. Texas United tries
to control the impact of interest rate fluctuations by managing the
relationship between its interest rate sensitive assets and liabilities. See
Interest Rate Sensitivity and Market Risk below.

Goodwill Amortization

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, (SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible
Assets(SFAS No. 142). SFAS No. 141 requires that the purchase method of
accounting be used for all future business combinations. SFAS No. 141
specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their

-23-





---



##### Table of Contents



estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and subsequently, SFAS No. 144.

The provisions of SFAS No. 141 became effective as of July 1, 2001, and
Texas United adopted the provisions of SFAS No. 142 as of January 1, 2002.

As of the date of adoption of SFAS No. 142, Texas United had goodwill of
approximately $6.9 million. No impairment was noted at the date of adoption of
SFAS No. 142. Amortization expense related to goodwill was $0, $508,000 and
$287,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

-24-





---



##### Table of Contents



Financial Condition

Loan Portfolio

Texas United provides a broad range of commercial, real estate and
consumer loan products to small and medium-sized businesses and individuals.
Total loans were $386.3 million at December 31, 2002, an increase of $111.4
million or 40.5% from $274.9 million at December 31, 2001. Loan growth
occurred primarily in mortgage loans and from the acquisition of Bryan-College
Station. Texas United acquired $57.8 million in loans in connection with the
Bryan-College Station acquisition. This represents 51.9% of the total loan
growth from 2002 compared to 2001. Loans comprised 88.4% of average earning
assets at December 31, 2002 compared with 76.4% at December 31, 2001.

Total loans increased by $35.3 million or 14.7% to $274.9
million at December 31, 2001 from $239.6 million at December 31, 2000.

The following table summarizes the loan portfolio of Texas United by type
of loan at the periods indicated:

|                          |                        |   |              |         |         |  |                        |       |         |   |        |         |  |  |      |       |  
|------------------------- | ---------------------- | - | ------------ | ------- | ------- |  | ---------------------- | ----- | ------- | - | ------ | ------- |  |  | ---- | ----- | -
|                          |                        |   | December 31,
|                          |                        |   |             
|                          |                        |   | 2002         |         | 2001   
|                          |                        |   |              |         |        
|                          |                        |   | Amount       |         | Percent |  | Amount                 |       | Percent
|                          |                        |   |              |         |         |  |                        |       |        
|                          |                        |   |              |         |         |  | (Dollars in thousands) |       |         |   |       
|Commercial and industrial |                        | $ | 62,391       |         |         |  | 16.2                   | %     |         | $ | 53,401 |         |  |  | 19.4 | %    
|Real estate:              |                        |   |              |         |         |  |                        |       |         |   |        |         |  |  |      |      
|                          | 1-4 family residential |   |              | 149,471 |         |  |                        | 38.7  |         |   |        | 114,663 |  |  |      | 41.7  |  
|                          | Commercial mortgages   |   |              | 62,014  |         |  |                        | 16.0  |         |   |        | 35,886  |  |  |      | 13.1  |  
|                          | Held for sale          |   |              | 33,674  |         |  |                        | 8.7   |         |   |        | 817     |  |  |      | 0.3   |  
|                          | Other                  |   |              | 18,269  |         |  |                        | 4.7   |         |   |        | 23,970  |  |  |      | 8.7   |  
|Consumer                  |                        |   | 60,496       |         |         |  | 15.7                   |       |         |   | 46,208 |         |  |  | 16.8 |      
|                          |                        |   |              |         |         |  |                        |       |         |   |        |         |  |  |      |      
|                          | Total loans            |   | $            | 386,315 |         |  |                        | 100.0 | %       |   | $      | 274,945 |  |  |      | 100.0 | %
|                          |                        |   |              |         |         |  |                        |       |         |   |        |         |  |  |      |      
|Allowance for loan losses |                        |   | 3,296        |         |         |  |                        |       |         |   | 1,754  |         |  |  |      |      
|                          |                        |   |              |         |         |  |                        |       |         |   |        |         |  |  |      |      
|                          | Net loans              |   | $            | 383,019 |         |  |                        |       |         |   | $      | 273,191 |  |  |      |       |  
|                          |                        |   |              |         |         |  |                        |       |         |   |        |         |  |  |      |      

|                          |                        |   |                        |         |         |  |        |       |         |   |        |         |         |  |      |       |   |   |        |         |  |  |      |       |  
|------------------------- | ---------------------- | - | ---------------------- | ------- | ------- |  | ------ | ----- | ------- | - | ------ | ------- | ------- |  | ---- | ----- | - | - | ------ | ------- |  |  | ---- | ----- | -
|                          |                        |   | December 31,          
|                          |                        |   |                       
|                          |                        |   | 2000                   |         | 1999    |  | 1998  
|                          |                        |   |                        |         |         |  |       
|                          |                        |   | Amount                 |         | Percent |  | Amount |       | Percent |   | Amount |         | Percent
|                          |                        |   |                        |         |         |  |        |       |         |   |        |         |        
|                          |                        |   | (Dollars in thousands)
|Commercial and industrial |                        | $ | 49,955                 |         |         |  | 20.8   | %     |         | $ | 32,165 |         |         |  | 18.5 | %     |   | $ | 19,433 |         |  |  | 17.0 | %    
|Real estate:              |                        |   |                        |         |         |  |        |       |         |   |        |         |         |  |      |       |   |   |        |         |  |  |      |      
|                          | 1-4 family residential |   |                        | 78,404  |         |  |        | 32.7  |         |   |        | 51,786  |         |  |      | 29.8  |   |   |        | 41,562  |  |  |      | 36.5  |  
|                          | Commercial mortgages   |   |                        | 31,753  |         |  |        | 13.3  |         |   |        | 25,018  |         |  |      | 14.4  |   |   |        | 15,281  |  |  |      | 13.4  |  
|                          | Held for sale          |   |                        | 3,669   |         |  |        | 1.5   |         |   |        | 3,587   |         |  |      | 2.1   |   |   |        | 3,332   |  |  |      | 2.9   |  
|                          | Other                  |   |                        | 28,642  |         |  |        | 12.0  |         |   |        | 18,449  |         |  |      | 10.6  |   |   |        | 8,450   |  |  |      | 7.4   |  
|Consumer                  |                        |   | 47,218                 |         |         |  | 19.7   |       |         |   | 42,792 |         |         |  | 24.6 |       |   |   | 25,971 |         |  |  | 22.8 |      
|                          |                        |   |                        |         |         |  |        |       |         |   |        |         |         |  |      |       |   |   |        |         |  |  |      |      
|                          | Total loans            |   | $                      | 239,641 |         |  |        | 100.0 | %       |   | $      | 173,797 |         |  |      | 100.0 | % |   | $      | 114,029 |  |  |      | 100.0 | %
|                          |                        |   |                        |         |         |  |        |       |         |   |        |         |         |  |      |       |   |   |        |         |  |  |      |      
|Allowance for loan losses |                        |   | 1,590                  |         |         |  |        |       |         |   | 1,737  |         |         |  |      |       |   |   | 1,278  |         |  |  |      |      
|                          |                        |   |                        |         |         |  |        |       |         |   |        |         |         |  |      |       |   |   |        |         |  |  |      |      
|                          | Net loans              |   | $                      | 238,051 |         |  |        |       |         |   | $      | 172,060 |         |  |      |       |   |   | $      | 112,751 |  |  |      |       |  
|                          |                        |   |                        |         |         |  |        |       |         |   |        |         |         |  |      |       |   |   |        |         |  |  |      |      

The primary lending focus of Texas United is on one to four family
residential mortgage loans to individuals and loans to small and medium-sized
businesses. Texas United offers business loans, commercial, real estate loans,
equipment loans, working capital loans, term loans, revolving lines of credit
and letters of credit. Most commercial loans are collateralized and on payment
programs. The purpose of a particular loan generally determines its structure.
In almost all cases, Texas United requires personal guarantees on commercial
loans to help assure repayment.

Commercial

Texas Uniteds commercial loans are primarily made within its market area
and are underwritten on the basis of the borrowers ability to service the debt
from income. As a general practice, Texas United takes as collateral a lien on
any available real estate, equipment, or other assets owned by the borrower and
obtains the personal guaranty of the borrower. In general, commercial
loans involve more credit risk than residential mortgage

-25-





---



##### Table of Contents



loans and commercial
mortgage loans and, therefore, usually yield a higher return. The increased
risk in commercial loans is due to the type of collateral securing these loans.
The increased risk also derives from the expectation that commercial loans
generally will be serviced principally from the operations of the business, and
those operations may not be successful. Historical trends have shown these
types of loans to have higher delinquencies than mortgage loans. As a result of
these additional complexities, variables and risks, commercial loans require
more thorough underwriting and servicing than other types of loans.

In addition to commercial loans secured by real estate, Texas United makes
commercial mortgage loans to finance the purchase of real property, which
generally consists of real estate with completed structures. Commercial
mortgage lending typically involves higher loan principal amounts and the
repayment of loans is dependent, in large part, on sufficient income from the
properties securing the loans to cover operating expenses and debt service. As
a general practice, Texas United requires its commercial mortgage loans to be
secured by well-managed income producing property with adequate margins and to
be guaranteed by responsible parties. Texas United looks for opportunities
where cash flow from the collateral provides adequate debt service coverage and
the guarantors net worth is centered on assets other than the project Texas
United is financing.

In underwriting commercial mortgage loans, Texas United considers the
propertys operating history, future operating projections, current and
projected occupancy, location and physical condition. The underwriting analysis
also includes credit checks, appraisals and a review of the financial condition
of the borrower.

Texas Uniteds commercial mortgage loans are generally secured by first
liens on real estate, typically have fixed interest rates and amortize over a
10 to 15 year period with balloon payments due at the end of one to nine years.
Payments on loans secured by such properties are often dependent on the
successful operation or management of the properties. Accordingly, repayment of
these loans may be subject to adverse conditions in the real estate market or
the economy to a greater extent than other types of loans.

One to Four Family Residential Mortgage

A significant portion of Texas Uniteds lending activity has consisted of
the origination of 1-4 family residential mortgage loans collateralized by
owner-occupied properties located in its market areas. Texas United offers a
variety of mortgage loan products which generally are amortized over five to 25
years. Loans collateralized by 1-4 family residential real estate generally
have been originated in amounts of no more than 90% of the lower of cost or
appraised value or have mortgage insurance. Of the mortgage loans originated,
Texas United generally retains shorter-term loans with variable rates and sells
longer-term fixed-rate loans to Fannie Mae and retains the servicing. As of
December 31, 2002, Texas Uniteds one to four family real estate loan portfolio
was $149.5 million. A significant portion of this amount is repriceable after
one year.

Texas United retains a valid lien on real estate and obtains a title
insurance policy that insures that the property is free of encumbrances. Texas
United also requires hazard insurance in the amount of the loan and, if the
property is in a flood plain as designated by the Department of Housing and
Urban Development, Texas United also requires flood insurance. Texas United
also requires most borrowers to advance funds on a monthly basis from which it
makes disbursements for items such as real estate taxes, private mortgage
insurance and hazard insurance.

Construction

Texas United also makes loans to finance the construction of residential
and, to a limited extent, nonresidential properties. Construction loans
generally are secured by first liens on real estate. Texas United conducts
periodic inspections, either directly or through an agent, prior to approval of
periodic draws on these loans. Underwriting guidelines similar to those
described above are also used in Texas
Uniteds construction lending activities. In keeping with the
community-oriented nature of its customer base, Texas United provides
construction and permanent financing for churches located within its market
area. Construction loans involve additional risks attributable to the fact that
loan funds are advanced upon the security of a project under construction, and
the project is of uncertain value prior to its completion. Because of
uncertainties inherent in estimating construction costs, the market value of
the completed project and the effects of governmental regulation on real
property, it can be difficult to accurately evaluate the total funds required
to complete a project and the related loan to value ratio. As a result of these
uncertainties, construction lending often involves the disbursement of
substantial funds with repayment

-26-





---



##### Table of Contents



dependent, in part, on the success of the
ultimate project rather than the ability of a borrower or guarantor to repay
the loan. If Texas United is forced to foreclose on a project prior to
completion, there is no assurance that it will be able to recover all of the
unpaid portion of the loan. In addition, Texas United may be required to fund
additional amounts to complete a project and may have to hold the property for
an indeterminate period of time. While Texas United has underwriting procedures
designed to identify what it believes to be acceptable levels of risks in
construction lending, it can give no assurance that these procedures will
prevent losses from the risks described above.

Consumer

Texas United provides a wide variety of consumer loans including motor
vehicle, watercraft, education, personal (collateralized and uncollateralized)
and deposit account collateralized loans. The terms of these loans typically
range from 12 to 72 months and vary based upon the nature of collateral and
size of loan. Consumer loans entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the outstanding loan balance. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrowers continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws may limit the amount which can be recovered on
such loans. As of December 31, 2002, Texas United had $3.2 million in indirect
consumer loans comprised of the Second Chance sub-prime loan portfolio acquired
from Bryan-College Station. Texas United personally has initiated very few
indirect consumer loans, indicating a preference to maintain personal banking
relationships and strict underwriting standards. Installment loans have
decreased during the last five years, reflecting managements tight control of
consumer credit due to record high personal bankruptcy filings nationwide.

Underwriting Strategy

Texas United rarely makes loans at its legal lending limit. Lending
officers are assigned various levels of loan approval authority based upon
their respective levels of experience and expertise. Texas Uniteds strategy
for approving or disapproving loans is to follow conservative loan policies and
underwriting practices which include:



| |  |  | granting loans on a sound and collectible basis;                                                                                                                                                                                                                                          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | investing funds properly for the benefit of stockholders and the
protection of depositors;                                                                                                                                                                                                
|
| |  |  | serving the legitimate needs of the community and Texas Uniteds
general market area while obtaining a balance between maximum
yield and minimum risk;                                                                                                                                    
|
| |  |  | ensuring that primary and secondary sources of repayment are
adequate in relation to the amount of the loan;                                                                                                                                                                              
|
| |  |  | developing and maintaining adequate diversification of the loan
portfolio as a whole and of the loans within each category; and                                                                                                                                                           
|
| |  |  | ensuring that each loan is properly documented and, if
appropriate, insurance coverage is adequate. Texas Uniteds loan
review and compliance personnel interact daily with commercial,
mortgage and consumer lenders to identify potential underwriting
or technical exception variances.

In addition, Texas United has placed increased emphasis on the early
identification of problem loans to aggressively seek resolution of the
situations and thereby keep loan losses at a minimum.

-27-





---



##### Table of Contents



The contractual maturity ranges of each of the primary categories of Texas
Uniteds loan portfolio and the amount of such loans with predetermined
interest rates and floating interest rates in each maturity range as of
December 31, 2002 are summarized in the following table:

|                                         |       |   |                   |         |            |   |                        |         |       |   |        |        |  |   |         |         | 
|---------------------------------------- | ----- | - | ----------------- | ------- | ---------- | - | ---------------------- | ------- | ----- | - | ------ | ------ |  | - | ------- | ------- | 
|                                         |       |   | December 31, 2002
|                                         |       |   |                  
|                                         |       |   |                   |         |            |   | After One              |         |       |   |        |        |  |   |        
|                                         |       |   | One Year          |         | Through    |   | After                  |         |       |   |       
|                                         |       |   | Or Less           |         | Five Years |   | Five Years             |         | Total
|                                         |       |   |                   |         |            |   |                        |         |      
|                                         |       |   |                   |         |            |   | (Dollars in thousands) |         |       |   |       
|Commercial and industrial                |       | $ | 51,716            |         |            | $ | 10,502                 |         |       | $ | 173    |        |  | $ | 62,391  |        
|Real estate                              |       |   | 104,632           |         |            |   | 106,690                |         |       |   | 52,106 |        |  |   | 263,428 |        
|Consumer                                 |       |   | 31,975            |         |            |   | 28,116                 |         |       |   | 405    |        |  |   | 60,496  |        
|                                         |       |   |                   |         |            |   |                        |         |       |   |        |        |  |   |         |        
|                                         | Total |   | $                 | 188,323 |            |   | $                      | 145,308 |       |   | $      | 52,684 |  |   | $       | 386,315 | 
|                                         |       |   |                   |         |            |   |                        |         |       |   |        |        |  |   |         |        
|Loans with a predetermined interest rate |       | $ | 84,224            |         |            | $ | 70,795                 |         |       | $ | 51,210 |        |  | $ | 206,229 |        
|Loans with a floating interest rate      |       |   | 104,099           |         |            |   | 74,513                 |         |       |   | 1,474  |        |  |   | 180,086 |        
|                                         |       |   |                   |         |            |   |                        |         |       |   |        |        |  |   |         |        
|                                         | Total |   | $                 | 188,323 |            |   | $                      | 145,308 |       |   | $      | 52,684 |  |   | $       | 386,315 | 
|                                         |       |   |                   |         |            |   |                        |         |       |   |        |        |  |   |         |        

Nonperforming Assets

Texas United has several procedures in place to assist it in maintaining
the overall quality of its loan portfolio. Texas United has established
underwriting guidelines to be followed by its officers and also monitors its
delinquency levels for any negative or adverse trends. There can be no
assurance, however, that Texas Uniteds loan portfolio will not become subject
to increasing pressures from deteriorating borrower credit due to general
economic conditions.

Nonperforming assets were $2.0 million at December 31, 2002 compared with
$562,000 at December 31, 2001, an increase of $1.4 million or 249.1%. The
increase was primarily due to the $739,000 nonperforming assets acquired from
Bryan-College Station and a deterioration in the Central Texas economy.
Nonperforming assets were $562,000 at December 31, 2001 compared to $1.2
million at December 31, 2000, a decrease of $640,000 or 53.2%. The decrease was
primarily due to the charge-off of loans and the sale of other real estate. The
ratio of nonperforming assets to total loans and other real estate was 0.52%,
0.20% and 0.50% at December 31, 2002, 2001, and 2000, respectively.

Texas United generally places a loan on nonaccrual status and ceases to
accrue interest when loan payment performance is deemed unsatisfactory. Loans
where the interest payments jeopardize the collection of principal are placed
on nonaccrual status, unless the loan is both well-secured and in the process
of collection. Cash payments received while a loan is classified as nonaccrual
are recorded as a reduction of principal as long as doubt exists as to
collection. While Texas United is sometimes required to revise a loans
interest rate or repayment terms in a troubled debt restructuring, Texas United
had no restructured loans at December 31, 2002, 2001 and 2000. In addition to an internal
loan review, Texas United retains TIB Service Company for an annual external
review to evaluate the loan portfolio.

Texas United maintains current appraisals on loans secured by real estate,
particularly those categorized as nonperforming loans and potential problem
loans. In instances where updated appraisals
reflect reduced collateral values, an evaluation of the borrowers overall
financial condition is made to determine the need, if any, for possible
writedowns or appropriate additions to the allowance for loan losses. Texas
United records other real estate at the lower of book value or fair value at
the time of acquisition, less estimated costs to sell.

Texas United has adopted SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting for Creditors for
Impairment of a Loan-Income Recognition and Disclosures. Under SFAS No. 114, as
amended, a loan is considered impaired based on current information and events
if it is probable that Texas United will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. The measurement of impaired loans is based on the
present value of expected future cash flows discounted at the loans effective
interest rate or the loans observable market price or

-28-





---



##### Table of Contents



based on the fair value
of the collateral if the loan is collateral-dependent. The implementation of
SFAS No. 114 did not have a material adverse affect on Texas Uniteds financial
statements.

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

|                                                          |                            |   |              |       |      |   |                        |     |      |   |      |       |  |   |      |       |  |   |      |     | 
|--------------------------------------------------------- | -------------------------- | - | ------------ | ----- | ---- | - | ---------------------- | --- | ---- | - | ---- | ----- |  | - | ---- | ----- |  | - | ---- | --- | 
|                                                          |                            |   | December 31,
|                                                          |                            |   |             
|                                                          |                            |   | 2002         |       | 2001 |   | 2000                   |     | 1999 |   | 1998
|                                                          |                            |   |              |       |      |   |                        |     |      |   |     
|                                                          |                            |   |              |       |      |   | (Dollars in thousands) |     |      |   |     
|Nonaccrual loans                                          |                            | $ | 709          |       |      | $ | 380                    |     |      | $ | 680  |       |  | $ | 656  |       |  | $ | 244  |    
|Accruing loans past due 90 days or more                   |                            |   | 960          |       |      |   | 144                    |     |      |   | 334  |       |  |   | 301  |       |  |   | 175  |    
|Restructured loans                                        |                            |   |             |       |      |   |                       |     |      |   |     |       |  |   |     |       |  |   |     |    
|Other real estate                                         |                            |   | 356          |       |      |   | 38                     |     |      |   | 188  |       |  |   | 321  |       |  |   | 208  |    
|                                                          |                            |   |              |       |      |   |                        |     |      |   |      |       |  |   |      |       |  |   |      |    
|                                                          | Total nonperforming assets |   | $            | 2,025 |      |   | $                      | 562 |      |   | $    | 1,202 |  |   | $    | 1,278 |  |   | $    | 627 | 
|                                                          |                            |   |              |       |      |   |                        |     |      |   |      |       |  |   |      |       |  |   |      |    
|Nonperforming assets to total loans
and other
real estate |                            |   | 0.52         | %     |      |   | 0.20                   | %   |      |   | 0.50 | %     |  |   | 0.74 | %     |  |   | 0.55 | %  

Allowance for Loan Losses

The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Management has
established an allowance for loan losses, which it believes, is adequate for
estimated losses in Texas Uniteds loan portfolio. Based on an evaluation of
the loan portfolio, management presents a quarterly review of the allowance for
loan losses to Texas Uniteds Board of Directors, indicating any change in the
allowance since the last review and any recommendations as to adjustments in
the allowance. In making its evaluation, management considers the
diversification by industry of Texas Uniteds commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio of
current economic indicators and their probable impact on borrowers, the amount
of charge-offs for the period, the amount of nonperforming loans and related
collateral security, and the evaluation of its loan portfolio by the annual
external loan review. Charge-offs occur when loans are deemed to be
uncollectible.

In originating loans, Texas United recognizes that loan losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. Texas United maintains an
allowance for loan losses based upon, among other things, historical
experience, the volume and type of lending conducted by Texas United, the
amount of nonperforming assets, regulatory policies, generally accepted
accounting principles, general economic conditions and other factors related to
the collectibility of loans in Texas Uniteds portfolio.

Texas United has several systems in place to assist in maintaining the
overall quality of its loan portfolio. Texas United has established
underwriting guidelines to be followed at each of its banking centers. Texas
United 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. However, there can be no assurance that Texas Uniteds loan portfolio
will not become subject to increasing pressures from deteriorating borrower
creditworthiness due to general economic conditions.

Texas United 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.

-29-





---



##### Table of Contents



Texas United then charges to operations a provision for loan losses to
maintain the allowance for loan losses at an adequate level determined by the
foregoing methodology. In addition, Texas United contracts with TIB Service
Company to perform an external loan review annually.

The loan grades discussed above aid Texas United in monitoring the overall
quality of the loan portfolio. Loans categorized as watch list loans show
warning elements where the present status portrays one or more deficiencies
that require attention in the short term or where pertinent ratios of the loan
account have weakened to a point where more frequent monitoring is warranted.
These loans do not have all of the characteristics of a classified loan
(substandard or doubtful) but do show weakened elements as compared with those
of a satisfactory credit. Texas United reviews these loans to assist in
assessing the adequacy of the allowance for loan losses. At December 31, 2002,
2001 and 2000, Texas United had $6.6 million, $5.1 million, and $5.1 million of
watch list loans, respectively.

Loans internally classified as substandard or in the more severe
categories of doubtful or loss are those loans that at a minimum have clear
and defined weaknesses such as a highly-leveraged position, unfavorable
financial ratios, uncertain repayment sources or poor financial condition which
may jeopardize recoverability of the debt. At December 31, 2002, Texas United
had $4.5 million in loans classified as substandard, or 1.16% of total loans
compared with $3.6 million, or 1.31% of total loans, at December 31, 2001. At
December 31, 2000, Texas United had $3.5 million in loans classified as
substandard, or 1.45% of total loans. The increase in 2002 is primarily
attributed to a slight deterioration in the consumer loan portfolio due to
general economic conditions in the Central Texas area. At December 31, 2002,
Texas United had no loans classified as doubtful or loss.

Management actively monitors Texas Uniteds asset quality and provides
specific loss allowances when necessary. Loans are charged-off against the
allowance for loan losses when appropriate. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations. The allowance for loan losses as a percentage of nonperforming
loans was 197.48% at December 31, 2002.

At December 31, 2002, the allowance for loan losses was $3.3 million or 0.85%
of total loans. For the year ended December 31, 2002, net loan charge-offs
totaled $1.1 million or 0.34% of average loans outstanding for the period,
compared with $761,000 in net loan charge-offs or 0.29% of average loans for
the year ended December 31, 2001. During 2002, Texas United recorded a
provision for loan losses of $1.9 million compared with $925,000 for 2001. Texas United made a provision
for loan losses of $293,000 for 2000. At December 31, 2001, the allowance for
loan losses totaled $1.8 million, or 0.63% of total loans. At December 31,
2000, the allowance for loan losses totaled $1.6 million or 0.66% of total
loans.

-30-





---



##### Table of Contents



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

|                                                        |                           |   |              |        |      |   |                        |      |      |   |         |        |   |   |         |      |   |   |         |      |  
|------------------------------------------------------- | ------------------------- | - | ------------ | ------ | ---- | - | ---------------------- | ---- | ---- | - | ------- | ------ | - | - | ------- | ---- | - | - | ------- | ---- | -
|                                                        |                           |   | December 31,
|                                                        |                           |   |             
|                                                        |                           |   | 2002         |        | 2001 |   | 2000                   |      | 1999 |   | 1998   
|                                                        |                           |   |              |        |      |   |                        |      |      |   |        
|                                                        |                           |   |              |        |      |   | (Dollars in thousands) |      |      |   |        
|Average loans outstanding                               |                           | $ | 319,151      |        |      | $ | 264,129                |      |      | $ | 204,058 |        |   | $ | 140,025 |      |   | $ | 106,220 |     
|                                                        |                           |   |              |        |      |   |                        |      |      |   |         |        |   |   |         |      |   |   |         |     
|Gross loans outstanding at end of period                |                           | $ | 386,315      |        |      | $ | 274,945                |      |      | $ | 239,641 |        |   | $ | 173,797 |      |   | $ | 114,029 |     
|                                                        |                           |   |              |        |      |   |                        |      |      |   |         |        |   |   |         |      |   |   |         |     
|Allowance for loan losses at beginning of
period        |                           | $ | 1,754        |        |      | $ | 1,590                  |      |      | $ | 1,737   |        |   | $ | 1,278   |      |   | $ | 805     |     
|Provision for loan losses                               |                           |   | 1,900        |        |      |   | 925                    |      |      |   | 293     |        |   |   | 188     |      |   |   | 131     |     
|Balance acquired from mergers                           |                           |   | 740          |        |      |   |                       |      |      |   |        |        |   |   | 492     |      |   |   | 647     |     
|Charge-offs:                                            |                           |   |              |        |      |   |                        |      |      |   |         |        |   |   |         |      |   |   |         |     
|                                                        | Commercial and industrial |   |              | (401   | )    |   |                        | (389 | )    |   |         | (452   | ) |   |         | (351 | ) |   |         | (62  | )
|                                                        | Real estate               |   |              | (117   | )    |   |                        | (37  | )    |   |         | (41    | ) |   |         | (59  | ) |   |         | (98  | )
|                                                        | Consumer                  |   |              | (1,528 | )    |   |                        | (881 | )    |   |         | (1,145 | ) |   |         | (361 | ) |   |         | (198 | )
|                                                        | Other                     |   |              | (6     | )    |   |                        | (76  | )    |   |         |       |   |   |         | (26  | ) |   |         | (193 | )
|                                                        |                           |   |              |        |      |   |                        |      |      |   |         |        |   |   |         |      |   |   |         |     
|Total
charge-offs                                       |                           |   | (2,052       | )      |      |   | (1,383                 | )    |      |   | (1,638  | )      |   |   | (797    | )    |   |   | (551    | )   
|Recoveries:                                             |                           |   |              |        |      |   |                        |      |      |   |         |        |   |   |         |      |   |   |         |     
|                                                        | Commercial and industrial |   |              | 261    |      |   |                        | 153  |      |   |         | 364    |   |   |         | 218  |   |   |         | 48   |  
|                                                        | Real estate               |   |              | 36     |      |   |                        | 23   |      |   |         | 173    |   |   |         | 37   |   |   |         | 42   |  
|                                                        | Consumer                  |   |              | 603    |      |   |                        | 434  |      |   |         | 622    |   |   |         | 221  |   |   |         | 122  |  
|                                                        | Other                     |   |              | 54     |      |   |                        | 12   |      |   |         | 39     |   |   |         | 100  |   |   |         | 34   |  
|                                                        |                           |   |              |        |      |   |                        |      |      |   |         |        |   |   |         |      |   |   |         |     
|Total recoveries                                        |                           |   | 954          |        |      |   | 622                    |      |      |   | 1,198   |        |   |   | 576     |      |   |   | 246     |     
|                                                        |                           |   |              |        |      |   |                        |      |      |   |         |        |   |   |         |      |   |   |         |     
|Net loan charge-offs                                    |                           |   | (1,098       | )      |      |   | (761                   | )    |      |   | (440    | )      |   |   | (221    | )    |   |   | (305    | )   
|Allowance for loan losses at end of period              |                           | $ | 3,296        |        |      | $ | 1,754                  |      |      | $ | 1,590   |        |   | $ | 1,737   |      |   | $ | 1,278   |     
|                                                        |                           |   |              |        |      |   |                        |      |      |   |         |        |   |   |         |      |   |   |         |     
|Ratio of allowance to end of period loans               |                           |   | 0.85         | %      |      |   | 0.63                   | %    |      |   | 0.66    | %      |   |   | 0.99    | %    |   |   | 1.12    | %   
|Ratio of net loan charge-offs to average
loans          |                           |   | 0.34         | %      |      |   | 0.29                   | %    |      |   | 0.22    | %      |   |   | 0.16    | %    |   |   | 0.32    | %   
|Ratio of allowance to end of period
nonperforming loans |                           |   | 197.48       | %      |      |   | 334.73                 | %    |      |   | 156.80  | %      |   |   | 181.50  | %    |   |   | 305.01  | %   

The following table describes the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.

|                                                    |                        |   |                        |     |       |  |            |      |       |   |        |     |            |  |        |      |       |   |            |     |       |  |       |      |            |   |       |     |  |  |            |      |  |   |       |     |  |  |       |      | 
|--------------------------------------------------- | ---------------------- | - | ---------------------- | --- | ----- |  | ---------- | ---- | ----- | - | ------ | --- | ---------- |  | ------ | ---- | ----- | - | ---------- | --- | ----- |  | ----- | ---- | ---------- | - | ----- | --- |  |  | ---------- | ---- |  | - | ----- | --- |  |  | ----- | ---- | 
|                                                    |                        |   | 2002                   |     | 2001  |  | 2000       |      | 1999  |   | 1998  
|                                                    |                        |   |                        |     |       |  |            |      |       |   |       
|                                                    |                        |   |                        |     |       |  | Percent of |      |       |   |        |     | Percent of |  |        |      |       |   | Percent of |     |       |  |       |      | Percent of |   |       |     |  |  | Percent of
|                                                    |                        |   |                        |     |       |  | Loans to   |      |       |   |        |     | Loans to   |  |        |      |       |   | Loans to   |     |       |  |       |      | Loans to   |   |       |     |  |  | Loans to  
|                                                    |                        |   |                        |     |       |  | Total      |      |       |   |        |     | Total      |  |        |      |       |   | Total      |     |       |  |       |      | Total      |   |       |     |  |  | Total     
|                                                    |                        |   | Amount                 |     | Loans |  | Amount     |      | Loans |   | Amount |     | Loans      |  | Amount |      | Loans |   | Amount     |     | Loans
|                                                    |                        |   |                        |     |       |  |            |      |       |   |        |     |            |  |        |      |       |   |            |     |      
|                                                    |                        |   | (Dollars in thousands)
|Balance of
allowance for loan
losses applicable
to: |                        |   |                        |     |       |  |            |      |       |   |        |     |            |  |        |      |       |   |            |     |       |  |       |      |            |   |       |     |  |  |            |      |  |   |       |     |  |  |       |     
|Commercial and
industrial                           |                        | $ | 335                    |     |       |  | 16.2       | %    |       | $ | 212    |     |            |  | 19.4   | %    |       | $ | 225        |     |       |  | 20.8  | %    |            | $ | 160   |     |  |  | 18.5       | %    |  | $ | 115   |     |  |  | 17.0  | %   
|Real estate:                                        |                       
|                                                    | 1-4 family
residential |   |                        | 258 |       |  |            | 38.7 |       |   |        | 123 |            |  |        | 41.7 |       |   |            | 135 |       |  |       | 32.7 |            |   |       | 153 |  |  |            | 29.8 |  |   |       | 90  |  |  |       | 36.5 | 
|                                                    | Commercial
mortgage    |   |                        | 340 |       |  |            | 16.0 |       |   |        | 188 |            |  |        | 13.1 |       |   |            | 205 |       |  |       | 13.3 |            |   |       | 245 |  |  |            | 14.4 |  |   |       | 213 |  |  |       | 13.4 | 
|                                                    | Held for sale          |   |                        |    |       |  |            | 8.7  |       |   |        |    |            |  |        | 0.3  |       |   |            |    |       |  |       | 1.5  |            |   |       |    |  |  |            | 2.1  |  |   |       |    |  |  |       | 2.9  | 
|                                                    | Other                  |   |                        | 73  |       |  |            | 4.7  |       |   |        | 125 |            |  |        | 8.7  |       |   |            | 130 |       |  |       | 12.0 |            |   |       | 94  |  |  |            | 10.6 |  |   |       | 50  |  |  |       | 7.4  | 
|Consumer                                            |                        |   | 715                    |     |       |  | 15.7       |      |       |   | 476    |     |            |  | 16.8   |      |       |   | 375        |     |       |  | 19.7  |      |            |   | 434   |     |  |  | 24.6       |      |  |   | 310   |     |  |  | 22.8  |     
|Unallocated                                         |                        |   | 1,575                  |     |       |  |           |      |       |   | 630    |     |            |  |       |      |       |   | 520        |     |       |  |      |      |            |   | 651   |     |  |  |           |      |  |   | 500   |     |  |  |      |     
|                                                    |                        |   |                        |     |       |  |            |      |       |   |        |     |            |  |        |      |       |   |            |     |       |  |       |      |            |   |       |     |  |  |            |      |  |   |       |     |  |  |       |     
|Total allowance for
loan losses                     |                        | $ | 3,296                  |     |       |  | 100.0      | %    |       | $ | 1,754  |     |            |  | 100.0  | %    |       | $ | 1,590      |     |       |  | 100.0 | %    |            | $ | 1,737 |     |  |  | 100.0      | %    |  | $ | 1,278 |     |  |  | 100.0 | %   
|                                                    |                        |   |                        |     |       |  |            |      |       |   |        |     |            |  |        |      |       |   |            |     |       |  |       |      |            |   |       |     |  |  |            |      |  |   |       |     |  |  |       |     

-31-





---



##### Table of Contents



Management believes that the allowance for credit losses at December 31,
2002 is adequate to cover losses inherent in the portfolio as of such date.
There can be no assurance, however, that Texas United will not sustain losses
in future periods, which could be substantial in relation to the size of the
allowance for credit losses at December 31, 2002.

Investment Securities

Texas United uses its securities portfolio to ensure liquidity for cash
requirements, to manage interest rate risk, to provide a source of income, to
ensure collateral is available for municipal pledging requirements and to
manage asset quality. Securities totaled $132.1 million at December 31, 2002,
an increase of $22.2 million from $109.9 million at December 31, 2001. The
increase was primarily due to additional funds available to invest as a result
of an increase in deposits and the sale of mortgage loans. At December 31,
2002, securities represented 22.5% of total assets compared with 24.2% of total
assets at December 31, 2001. The yield on average securities for the year
ended December 31, 2002 was 4.51% compared with 6.54% for 2001. The decrease
in average yield is attributed to a lower interest rate environment. At
December 31, 2002, the fair value for investment securities included $33.8
million in U.S. Government securities, $80.8 million in mortgage-backed
securities and $14.3 million in municipal securities. The average life of the
securities portfolio at December 31, 2002 was approximately three years.

Securities totaled $109.9 million at December 31, 2001, an increase of
$34.1 million from $75.8 million at December 31, 2000. The increase was
primarily due to an increase in deposits and the sale of mortgage loans. At
December 31, 2001, securities represented 24.2% of total assets compared with
20.0% of total assets at December 31, 2000. The yield on average securities
for the year ended December 31, 2001 was 6.54% compared with 6.61% for 2000.
At December 31, 2001, the fair value of investment securities included $20.5
million in U.S. Government securities, $60.2 million in mortgage-backed
securities and $26.7 million in municipal securities. The average life of the
securities portfolio at December 31, 2001 was approximately five years.

The following table summarizes the contractual maturity of investment
securities on an amortized cost basis and their weighted average yields as of
December 31, 2002:

|                           |                  |   |                        |        |                 |  |                  |   |                 |   |           |        |            |  |        |   |       |   |       |        |       |  |      |   |  |   |       |       |  |  |      |   |  |   |        |         |  |  |      |   | 
|-------------------------- | ---------------- | - | ---------------------- | ------ | --------------- |  | ---------------- | - | --------------- | - | --------- | ------ | ---------- |  | ------ | - | ----- | - | ----- | ------ | ----- |  | ---- | - |  | - | ----- | ----- |  |  | ---- | - |  | - | ------ | ------- |  |  | ---- | - | 
|                           |                  |   | December 31, 2002     
|                           |                  |   |                       
|                           |                  |   |                        |        |                 |  |                  |   |                 |   | After One |        | After Five |  |        |   |       |   |       |        |       |  |      |   |  |   |       |       | 
|                           |                  |   | Within                 |        | Year but Within |  | Years but Within |   |                 |   |           |        |            |  |        |   |       |   |       |        |       |  |     
|                           |                  |   | One Year               |        | Five Years      |  | Ten Years        |   | After Ten Years |   |           |        |            |  |        |   |      
|                           |                  |   |                        |        |                 |  |                  |   |                 |   |           |        |            |  |        |   |      
|                           |                  |   | Amount                 |        | Yield           |  | Amount           |   | Yield           |   | Amount    |        | Yield      |  | Amount |   | Yield |   | Total |        | Yield
|                           |                  |   |                        |        |                 |  |                  |   |                 |   |           |        |            |  |        |   |       |   |       |        |      
|                           |                  |   | (Dollars in thousands)
|U.S. Government securities |                  | $ |                       |        |                 |  |                 | % |                 | $ | 29,755    |        |            |  | 3.54   | % |       | $ | 3,272 |        |       |  | 4.13 | % |  | $ |      |       |  |  |     | % |  | $ | 33,027 |         |  |  | 3.63 | %
|Municipal securities       |                  |   |                       |        |                 |  |                 |   |                 |   | 8,875     |        |            |  | 6.55   |   |       |   | 4,680 |        |       |  | 6.58 |   |  |   |      |       |  |  |     |   |  |   | 13,555 |         |  |  | 6.62 |  
|                           |                  |   |                        |        |                 |  |                  |   |                 |   |           |        |            |  |        |   |       |   |       |        |       |  |      |   |  |   |       |       |  |  |      |   |  |   |        |         |  |  |      |  
|                           | Subtotal         |   |                        |       |                 |  |                  |   |                 |   |           | 38,630 |            |  |        |   |       |   |       | 7,952  |       |  |      |   |  |   |       |      |  |  |      |  |  |   |        | 46,582  |  |  |      |   | 
|Mortgage-backed securities |                  |   | 29,977                 |        |                 |  | 4.75             |   |                 |   | 37,895    |        |            |  | 4.52   |   |       |   | 9,787 |        |       |  | 4.30 |   |  |   | 2,227 |       |  |  | 5.24 |   |  |   | 79,886 |         |  |  | 4.60 |  
|Other                      |                  |   |                       |        |                 |  |                 |   |                 |   |          |        |            |  |       |   |       |   |      |        |       |  |     |   |  |   | 3,229 |       |  |  | 3.00 |   |  |   | 3,229  |         |  |  | 3.00 |  
|                           |                  |   |                        |        |                 |  |                  |   |                 |   |           |        |            |  |        |   |       |   |       |        |       |  |      |   |  |   |       |       |  |  |      |   |  |   |        |         |  |  |      |  
|                           | Total securities |   | $                      | 29,977 |                 |  |                  |   |                 |   | $         | 76,525 |            |  |        |   |       |   | $     | 17,739 |       |  |      |   |  |   | $     | 5,456 |  |  |      |   |  |   | $      | 129,697 |  |  |      |   | 
|                           |                  |   |                        |        |                 |  |                  |   |                 |   |           |        |            |  |        |   |       |   |       |        |       |  |      |   |  |   |       |       |  |  |      |   |  |   |        |         |  |  |      |  

The
following table summarizes the carrying value and classification of securities as of the dates shown:

|                   |                  |   |                        |         |      |   |         |         |  |   |        |        | 
|------------------ | ---------------- | - | ---------------------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                   |                  |   | December 31,          
|                   |                  |   |                       
|                   |                  |   | 2002                   |         | 2001 |   | 2000   
|                   |                  |   |                        |         |      |   |        
|                   |                  |   | (Dollars in thousands)
|Available-for-sale |                  | $ | 132,140                |         |      | $ | 109,877 |         |  | $ | 67,303 |       
|Held-to-maturity   |                  |   |                       |         |      |   |        |         |  |   | 8,528  |       
|                   |                  |   |                        |         |      |   |         |         |  |   |        |       
|                   | Total securities |   | $                      | 132,140 |      |   | $       | 109,877 |  |   | $      | 75,831 | 
|                   |                  |   |                        |         |      |   |         |         |  |   |        |       

-32-





---



##### Table of Contents



The
following table summarizes the amortized cost of securities classified
as held to maturity and their approximate fair values as of December 31, 2000.
There were no securities classified as held to maturity at December 31, 2002 or
2001.

|                  |                                                                      |  |           |       |            |  |                        |   |       |  |   |    |  |  |   |       | 
|----------------- | -------------------------------------------------------------------- |  | --------- | ----- | ---------- |  | ---------------------- | - | ----- |  | - | -- |  |  | - | ----- | 
|                  |                                                                      |  |           |       |            |  | Gross                  |   | Gross |  |   |    | 
|                  |                                                                      |  | Amortized |       | Unrealized |  | Unrealized             |   | Fair 
|                  |                                                                      |  | Cost      |       | Gains      |  | Losses                 |   | Value
|                  |                                                                      |  |           |       |            |  |                        |   |      
|                  |                                                                      |  |           |       |            |  | (Dollars in thousands) |   |       |  |  
|Held to maturity: |                                                                      |  |           |       |            |  |                        |   |       |  |   |    |  |  |   |      
|                  | U.S. Treasury securities
and obligations of U.S.
government
agencies |  | $         |      |            |  | $                      |  |       |  | $ |   |  |  | $ |      | 
|                  | Mortgage-backed
securities                                           |  |           |      |            |  |                        |  |       |  |   |   |  |  |   |      | 
|                  | State and municipal
securities                                       |  |           | 8,528 |            |  |                        | 1 |       |  |   | 95 |  |  |   | 8,434 | 
|                  |                                                                      |  |           |       |            |  |                        |   |       |  |   |    |  |  |   |      
|                  | Total                                                                |  | $         | 8,528 |            |  | $                      | 1 |       |  | $ | 95 |  |  | $ | 8,434 | 
|                  |                                                                      |  |           |       |            |  |                        |   |       |  |   |    |  |  |   |       | 

The following tables summarize the amortized cost of securities classified
as available for sale and their approximate fair values as the dates shown:

|                                                                     |       |   |                        |         |            |   |            |       |       |   |     |     |  |   |        |         | 
|-------------------------------------------------------------------- | ----- | - | ---------------------- | ------- | ---------- | - | ---------- | ----- | ----- | - | --- | --- |  | - | ------ | ------- | 
|                                                                     |       |   | December 31, 2002     
|                                                                     |       |   |                       
|                                                                     |       |   |                        |         |            |   | Gross      |       | Gross |   |     |     | 
|                                                                     |       |   | Amortized              |         | Unrealized |   | Unrealized |       | Fair 
|                                                                     |       |   | Cost                   |         | Gains      |   | Losses     |       | Value
|                                                                     |       |   |                        |         |            |   |            |       |      
|                                                                     |       |   | (Dollars in thousands)
|U.S. Treasury securities and obligations of U.S. government agencies |       | $ | 33,027                 |         |            | $ | 726        |       |       | $ |    |     |  | $ | 33,753 |        
|Mortgage-backed securities                                           |       |   | 79,886                 |         |            |   | 1,113      |       |       |   | 154 |     |  |   | 80,845 |        
|Municipal securities                                                 |       |   | 13,555                 |         |            |   | 758        |       |       |   |    |     |  |   | 14,313 |        
|Other                                                                |       |   | 3,229                  |         |            |   |           |       |       |   |    |     |  |   | 3,229  |        
|                                                                     |       |   |                        |         |            |   |            |       |       |   |     |     |  |   |        |        
|                                                                     | Total |   | $                      | 129,697 |            |   | $          | 2,597 |       |   | $   | 154 |  |   | $      | 132,140 | 
|                                                                     |       |   |                        |         |            |   |            |       |       |   |     |     |  |   |        |        

|                                                                     |       |   |                        |         |                   |   |            |     |       |   |           |       |            |   |            |         |       |   |        |        |       |   |    |    |  |   |     |       |  |   |        |        | 
|-------------------------------------------------------------------- | ----- | - | ---------------------- | ------- | ----------------- | - | ---------- | --- | ----- | - | --------- | ----- | ---------- | - | ---------- | ------- | ----- | - | ------ | ------ | ----- | - | -- | -- |  | - | --- | ----- |  | - | ------ | ------ | 
|                                                                     |       |   | December 31, 2001      |         | December 31, 2000
|                                                                     |       |   |                        |         |                  
|                                                                     |       |   |                        |         |                   |   | Gross      |     | Gross |   |           |       |            |   |            |         |       |   | Gross  |        | Gross |   |    |    | 
|                                                                     |       |   | Amortized              |         | Unrealized        |   | Unrealized |     | Fair  |   | Amortized |       | Unrealized |   | Unrealized |         | Fair 
|                                                                     |       |   | Cost                   |         | Gains             |   | Losses     |     | Value |   | Cost      |       | Gains      |   | Losses     |         | Value
|                                                                     |       |   |                        |         |                   |   |            |     |       |   |           |       |            |   |            |         |      
|                                                                     |       |   | (Dollars in thousands)
|U.S. Treasury securities
and obligations of U.S.
government agencies |       | $ | 20,777                 |         |                   | $ | 9          |     |       | $ | 264       |       |            | $ | 20,522     |         |       | $ | 9,549  |        |       | $ | 10 |    |  | $ | 59  |       |  | $ | 9,500  |       
|Mortgage-backed securities                                           |       |   | 60,344                 |         |                   |   | 365        |     |       |   | 546       |       |            |   | 60,163     |         |       |   | 36,067 |        |       |   | 33 |    |  |   | 418 |       |  |   | 35,682 |       
|State and municipal
securities                                       |       |   | 26,637                 |         |                   |   | 254        |     |       |   | 235       |       |            |   | 26,656     |         |       |   | 20,775 |        |       |   | 51 |    |  |   | 623 |       |  |   | 20,203 |       
|Other                                                                |       |   | 2,536                  |         |                   |   |           |     |       |   |          |       |            |   | 2,536      |         |       |   | 1,918  |        |       |   |   |    |  |   |    |       |  |   | 1,918  |       
|                                                                     |       |   |                        |         |                   |   |            |     |       |   |           |       |            |   |            |         |       |   |        |        |       |   |    |    |  |   |     |       |  |   |        |       
|                                                                     | Total |   | $                      | 110,294 |                   |   | $          | 628 |       |   | $         | 1,045 |            |   | $          | 109,877 |       |   | $      | 68,309 |       |   | $  | 94 |  |   | $   | 1,100 |  |   | $      | 67,303 | 
|                                                                     |       |   |                        |         |                   |   |            |     |       |   |           |       |            |   |            |         |       |   |        |        |       |   |    |    |  |   |     |       |  |   |        |       

Texas United accounts for securities according to SFAS No.115, Accounting
for Certain Investments in Debt and Equity Securities. At the date of
purchase, Texas United is required to classify debt and equity securities into
one of three categories: held-to-maturity, trading or available-for-sale.
Investments in debt securities are classified as held-to-maturity and measured
at amortized cost in the financial statements only if management has the
positive intent and ability to hold those securities to maturity. Securities
that are bought and held principally for the purpose of selling them in the
near term are classified as trading and measured at fair value in the financial
statements with unrealized gains and losses included in earnings. Investments
not classified as either held-to-maturity or trading are classified as
available-for-sale and measured at fair value in the financial statements with
unrealized gains and losses reported, net of tax, in a separate component of
shareholders equity until realized.

In 2001, Texas United transferred investment securities classified as
held-to-maturity with an amortized cost of $8.5 million to the
available-for-sale classification in order to provide it with more flexibility
in managing the interest rate risk in the investment portfolio. The transfer
of the securities was permitted under the transition rules upon adoption of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and
therefore

-33-





---



##### Table of Contents



is not considered to have tainted the investment portfolio and will not
prevent Texas United from classifying investment securities as held-to-maturity
in the future. These investment securities had gross unrealized gains of
$151,000 and gross unrealized losses of $2,000 at the date of transfer.

Deposits

Total deposits at December 31, 2002 were $452.9 million compared to $375.7
million at December 31, 2001, an increase of $77.2 million or 20.5%. Texas
United assumed $73.9 million in deposits in connection with the Bryan-College
Station acquisition.

Texas United offers a variety of deposit accounts having a wide range of
interest rates and terms. Texas Uniteds deposit accounts consist of demand,
savings, money market and time accounts. Texas United relies primarily on
competitive pricing policies and customer service to attract and retain these
deposits. Texas United does not have or accept any brokered deposits.

At December 31, 2002, demand, money market and savings deposits accounted
for approximately 58.7% of total deposits, while certificates of deposit made
up 41.3% of total deposits. Noninterest-bearing demand deposits totaled $82.3
million or 18.2% of total deposits at December 31, 2002, compared with $72.0
million or 19.2% of total deposits at December 31, 2001. The average cost of
deposits, including noninterest-bearing demand deposits, was 1.97% for the year
ended December 31, 2002 compared with 3.21% for 2001. The decrease in the
average cost of deposits was primarily due to the lower interest rate
environment during 2002 compared with 2001.

At December 31, 2001, demand, money market and savings deposits accounted
for approximately 59.0% of total deposits, while certificates of deposit made
up 41.0% of total deposits. Noninterest-bearing demand deposits totaled $72.0
million or 19.2% of total deposits at December 31, 2001, compared with $58.7
million or 17.4% of total deposits at December 31, 2000. The average cost of
deposits, including noninterest-bearing demand deposits, was 3.21% for the year
ended December 31, 2001 compared with 3.48% for 2000. The decrease in the
average cost of deposits was primarily due to the lower interest rate
environment during 2001 compared with 2000.

The following table presents for the periods indicated the daily average
balances and weighted average rates paid on deposits:

|                           |                |   |                          |         |      |  |        |      |      |   |         |         |      |  |      |      |   |   |         |         |  |  |      |      |  
|-------------------------- | -------------- | - | ------------------------ | ------- | ---- |  | ------ | ---- | ---- | - | ------- | ------- | ---- |  | ---- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | -
|                           |                |   | Years Ended December 31,
|                           |                |   |                         
|                           |                |   | 2002                     |         | 2001 |  | 2000  
|                           |                |   |                          |         |      |  |       
|                           |                |   | Amount                   |         | Rate |  | Amount |      | Rate |   | Amount  |         | Rate
|                           |                |   |                          |         |      |  |        |      |      |   |         |         |     
|                           |                |   | (Dollars in thousands)  
|Noninterest-bearing demand |                | $ | 75,322                   |         |      |  |       | %    |      | $ | 67,611  |         |      |  |     | %    |   | $ | 61,721  |         |  |  |     | %   
|Interest-bearing demand    |                |   | 105,237                  |         |      |  | 1.49   |      |      |   | 82,422  |         |      |  | 2.36 |      |   |   | 50,397  |         |  |  | 3.26 |     
|Savings and money market   |                |   | 61,788                   |         |      |  | 1.47   |      |      |   | 51,753  |         |      |  | 2.60 |      |   |   | 49,151  |         |  |  | 3.05 |     
|Time                       |                |   | 167,293                  |         |      |  | 3.34   |      |      |   | 155,418 |         |      |  | 5.27 |      |   |   | 125,254 |         |  |  | 5.45 |     
|                           |                |   |                          |         |      |  |        |      |      |   |         |         |      |  |      |      |   |   |         |         |  |  |      |     
|                           | Total deposits |   | $                        | 409,640 |      |  |        | 1.97 | %    |   | $       | 357,204 |      |  |      | 3.21 | % |   | $       | 286,523 |  |  |      | 3.48 | %
|                           |                |   |                          |         |      |  |        |      |      |   |         |         |      |  |      |      |   |   |         |         |  |  |      |     

The following table sets forth the amount of Texas Uniteds certificates
of deposit that are $100,000 or greater by time remaining until maturity:

|                                      |       |   |                        |        | 
|------------------------------------- | ----- | - | ---------------------- | ------ | 
|                                      |       |   | December 31, 2002     
|                                      |       |   |                       
|                                      |       |   | (Dollars in thousands)
|Three months or less                  |       | $ | 13,838                 |       
|Over three months through six months  |       |   | 12,094                 |       
|Over six months through twelve
months |       |   | 12,113                 |       
|Over one year                         |       |   | 15,050                 |       
|                                      |       |   |                        |       
|                                      | Total |   | $                      | 53,095 | 
|                                      |       |   |                        |       

While a majority of the certificates of deposit in amounts of $100,000 or
more will mature during 2003, Texas United expects that a significant portion
of these deposits will be renewed. Historically, Texas Uniteds large

-34-





---



##### Table of Contents



time deposits have been stable and management believes that the rates
offered on certificates of deposit are comparable with rates offered by
competition in its market areas. If a significant portion of the certificates
of deposit were not renewed, it would have an adverse effect on the liquidity
of Texas United. However, Texas United has other available funding sources,
such as purchased funds from correspondent banks and FHLB advances, to mitigate
this risk.

Borrowings

Borrowings consist of short-term and long-term advances from the Federal
Home Loan Bank. Federal Funds purchased increased $19.1 million to $19.7
million at December 31, 2002 compared with $647,000 at December 31, 2001.
Borrowings increased $23.7 million to $62.9 million at December 31, 2002
compared with $39.2 million at December 31, 2001. Long-term borrowings totaled
$62.9 million at December 31, 2002 with an average interest rate of 3.63%.
Long-term borrowings at December 31, 2001 totaled $9.2 million with an average
interest rate of 5.14%. The borrowings at December 31, 2002 and 2001 represent
the highest amount outstanding during each of those years.

Texas United had no short-term borrowings from the FHLB at December 31,
2002. The average balance of short-term borrowings for the year was $1.7
million and the highest amount outstanding at any time during the year was
$25.0 million. The average interest rate was 1.92%.

Short-term borrowings totaled $30.0 million at December 31, 2001, with an
average interest rate of 1.97%. The borrowings at December 31, 2001 represent
the highest amount outstanding during the year. The average outstanding balance
during 2001 was $10.0 million.

During 2001, Texas United entered into a $1.0 million revolving credit
line with a commercial bank. The line of credit was increased to $10.0 million
in February 2002. Any borrowings under the line of credit bear interest at the
Federal Funds rate plus 2.25%. The line of credit expires February
2004. At
December 31, 2002, Texas United had $5.3 million advanced under this line of
credit, which is the highest amount outstanding during the year. The average
balance under the line of credit during 2002 was $2.0 million at an average
interest rate 4.94%. Texas United did not advance on the line of credit during
2001.

During 1999, Texas United entered into a $5.0 million revolving line of
credit with a commercial bank. The average outstanding balance under the line
of credit during 2000 was $2.5 million and the average interest rate was 8.61%.
The highest amount outstanding at any time during the year was $5.0 million.
The balance was paid off on June 12, 2000.

Texas United had no short-term borrowings from the FHLB at December 31,
2000. The average balance of short-term borrowings for the year was $4.1
million and the highest amount outstanding at any time during the year was
$16.2 million. The average interest rate was 6.5%.

In September 2000, Texas United formed a wholly-owned statutory business
trust, TXUI Statutory Trust I (Trust I), which issued $7.0 million in capital
securities. Trust I invested the proceeds in an equivalent amount of Texas
Uniteds 10.60% Junior Subordinated Deferrable Interest Debentures (Junior
Subordinated Debentures) bearing an interest rate of 10.60% per annum. The
Junior Subordinated Debentures will mature in 2030, which date may be shortened
to a date not earlier than 2010 if certain conditions are met, including prior
approval of the Federal Reserve. The Junior Subordinated Debentures, which are
the only assets of Trust I, are subordinate and junior in right of payment to
all of Texas Uniteds present and future senior indebtedness. Texas United has
fully and unconditionally guaranteed Trust Is obligations under the capital
securities.

The Junior Subordinated Debentures issued to Trust I accrue interest at an
annual rate of 10.60% of the aggregate liquidation amount, payable
semi-annually. The semi-annual distributions on the capital securities are
paid at the same rate that interest is paid on the Junior Subordinated
Debentures. Distributions to the holders of the capital securities are
included in interest expense, within the category entitled borrowings. Under
the provisions of

-35-





---



##### Table of Contents



the Junior Subordinated Debentures, Texas United has the right to defer
payment of interest on the Junior Subordinated Debentures at any time, or from
time to time, for periods not exceeding five years. If interest payments on
the Junior Subordinated Debentures are deferred, the distributions on the
capital securities will also be deferred.

For financial reporting purposes, Trust I is treated as Texas Uniteds
subsidiary and consolidated in Texas Uniteds financial statements. The
capital securities are presented as a separate category of long-term debt on
the balance sheet. The capital securities are not included as a component of
shareholders equity in the balance sheet, however, for regulatory purposes,
the Federal Reserve Board treats a portion of the capital securities as Tier 1
capital. The treatment of the capital securities as Tier 1 or Tier 2 capital,
in addition to the ability to deduct the expense of the Junior Subordinated
Debentures for federal income tax purposes, provided Texas United with a
cost-effective method of raising capital to support State Bank.

Taking the underwriting
discount into account, the capital securities have a pretax interest
cost to Texas United of 10.7% per annum. Texas
United utilized $5.0 million of the proceeds to pay off short- term debt and
injected the remainder as capital into State Bank.

In connection with the acquisition of Bryan-College Station, Texas United
assumed $3.6 million in subordinated notes and debentures. The debentures
require quarterly interest payments of approximately $105,000 at an interest
rate of 11.5%. The balance of these debentures was $3.2 million as of December
31, 2002. The debentures mature March 31, 2003.

Interest Rate Sensitivity and Market Risk

Texas United is engaged primarily in the business of investing funds
obtained from deposits and borrowings into interest-bearing loans and
investments and its primary component of market risk is interest rate risk
volatility. Consequently, its earnings depend to a significant extent on its
net interest income, which is the difference between the interest income on
loans and investments and the interest expense on deposits and borrowing. To
the extent that Texas Uniteds interest-bearing liabilities do not reprice or
mature at the same time as its interest-bearing assets, it is subject to
interest rate risk and corresponding fluctuations in net interest income. Texas
United has employed asset/liability management policies that attempt to manage
its interest-earning assets and interest-bearing liabilities, thereby
attempting to control the volatility of net interest income, without having to
incur unacceptable levels of credit or investment risk.

Texas Uniteds asset liability and funds management policy provides
management with the necessary guidelines for effective funds management, and
Texas United has established a measurement system for monitoring its net
interest rate sensitivity position. Texas United manages its sensitivity
position within established guidelines. Based upon the nature of Texas
Uniteds operations, Texas United is not subject to foreign exchange or
commodity price risk. Texas United does not own any trading assets.

Interest rate risk is the potential of economic losses due to future
interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximizing
income. Management realizes certain risks are inherent, and that the goal is
to identify and accept the risks.

Texas Uniteds exposure to interest rate risk is managed by State Banks
Asset Liability Committee (ALCO), which is composed of senior officers of Texas
United and State Bank, in accordance with policies approved by Texas Uniteds
Board of Directors. The ALCO formulates strategies based on appropriate levels
in interest rate risk. In determining the appropriate level of interest rate
risk, the ALCO considers the impact on earnings and capital based on the
current outlook on interest rates, potential changes in interest rates,
regional economies, liquidity, business strategies, and other factors. The
ALCO meets regularly to review, among other things, the sensitivity of assets
and liabilities to interest rate changes, the book and market values of assets
and liabilities, unrealized gains and losses, purchase and sale activity,
commitments to originate loans, and the maturities of investments and
borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility,
maturities of deposits and consumer and commercial deposit activity.
Management uses two methodologies to manage interest

-36-





---



##### Table of Contents



rate risk: (i) an analysis of relationships between interest-earning
assets and interest-bearing liabilities; and (ii) an interest rate shock
simulation model. Texas United has traditionally managed its business to
reduce its overall exposure to changes in interest rates, however, under
current policies of Texas Uniteds Board of Directors, management has been
given some latitude to increase Texas Uniteds interest rate sensitivity
position within certain limits if, in managements judgment, it will enhance
profitability.

To effectively measure and manage interest rate risk, Texas United uses an
interest rate shock simulation model to determine the impact on net interest
income under various interest rate scenarios, balance sheet trends and
strategies. From these simulations, interest rate risk is quantified and
appropriate strategies are developed and implemented. Additionally, duration
and market value sensitivity measures are utilized when they provide added
value to the overall interest rate risk management process. The overall
interest rate risk position and strategies are reviewed by Texas Uniteds Board
of Directors on an ongoing basis.

Texas United manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. Texas United does not
currently enter into instruments such as leveraged derivatives, structured
notes, interest rate swaps, caps, floors, financial options, financial futures
contracts or forward delivery contracts for the purpose of reducing interest
rate risk.

An interest rate sensitive asset or liability is one that, within a
defined time period, either matures or experiences an interest rate change in
line with general market interest rates. The management of interest rate risk
is performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time (GAP) and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments.
Interest rate sensitivity reflects the potential effect on net interest income
of a movement in interest rates. A company is considered to be asset sensitive,
or having a positive GAP, when the amount of its interest-earning assets
maturing or repricing within a given period exceeds the amount of its
interest-bearing liabilities also maturing or repricing within that time
period. Conversely, a company is considered to be liability sensitive, or
having a negative GAP, when the amount of its interest-bearing liabilities
maturing or repricing within a given period exceeds the amount of its
interest-earning assets also maturing or repricing within that time period.
During a period of rising interest rates, a negative GAP would tend to affect
net interest income adversely, while a positive GAP would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative GAP would tend to result in an increase in net interest income, while
a positive GAP would tend to affect net interest income adversely. However, it
is managements intent to achieve a proper balance so that incorrect rate
forecasts should not have a significant impact on earnings.

-37-





---



##### Table of Contents



The following table sets forth an interest rate sensitivity analysis for
Texas United at December 31, 2002:

|                                   |                                                 |   |                                     |         |        |   |          |        |        |   |          |        |  |   |         |         |  |   |         |         | 
|---------------------------------- | ----------------------------------------------- | - | ----------------------------------- | ------- | ------ | - | -------- | ------ | ------ | - | -------- | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                   |                                                 |   | Volumes Subject to Repricing Within
|                                   |                                                 |   |                                    
|                                   |                                                 |   |                                     |         |        |   |          |        |        |   |          |        |  |   | Greater |         |  |   |        
|                                   |                                                 |   | 0-30                                |         | 31-180 |   | 181-365  |        | than   |   |          |        | 
|                                   |                                                 |   | Days                                |         | Days   |   | Days     |        | 1 Year |   | Total   
|                                   |                                                 |   |                                     |         |        |   |          |        |        |   |         
|                                   |                                                 |   | (Dollars in thousands)             
|Interest-earning assets:           |                                                 |   |                                     |         |        |   |          |        |        |   |          |        |  |   |         |         |  |   |         |        
|                                   | Securities                                      |   | $                                   | 4,040   |        |   | $        | 8,584  |        |   | $        | 17,353 |  |   | $       | 99,720  |  |   | $       | 129,697 | 
|                                   | Loans                                           |   |                                     | 100,705 |        |   |          | 42,863 |        |   |          | 44,755 |  |   |         | 197,992 |  |   |         | 386,315 | 
|                                   |                                                 |   |                                     |         |        |   |          |        |        |   |          |        |  |   |         |         |  |   |         |         | 
|Total interest-earning assets      |                                                 | $ | 104,745                             |         |        | $ | 51,447   |        |        | $ | 62,108   |        |  | $ | 297,712 |         |  | $ | 516,012 |        
|Interest-bearing liabilities:      |                                                 |   |                                     |         |        |   |          |        |        |   |          |        |  |   |         |         |  |   |         |        
|                                   | Demand, money market and savings deposits       |   | $                                   | 183,698 |        |   | $        |       |        |   | $        |       |  |   | $       |        |  |   | $       | 183,698 | 
|                                   | Certificates of deposit and other time
deposits |   |                                     | 12,114  |        |   |          | 83,961 |        |   |          | 43,875 |  |   |         | 46,977  |  |   |         | 186,927 | 
|                                   | Federal fund purchased and FHLB
borrowings      |   |                                     | 21,437  |        |   |          | 14,818 |        |   |          | 15,880 |  |   |         | 25,192  |  |   |         | 77,327  | 
|                                   |                                                 |   |                                     |         |        |   |          |        |        |   |          |        |  |   |         |         |  |   |         |         | 
|Total interest-bearing liabilities |                                                 | $ | 217,249                             |         |        | $ | 98,779   |        |        | $ | 59,755   |        |  | $ | 72,169  |         |  | $ | 447,952 |        
|Period GAP                         |                                                 | $ | (112,504                            | )       |        | $ | (47,332  | )      |        | $ | 2,353    |        |  | $ | 225,543 |         |  | $ | 68,060  |        
|Cumulative GAP                     |                                                 | $ | (112,504                            | )       |        | $ | (159,836 | )      |        | $ | (157,483 | )      |  | $ | 68,060  |         |  | $ | 68,060  |        
|Period GAP to total assets         |                                                 |   | (19.2                               | )%      |        |   | (8.1     | )%     |        |   | 0.4      | %      |  |   | 38.4    | %       |  |   | 11.6    | %      
|Cumulative GAP to total assets     |                                                 |   | (19.2                               | )%      |        |   | (27.2    | )%     |        |   | (26.8    | )%     |  |   | 11.6    | %       |  |   | 11.6    | %      

Texas Uniteds one-year cumulative GAP position at December 31, 2002, was
negative $157.5 million or 26.8% of assets. This is a one-day position that is
continually changing and is not indicative of Texas Uniteds position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. For example, the GAP position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets tend to prepay
more rapidly during periods of declining interest rates than during periods of
rising interest rates. Because of this and other risk factors not contemplated
by the GAP position, an institution could have a matched GAP position in the
current rate environment and still have its net interest income exposed to
increased rate risk. Texas United maintains a Rate Committee and the ALCO that
review Texas Uniteds interest rate risk position on a monthly and quarterly
basis, respectively.

Liquidity

Liquidity involves Texas United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 Texas
United on an ongoing basis. Texas United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, Texas United does not rely on these external funding
sources. Texas United 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 yield on liquid assets. Several options are
available to increase liquidity, including the sale of investment and loans,
increasing deposit marketing activities, and borrowing from the FHLB or
correspondent banks. The cash and federal

-38-





---



##### Table of Contents



funds sold position, supplemented by amortizing investments along with
payments and maturities within the loan portfolio, have historically created an
adequate liquidity position.

Cash flows from operating activities for the year ended December 31, 2002
were used to fund loans held for sale. Cash flows from operating activities for
each of the years ended December 31, 2001 and 2000 were predominately provided
through net earnings. Cash flows from investing activities during each of the
same fiscal years were used to fund loans and acquire securities for investing
activities, partially offset by funds received from the sale of securities and
cash obtained from acquisitions. In addition, cash flows from financing
activities were provided for from the increase in deposits and borrowings.

Texas Uniteds future cash payments associated with its contractual
obligations pursuant to its long-term debt, operating leases, letters of credit
and commitments to extend credit as of December 31, 2002 are summarized below:

|                                                                                        |  |       |        |                  |        |           |        |                        |        |            |        |       |        |   |       |   |       |   |        |   |        | 
|--------------------------------------------------------------------------------------- |  | ----- | ------ | ---------------- | ------ | --------- | ------ | ---------------------- | ------ | ---------- | ------ | ----- | ------ | - | ----- | - | ----- | - | ------ | - | ------ | 
|                                                                                        |  |       |        | Payments due in: |        |           |        |                       
|                                                                                        |  |       |        |                  |        |           |        |                       
|                                                                                        |  |       |        |                  |        |           |        | Fiscal                 |        | Fiscal     |        |       |        |   |       |   |       |  
|                                                                                        |  |       |        | Fiscal 2003      |        | 2004-2005 |        | 2006-2007              |        | Thereafter |        | Total
|                                                                                        |  |       |        |                  |        |           |        |                        |        |            |        |      
|                                                                                        |  |       |        |                  |        |           |        | (Dollars in thousands) |        |            |        |       |        |   |       |  
|Company-obligated manditorily
redeemable trust preferred
securities of subsidiary
trust |  | $     |       |                  |        | $         |       |                        |        | $          |       |       |        | $ | 7,000 |   |       | $ | 7,000  |  
|Long-term debt                                                                          |  |       | 25,718 |                  |        |           | 18,786 |                        |        |            | 16,027 |       |        |   | 2,414 |   |       |   | 62,945 |  
|Operating leases                                                                        |  |       | 357    |                  |        |           | 311    |                        |        |            | 20     |       |        |   |      |   |       |   | 688    |  
|                                                                                        |  |       |        |                  |        |           |        |                        |        |            |        |       |        |   |       |   |       |   |        |  
|                                                                                        |  | Total |        | $                | 26,075 |           |        | $                      | 19,097 |            |        | $     | 16,047 |   |       | $ | 9,414 |   |        | $ | 70,633 | 
|                                                                                        |  |       |        |                  |        |           |        |                        |        |            |        |       |        |   |       |   |       |   |        |  

In the
ordinary course of business, Texas United enters into off-balance
sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit and standby letters of credit.
Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received. Texas Uniteds commitments associated with outstanding letters of credit
and commitments to extend credit as of December 31, 2002 are summarized below.
Since commitments associated with letters of credit and commitments to extend
credit may expire unused, the amounts shown do not necessarily reflect the
actual future cash funding requirements:

|                             |       |   |             |        |           |   |                        |       |            |   |       |    |  |   |       |       |  |   |        |        | 
|---------------------------- | ----- | - | ----------- | ------ | --------- | - | ---------------------- | ----- | ---------- | - | ----- | -- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                             |       |   |             |        |           |   | Fiscal                 |       | Fiscal     |   |       |    |  |   |       |       | 
|                             |       |   | Fiscal 2003 |        | 2004-2005 |   | 2006-2007              |       | Thereafter |   | Total
|                             |       |   |             |        |           |   |                        |       |            |   |      
|                             |       |   |             |        |           |   | (Dollars in thousands) |       |            |   |       |    |  |   |      
|Standby letters of credit    |       | $ | 761         |        |           | $ | 16                     |       |            | $ | 10    |    |  | $ |      |       |  | $ | 787    |       
|Commitments to extend credit |       |   | 33,920      |        |           |   | 2,880                  |       |            |   |      |    |  |   | 2,105 |       |  |   | 38,905 |       
|                             |       |   |             |        |           |   |                        |       |            |   |       |    |  |   |       |       |  |   |        |       
|                             | Total |   | $           | 34,681 |           |   | $                      | 2,896 |            |   | $     | 10 |  |   | $     | 2,105 |  |   | $      | 39,692 | 
|                             |       |   |             |        |           |   |                        |       |            |   |       |    |  |   |       |       |  |   |        |       

-39-





---



##### Table of Contents



Capital Resources

Capital management consists of providing equity to support both current
and future operations. Texas United is subject to capital adequacy requirements
imposed by the Federal Reserve, and State Bank is subject to capital adequacy
requirements imposed by the FDIC. Both the Federal Reserve and the FDIC have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards define capital and establish minimum
capital requirements in relation to assets and off-balance sheet exposure,
adjusted for credit risk. The risk-based capital standards currently in effect
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.

The risk-based capital standards issued by the Federal Reserve require all
bank holding companies to have Tier 1 capital of at least 4.0% and total
risk-based capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted
assets. Tier 1 capital generally includes common shareholders equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings, less deductions for goodwill and various other intangibles.
Tier 2 capital may consist of a limited amount of intermediate-term preferred
stock, a limited amount of term subordinated debt, certain hybrid capital
instruments and other debt securities, perpetual preferred stock not qualifying
as Tier 1 capital, and a limited amount of the general valuation allowance for
loan losses. The sum of Tier 1 capital and Tier 2 capital is total risk-based
capital.

The Federal Reserve has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to average
total consolidated assets (leverage ratio) of 3.0% for institutions with well
diversified risk, including no undue interest rate exposure; excellent asset
quality; high liquidity; good earnings; and that are generally considered to be
strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to
maintain capital positions substantially above the minimum supervisory levels
and comparable to peer group averages, without significant reliance on
intangible assets.

Pursuant to FDICIA, each federal banking agency revised its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multifamily mortgages. State Bank is subject to
capital adequacy guidelines of the FDIC that are substantially similar to the
Federal Reserves guidelines. Also pursuant to FDICIA, the FDIC has promulgated
regulations setting the levels at which an insured institution such as State
Bank would be considered well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. State Bank is classified well capitalized for purposes of
the FDICs prompt corrective action regulations.

Total shareholders equity as of December 31, 2002 was $35.4 million, an
increase of $8.0 million or 29.2% compared with shareholders equity of $27.4
million at December 31, 2001. The increase was primarily due to net earnings
for 2002 of $4.3 million, issuance of common stock of $2.6 million related to
the Bryan-College Station acquisition, and the $1.9 million increase in
unrealized gains on securities. This was partially offset by the payment of
dividends in the amount of $1.0 million.

-40-





---



##### Table of Contents



The following table provides a comparison of Texas Uniteds and State
Banks leverage and risk-weighted capital ratios as of December 31, 2002 to the
minimum and well-capitalized regulatory standards:

|                                |  |                  |      |                   |  |                   |       |   |  |  |       |  
|------------------------------- |  | ---------------- | ---- | ----------------- |  | ----------------- | ----- | - |  |  | ----- | -
|                                |  |                  |      |                   |  | To be Well        |       |   |  | 
|                                |  | Minimum          |      | Capitalized Under |  | Actual           
|                                |  | Required for     |      | Prompt Corrective |  | Ratio at         
|                                |  | Capital Purposes |      | Action Provisions |  | December 31, 2002
|                                |  |                  |      |                   |  |                  
|Texas United                    |  |                  |      |                   |  |                   |       |   |  |  |       |  
|Leverage ratio                  |  |                  | 4.00 | %(1)              |  |                   | N/A   |   |  |  | 5.49  | %
|Tier 1 risk-based capital ratio |  |                  | 4.00 | %                 |  |                   | N/A   |   |  |  | 7.97  | %
|Risk-based capital ratio        |  |                  | 8.00 | %                 |  |                   | N/A   |   |  |  | 8.83  | %
|State Bank                      |  |                  |      |                   |  |                   |       |   |  |  |       |  
|Leverage ratio                  |  |                  | 4.00 | %(2)              |  |                   | 5.00  | % |  |  | 6.69  | %
|Tier 1 risk-based capital ratio |  |                  | 4.00 | %                 |  |                   | 6.00  | % |  |  | 9.57  | %
|Risk-based capital ratio        |  |                  | 8.00 | %                 |  |                   | 10.00 | % |  |  | 10.43 | %



---

|(1) |  | The Federal Reserve may require Texas United to maintain a leverage ratio above the required minimum.
|--- |  | -----------------------------------------------------------------------------------------------------
|   
|(2) |  | The FDIC may require State Bank to maintain a leverage ratio above the required minimum.             

-41-





---



##### Table of Contents






Item 7A.   Quantitative and Qualitative Disclosure About Market Risk

For information regarding the market risk of Texas Uniteds financial
instruments, see Item 7  Managements Discussion and Analysis of Financial
Condition and Results of Operations  Interest Rate Sensitivity and Market
Risk. Texas Uniteds principal market risk exposure is to interest rates.




Item 8.   Financial Statements and Supplementary Data

The financial statements, the reports thereon, and the notes thereto
commence at page F-1 of Annual Report on Form 10-K.

Consolidated Quarterly Financial Data of Texas United

|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |       | 
|-------------------------- | ----------------------------------- | - | --------------------------------------------- | ----- | ------------ | - | ----------- | ----- | -------- | - | ----- | ----- |  | - | ----- | ----- | 
|                           |                                     |   | Quarter Ended 2002                           
|                           |                                     |   |                                              
|                           |                                     |   |                                               |       |              |   | (unaudited) |       |          |   |      
|                           |                                     |   | December 31                                   |       | September 30 |   | June 30     |       | March 31
|                           |                                     |   |                                               |       |              |   |             |       |         
|                           |                                     |   | (Dollars in thousands, except per share data)
|Interest income            |                                     | $ | 9,131                                         |       |              | $ | 8,452       |       |          | $ | 7,501 |       |  | $ | 7,322 |      
|Interest expense           |                                     |   | 2,808                                         |       |              |   | 2,593       |       |          |   | 2,313 |       |  |   | 2,659 |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Net interest income                 |   |                                               | 6,323 |              |   |             | 5,859 |          |   |       | 5,188 |  |   |       | 4,663 | 
|Provision for loan losses  |                                     |   | 550                                           |       |              |   | 500         |       |          |   | 400   |       |  |   | 450   |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Net interest income after provision |   |                                               | 5,773 |              |   |             | 5,359 |          |   |       | 4,788 |  |   |       | 4,213 | 
|Noninterest income         |                                     |   | 3,747                                         |       |              |   | 2,198       |       |          |   | 2,571 |       |  |   | 3,155 |      
|Noninterest expense        |                                     |   | 8,198                                         |       |              |   | 6,777       |       |          |   | 5,565 |       |  |   | 5,348 |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Income before income taxes          |   |                                               | 1,322 |              |   |             | 780   |          |   |       | 1,794 |  |   |       | 2,020 | 
|Provision for income taxes |                                     |   | 394                                           |       |              |   | 189         |       |          |   | 501   |       |  |   | 554   |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|Net income                 |                                     | $ | 928                                           |       |              | $ | 591         |       |          | $ | 1,293 |       |  | $ | 1,466 |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|Earnings per share:        |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Basic                               |   | $                                             | 0.34  |              |   | $           | 0.23  |          |   | $     | 0.52  |  |   | $     | 0.59  | 
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Diluted                             |   | $                                             | 0.32  |              |   | $           | 0.22  |          |   | $     | 0.50  |  |   | $     | 0.56  | 
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      

|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |       | 
|-------------------------- | ----------------------------------- | - | --------------------------------------------- | ----- | ------------ | - | ----------- | ----- | -------- | - | ----- | ----- |  | - | ----- | ----- | 
|                           |                                     |   | Quarter Ended 2001                           
|                           |                                     |   |                                              
|                           |                                     |   |                                               |       |              |   | (unaudited) |       |          |   |      
|                           |                                     |   | December 31                                   |       | September 30 |   | June 30     |       | March 31
|                           |                                     |   |                                               |       |              |   |             |       |         
|                           |                                     |   | (Dollars in thousands, except per share data)
|Interest income            |                                     | $ | 7,532                                         |       |              | $ | 7,562       |       |          | $ | 7,533 |       |  | $ | 7,267 |      
|Interest expense           |                                     |   | 3,027                                         |       |              |   | 3,245       |       |          |   | 3,284 |       |  |   | 3,508 |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Net interest income                 |   |                                               | 4,505 |              |   |             | 4,317 |          |   |       | 4,249 |  |   |       | 3,759 | 
|Provision for loan losses  |                                     |   | 413                                           |       |              |   | 256         |       |          |   | 127   |       |  |   | 129   |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Net interest income after provision |   |                                               | 4,092 |              |   |             | 4,061 |          |   |       | 4,122 |  |   |       | 3,630 | 
|Noninterest income         |                                     |   | 2,801                                         |       |              |   | 1,671       |       |          |   | 1,726 |       |  |   | 1,667 |      
|Noninterest expense        |                                     |   | 6,567                                         |       |              |   | 4,382       |       |          |   | 4,596 |       |  |   | 4,216 |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Income before income taxes          |   |                                               | 326   |              |   |             | 1,350 |          |   |       | 1,252 |  |   |       | 1,081 | 
|Provision for income taxes |                                     |   | 62                                            |       |              |   | 300         |       |          |   | 216   |       |  |   | 207   |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|Net income                 |                                     | $ | 264                                           |       |              | $ | 1,050       |       |          | $ | 1,036 |       |  | $ | 874   |      
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|Earnings per share:        |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Basic                               |   | $                                             | 0.10  |              |   | $           | 0.42  |          |   | $     | 0.42  |  |   | $     | 0.35  | 
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      
|                           | Diluted                             |   | $                                             | 0.09  |              |   | $           | 0.41  |          |   | $     | 0.40  |  |   | $     | 0.34  | 
|                           |                                     |   |                                               |       |              |   |             |       |          |   |       |       |  |   |       |      

-42-





---



##### Table of Contents






Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

There have been no disagreements with accountants on any matter of
accounting principles or practices or financial statement disclosures during
the two year period ended December 31, 2002.




PART III.




Item 10. Directors and
Executive Officers of Texas United

The information under
the captions Election of Directors, Continuing
Directors and Executive Officers and Section 16(a) Beneficial Ownership
Reporting Compliance in Texas Uniteds definitive proxy statement for its 2003
Annual Meeting of Shareholders to be filed with the Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (2003
Proxy Statement), is incorporated herein by reference in response to this
item.




Item 11. Executive Compensation

The information under the caption Executive Compensation and Other
Matters in the 2003 Proxy Statement is incorporated herein by reference in
response to this item.




Item 12. Security Ownership of Certain Beneficial Owners and Management

The information under the caption Beneficial Ownership of Common Stock by
Management of the Company and Principal Shareholders in the 2003 Proxy
Statement is incorporated herein by reference in response to this item.




Item 13. Certain Relationships and Related Transactions

The information under the caption Interests of Management and others in
Certain Transactions in the 2003 Proxy Statement is incorporated herein by
reference in response to this item.




Item 14. Controls and Procedures

Evaluation of disclosure controls and procedures.Within 90 days prior to the
date of this report, 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-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the Exchange Act)) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
to the Companys management within the time periods specified in the Securities
and Exchange Commissions rules and forms.

Changes in internal controls. Subsequent to the date of the Companys most
recent evaluation, there were no significant changes in the Companys internal
controls or in other factors that could significantly affect the Companys
disclosure controls and procedures, and there were no corrective actions with
regard to significant deficiencies and material weaknesses based on such
evaluation.

-43-





---



##### Table of Contents






PART IV.




Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K



| | (a) |  | Financial Statements
| | --- |  | --------------------

Reference is made to the consolidated financial statements, reports
thereon, and notes thereto commencing at page F-1 of this Annual Report on Form
10-K. A list of such consolidated financial statements is set forth below:



| |                                                                                                      |  | 
| | ---------------------------------------------------------------------------------------------------- |  | 
| | Report of Independent Certified Public Accountants                                                   |  | 
| | Consolidated Balance Sheets at December 31, 2002 and 2001                                            |  | 
| | Consolidated Statements of Earnings for the Years Ended December 31, 2002, 2001, and 2000            |  | 
| | Consolidated Statement of Shareholders Equity for the Years Ended December 31, 2002, 2001, and 2000 |  | 
| | Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000          |  | 
| | Notes to Consolidated Financial Statements                                                           |  | 
| |                                                                                                      |  | 

| |                                                            |  | 
| | ---------------------------------------------------------- |  | 
| | There are no financial statement schedules filed herewith.



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



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | The Company did not file any Current Reports on form 8-K during the fourth quarter of 2002.



| | (c) |  | Exhibits
| | --- |  | --------

|        |       |                        |                                                                                                                                                                                                                                                                                                                               
|------- | ----- | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                       
|Number  |       | Description of Exhibit
|        |       |                       
|        | 2.1   |                        | Agreement and Plan of Reorganization between Texas United
Bancshares, Inc. and The Bryan-College Station Financial Holding
Company, as amended, dated November 5, 2001 (incorporated herein by
reference to Exhibit 2.1 to the Registration Statement on Form S-4
(Registration No. 333-84644) (the Registration Statement))
|        |       |                        |                                                                                                                                                                                                                                                                                                                               
|        | 3.1   |                        | Articles of Incorporation of Texas United, as amended (incorporated
herein by reference to Exhibit 3.1 to the Registration Statement)                                                                                                                                                                                         
|        |       |                       
|        | 3.2   |                        | Bylaws of Texas United (incorporated herein by reference to Exhibit
3.2 to the Registration Statement)                                                                                                                                                                                                                        
|        |       |                       
|        | 4.1   |                        | Specimen certificate representing shares of Texas United common
stock (incorporated herein by reference to Exhibit 4.1 to the
Registration Statement)                                                                                                                                                                         
|        |       |                       
|        | 4.2*  |                        | Indenture dated September 7, 2000 by and between Texas United
Bancshares, Inc. and State Street Bank and Trust Company of
Connecticut, National Association with respect to the Junior
Subordinated Deferrable Interest Debentures of Texas United
Bancshares, Inc.                                                           
|        |       |                       
|        | 10.1 |                        | Texas United Bancshares, Inc. 1998 Incentive Stock Option Plan
(incorporated herein by reference to Exhibit 10.1 to the
Registration Statement)                                                                                                                                                                               
|        |       |                       
|        | 10.2 |                        | Form of Nonqualified Stock Option Agreement (incorporated herein by
reference to Exhibit 10.2 to the Registration Statement)                                                                                                                                                                                                  
|        |       |                       
|        | 10.3 |                        | Texas United Bancshares, Inc. Stock Appreciation Rights Plan
(incorporated herein by reference to Exhibit 10.3 to the
Registration Statement)                                                                                                                                                                                 
|        |       |                       
|        | 10.4 |                        | Form of Deferred Compensation Agreement (incorporated herein by
reference to Exhibit 10.4 to the Registration Statement)                                                                                                                                                                                                      
|        |       |                       
|        | 10.5 |                        | Form of Executive Deferred Compensation Agreement (incorporated
herein by reference to Exhibit 10.5 to the Registration Statement)                                                                                                                                                                                            

-44-





---



##### Table of Contents



|        |        |                        |                                                                                                                                                  
|------- | ------ | ---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                       
|Number  |        | Description of Exhibit
|        |        |                       
|        | 21.1   |                        | Subsidiaries of Texas United (incorporated herein by reference to
Exhibit 21.1 to the Registration Statement)                                    
|        |        |                       
|        | 23.1** |                        | Consent of Grant Thornton LLP, independent auditors of Texas United                                                                              
|        |        |                       
|        | 99.1** |                        | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|        |        |                       
|        | 99.2** |                        | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002



---

*     This Exhibit is not filed herewith because it meets the exclusion set
forth in Section 601(b)(4)(iii)(A) of Regulation S-K and the Company hereby
agrees to furnish a copy thereof to the Commission upon request.

**    Filed herewith.

      Management contract or compensatory plan or arrangement.

-45-





---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has
caused this Registration Statement or amendment thereto to be signed on its
behalf by the undersigned, thereunto duly authorized.

| |  |                                            |  |                                                                      
| |  | ------------------------------------------ |  | ---------------------------------------------------------------------
| |  | TEXAS UNITED BANCSHARES, INC.
(Registrant)
| |  |                                            |  |                                                                      
| |  | By:                                        |  | /s/ L. Don Stricklin                                                 
| |  |                                            | 
| |  | Name:
Title:
Date:                         |  | L. Don Stricklin
President and Chief Executive Officer
March 28, 2003

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated and on the 28th day of March, 2003.

|                                               |  |                                                                                                               
|---------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------
|Signature                                      |  | Title                                                                                                         
|                                               |  |                                                                                                               
|                                              
|/s/ L. Don Stricklin

L. Don Stricklin         |  | President and Chief Executive Officer
(principal executive officer)                                           
|                                               |  |                                                                                                               
|/s/ Thomas N. Adams                            |  | Executive Vice President and Chief Financial Officer(principal financial officer/principal accounting officer)
|Thomas N. Adams                                |  |                                                                                                               
|                                               |  |                                                                                                               
|/s/ Bruce Frenzel
Bruce Frenzel                |  | Director                                                                                                      
|                                               |  |                                                                                                               
|/s/ Michael Kulhanek
Michael Kulhanek          |  | Director                                                                                                      
|                                               |  |                                                                                                               
|/s/ Lee D. Mueller, Jr.

Lee D. Mueller, Jr.   |  | Director                                                                                                      
|                                               |  |                                                                                                               
|/s/ James D. Selman, Jr.

James D. Selman, Jr. |  | Director                                                                                                      
|                                               |  |                                                                                                               
|/s/ Michael Steinhauser
Michael Steinhauser    |  | Director                                                                                                      
|                                               |  |                                                                                                               
|/s/ Ervan E. Zouzalik

Ervan E. Zouzalik       |  | Director                                                                                                      

-46-





---



##### Table of Contents






CERTIFICATIONS

I, L. Don Stricklin, President and Chief Executive Officer of the registrant,
certify that:

1.      I have reviewed this annual report on Form 10-K of Texas United
Bancshares, Inc.;

2.      Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;

3.      Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.      The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)     designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

(b)     evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

(c)     presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.      The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):

(a)     all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

(b)     any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.      The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 28, 2003

|                                                      
|------------------------------------------------------
|/s/ L. Don Stricklin                                  
|                                                      
|L. Don Stricklin
President and Chief Executive Officer

-47-





---



##### Table of Contents



I, Thomas N. Adams, Executive Vice President and Chief Financial Officer of the
registrant, certify that:

1.       I have reviewed this annual report on Form 10-K of Texas United
Bancshares, Inc.;

2.       Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;

3.       Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.       The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)      designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

(b)      evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

(c)      presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.       The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):

(a)      all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

(b)      any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.       The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 28, 2003

|                                                                                         
|-----------------------------------------------------------------------------------------
|/s/ Thomas N. Adams

Thomas N. Adams
Executive Vice President and Chief Financial Officer

-48-





---



##### Table of Contents



Index to Consolidated Financial Statements



| |                                                                                                      |  |    
| | ---------------------------------------------------------------------------------------------------- |  | ---
| | Report of Independent Certified Public Accountants                                                   |  | F-2
| | Consolidated Balance Sheets at December 31, 2002 and 2001                                            |  | F-3
| | Consolidated Statements of Earnings for the Years Ended December 31, 2002, 2001, and 2000            |  | F-4
| | Consolidated Statement of Shareholders Equity for the Years Ended December 31, 2002, 2001, and 2000 |  | F-5
| | Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000          |  | F-7
| | Notes to Consolidated Financial Statements                                                           |  | F-9













F-1



---



##### Table of Contents



Report of Independent Certified Public Accountants

The Board of Directors and Shareholders
Texas United Bancshares, Inc.

We have audited the accompanying consolidated balance sheets of Texas
United Bancshares, Inc. and Subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of earnings, shareholders equity
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Texas United Bancshares, Inc. and Subsidiaries as of December 31, 2002 and
2001, and the consolidated results of their operations and cash flows for
each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United
States of America.

As discussed in Note B and in Note I to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards
No. 147 (SFAS 147), Acquisitions of Certain Financial Institutions, on
October 1, 2002 and Statement of Financial Accounting Standards No. 142
(SFAS 142), Goodwill and Other Intangible Assets, on January 1, 2002.



/s/ GRANT THORNTON LLP



Houston, Texas
March 7, 2003

F-2



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands, except share amounts)

|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |         |         |  | 
|------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------------------------------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- |  | 
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         | 2002    |         | 2001  
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |       
|ASSETS                                                                          |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |       
|Cash and cash equivalents                                                       |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |       
|                                                                                | Cash and due from banks                                                                                                                                                                                                                                                                  |                     | $                               | 20,574 |         |         | $       | 21,466 |        
|                                                                                | Federal funds sold                                                                                                                                                                                                                                                                       |                     |                                 |       |         |         |         | 11,200 |        
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |        
|                                                                                |                                                                                                                                                                                                                                                                                          |                     | Total cash and cash equivalents |        |         | 20,574  |         |        |         | 32,666  | 
|Available-for-sale securities                                                   |                                                                                                                                                                                                                                                                                          |                     | 132,140                         |        |         |         | 109,877 |       
|Loans, net                                                                      |                                                                                                                                                                                                                                                                                          |                     | 349,345                         |        |         |         | 272,374 |       
|Loans held for sale                                                             |                                                                                                                                                                                                                                                                                          |                     | 33,674                          |        |         |         | 817     |       
|Premises and equipment, net                                                     |                                                                                                                                                                                                                                                                                          |                     | 23,363                          |        |         |         | 18,882  |       
|Accrued interest receivable                                                     |                                                                                                                                                                                                                                                                                          |                     | 3,006                           |        |         |         | 2,605   |       
|Goodwill                                                                        |                                                                                                                                                                                                                                                                                          |                     | 9,432                           |        |         |         | 6,889   |       
|Core deposit intangibles                                                        |                                                                                                                                                                                                                                                                                          |                     | 512                             |        |         |         |        |       
|Mortgage servicing rights                                                       |                                                                                                                                                                                                                                                                                          |                     | 2,877                           |        |         |         | 1,349   |       
|Other assets                                                                    |                                                                                                                                                                                                                                                                                          |                     | 12,139                          |        |         |         | 8,170   |       
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |        
|                                                                                |                                                                                                                                                                                                                                                                                          | $                   | 587,062                         |        |         | $       | 453,629 |       
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                            |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |       
|Liabilities                                                                     |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |       
|                                                                                | Deposits                                                                                                                                                                                                                                                                                 |                     |                                 |        |         |         |         |        |        
|                                                                                |                                                                                                                                                                                                                                                                                          | Noninterest-bearing |                                 | $      | 82,294  |         |         | $      | 71,976  |        
|                                                                                |                                                                                                                                                                                                                                                                                          | Interest-bearing    |                                 |        | 370,625 |         |         |        | 303,712 |        
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |        
|                                                                                |                                                                                                                                                                                                                                                                                          |                     | Total deposits                  |        |         | 452,919 |         |        |         | 375,688 | 
|                                                                                | Federal funds purchased                                                                                                                                                                                                                                                                  |                     |                                 | 19,732 |         |         |         | 647    |        
|                                                                                | Other liabilities                                                                                                                                                                                                                                                                        |                     |                                 | 5,807  |         |         |         | 3,690  |        
|                                                                                | Borrowings                                                                                                                                                                                                                                                                               |                     |                                 | 62,945 |         |         |         | 39,232 |        
|                                                                                | Subordinated notes and debentures                                                                                                                                                                                                                                                        |                     |                                 | 3,241  |         |         |         |       |        
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |        
|                                                                                |                                                                                                                                                                                                                                                                                          |                     | Total liabilities               |        |         | 544,644 |         |        |         | 419,257 | 
|Commitments and contingencies                                                   |                                                                                                                                                                                                                                                                                          |                     |                                |        |         |         |        |       
|Company obligated manditorily redeemable capital securities of subsidiary trust |                                                                                                                                                                                                                                                                                          |                     | 7,000                           |        |         |         | 7,000   |       
|Shareholders equity                                                            |                                                                                                                                                                                                                                                                                         
|                                                                                | Preferred stock, no par value, 500,000 shares authorized; none issued                                                                                                                                                                                                                    |                     |                                 |       |         |         |         |       |        
|                                                                                | Common stock, $1.00 par value, 20,000,000 shares authorized at December 31,
2002 and 3,000,000 shares authorized at December 31, 2001; 2,646,139
shares issued and 2,640,044 outstanding at December 31, 2002 and 2,502,145
shares issued and 2,483,392 outstanding at December 31, 2001 |                     |                                 | 2,646  |         |         |         | 2,502  |        
|                                                                                | Additional paid-in capital                                                                                                                                                                                                                                                               |                     |                                 | 16,683 |         |         |         | 14,136 |        
|                                                                                | Retained earnings                                                                                                                                                                                                                                                                        |                     |                                 | 14,594 |         |         |         | 11,342 |        
|                                                                                | Accumulated other comprehensive gain (loss)                                                                                                                                                                                                                                              |                     |                                 | 1,612  |         |         |         | (275   | )      
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |        
|                                                                                |                                                                                                                                                                                                                                                                                          |                     | 35,535                          |        |         |         | 27,705  |       
|                                                                                | Less common stock held in treasury - at cost                                                                                                                                                                                                                                             |                     |                                 | 117    |         |         |         | 333    |        
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |        
|                                                                                |                                                                                                                                                                                                                                                                                          |                     | 35,418                          |        |         |         | 27,372  |       
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |        
|                                                                                |                                                                                                                                                                                                                                                                                          | $                   | 587,062                         |        |         | $       | 453,629 |       
|                                                                                |                                                                                                                                                                                                                                                                                          |                     |                                 |        |         |         |         |        |        

The accompanying notes are an integral part of these statements.

F-3



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
(Dollars in thousands, except per share amounts)

|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |        |       |        | 
|--------------------------------- | ------------------------------------------------------------------------------- | ---------- | --------------------------------------------------- | ------ | ----- | ------ | ---- | ------ | ----- | ------ | ---- | ------ | ----- | ------ | 
|                                  |                                                                                 |            |                                                     |        | 2002  |        | 2001 |        | 2000 
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |      
|Interest income                   |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  | Loans                                                                           |            | $                                                   | 26,569 |       |        | $    | 24,486 |       |        | $    | 19,998 |      
|                                  | Investment securities                                                           |            |                                                     |        |       |        |      |        |       |        |      |        |      
|                                  |                                                                                 | Taxable    |                                                     |        | 5,027 |        |      |        | 3,781 |        |      |        | 3,424 |       
|                                  |                                                                                 | Tax-exempt |                                                     |        | 759   |        |      |        | 1,154 |        |      |        | 1,230 |       
|                                  | Federal funds sold and other temporary investments                              |            |                                                     | 51     |       |        |      | 473    |       |        |      | 703    |      
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  |                                                                                 |            | Total interest income                               |        |       | 32,406 |      |        |       | 29,894 |      |        |       | 25,355 | 
|Interest expense                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  | Deposits                                                                        |            |                                                     | 8,057  |       |        |      | 11,490 |       |        |      | 10,003 |      
|                                  | Federal funds purchased                                                         |            |                                                     | 330    |       |        |      | 235    |       |        |      | 192    |      
|                                  | Borrowings                                                                      |            |                                                     | 1,244  |       |        |      | 547    |       |        |      | 1,100  |      
|                                  | Company obligated manditorily redeemable capital
securities of subsidiary trust |            |                                                     | 742    |       |        |      | 792    |       |        |      | 187    |      
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  |                                                                                 |            | Total interest expense                              |        |       | 10,373 |      |        |       | 13,064 |      |        |       | 11,482 | 
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  |                                                                                 |            | Net interest income                                 |        |       | 22,033 |      |        |       | 16,830 |      |        |       | 13,873 | 
|Provision for loan losses         |                                                                                 |            | 1,900                                               |        |       |        | 925  |        |       |        | 293  |       
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  |                                                                                 |            | Net interest income after provision for loan losses |        |       | 20,133 |      |        |       | 15,905 |      |        |       | 13,580 | 
|Noninterest income                |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  | Service charges                                                                 |            |                                                     | 5,826  |       |        |      | 4,555  |       |        |      | 3,581  |      
|                                  | Other operating income                                                          |            |                                                     | 5,845  |       |        |      | 3,310  |       |        |      | 1,727  |      
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  |                                                                                 |            | Total noninterest income                            |        |       | 11,671 |      |        |       | 7,865  |      |        |       | 5,308  | 
|Noninterest expense               |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  | Employee compensation and benefits                                              |            |                                                     | 12,602 |       |        |      | 9,877  |       |        |      | 7,940  |      
|                                  | Occupancy expense                                                               |            |                                                     | 3,365  |       |        |      | 2,393  |       |        |      | 1,724  |      
|                                  | Other operating expenses                                                        |            |                                                     | 9,921  |       |        |      | 7,491  |       |        |      | 5,786  |      
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  |                                                                                 |            | Total noninterest expenses                          |        |       | 25,888 |      |        |       | 19,761 |      |        |       | 15,450 | 
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  |                                                                                 |            | Earnings before income taxes                        |        |       | 5,916  |      |        |       | 4,009  |      |        |       | 3,438  | 
|Provision for income taxes        |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  | Current expense                                                                 |            |                                                     | 1,206  |       |        |      | 504    |       |        |      | 464    |      
|                                  | Deferred expense (benefit)                                                      |            |                                                     | 432    |       |        |      | 281    |       |        |      | (63    | )    
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  |                                                                                 |            | 1,638                                               |        |       |        | 785  |        |       |        | 401  |       
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|                                  |                                                                                 |            | NET EARNINGS                                        |        | $     | 4,278  |      |        | $     | 3,224  |      |        | $     | 3,037  | 
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|Basic earnings per common share   |                                                                                 | $          | 1.68                                                |        |       | $      | 1.29 |        |       | $      | 1.25 |       
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       
|Diluted earnings per common share |                                                                                 | $          | 1.60                                                |        |       | $      | 1.24 |        |       | $      | 1.19 |       
|                                  |                                                                                 |            |                                                     |        |       |        |      |        |       |        |      |       

The accompanying notes are an integral part of these statements.

F-4



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
Years ended December 31, 2000, 2001 and 2002
(Dollars in thousands)

|                                                                 |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |       | 
|---------------------------------------------------------------- | ------------------------------------------------------------------------- |  | ------------ | - | ---------- | - | -------- | - | ------------- | - | ------------- | - | ------------- | - | ------ | ----- |  | - | ----------- | ----- |  | - | ---- | - |  | - | ------ | ----- | 
|                                                                 |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   | Accumulated |       |  |   |      |   |  |   |       
|                                                                 |                                                                           |  | Common stock |   | Additional |   |          |   |               |   | other         |   | Common        |   | Total 
|                                                                 |                                                                           |  |              |   | paid-in    |   | Retained |   | comprehensive |   | stock in      |   | shareholders
|                                                                 |                                                                           |  | Shares       |   | Amount     |   | capital  |   | earnings      |   | income (loss) |   | treasury      |   | equity
|                                                                 |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |       
|Balance at January 1, 2000                                       |                                                                           |  | 2,411,810    |   |            | $ | 2,412    |   |               | $ | 12,682        |   |               | $ | 6,746  |       |  | $ | (1,673      | )     |  | $ | (321 | ) |  | $ | 19,846 |      
|Comprehensive income:                                            |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      
|                                                                 | Net earnings                                                              |  |              |  |            |   |          |  |               |   |               |  |               |   |        | 3,037 |  |   |             |      |  |   |      |  |  |   |        | 3,037 | 
|                                                                 | Unrealized gain on securities, net of
tax and reclassification adjustment |  |              |  |            |   |          |  |               |   |               |  |               |   |        |      |  |   |             | 1,010 |  |   |      |  |  |   |        | 1,010 | 
|                                                                 |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      
|Comprehensive income                                             |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   | 4,047  |      
|Issuance of common stock                                         |                                                                           |  | 74,255       |   |            |   | 74       |   |               |   | 1,219         |   |               |   |       |       |  |   |            |       |  |   |     |   |  |   | 1,293  |      
|Purchase of treasury stock                                       |                                                                           |  |             |   |            |   |         |   |               |   |              |   |               |   |       |       |  |   |            |       |  |   | (281 | ) |  |   | (281   | )    
|Sale of treasury stock                                           |                                                                           |  |             |   |            |   |         |   |               |   |              |   |               |   |       |       |  |   |            |       |  |   | 471  |   |  |   | 471    |      
|Dividends                                                        |                                                                           |  |             |   |            |   |         |   |               |   |              |   |               |   | (772   | )     |  |   |            |       |  |   |     |   |  |   | (772   | )    
|                                                                 |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      
|Balance at December 31, 2000                                     |                                                                           |  | 2,486,065    |   |            |   | 2,486    |   |               |   | 13,901        |   |               |   | 9,011  |       |  |   | (663        | )     |  |   | (131 | ) |  |   | 24,604 |      
|Comprehensive income:                                            |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      
|                                                                 | Net earnings                                                              |  |              |  |            |   |          |  |               |   |               |  |               |   |        | 3,224 |  |   |             |      |  |   |      |  |  |   |        | 3,224 | 
|                                                                 | Unrealized gain on securities, net of
tax and reclassification adjustment |  |              |  |            |   |          |  |               |   |               |  |               |   |        |      |  |   |             | 388   |  |   |      |  |  |   |        | 388   | 
|                                                                 |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      
|Comprehensive income                                             |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   | 3,612  |      
|Compensation related to exercise of
stock options                |                                                                           |  |             |   |            |   |         |   |               |   | 105           |   |               |   |       |       |  |   |            |       |  |   |     |   |  |   | 105    |      
|Issuance of common stock upon
exercise of employee stock options |                                                                           |  | 16,080       |   |            |   | 16       |   |               |   | 122           |   |               |   |       |       |  |   |            |       |  |   |     |   |  |   | 138    |      
|Purchase of treasury stock                                       |                                                                           |  |             |   |            |   |         |   |               |   |              |   |               |   |       |       |  |   |            |       |  |   | (417 | ) |  |   | (417   | )    
|Sale of treasury stock                                           |                                                                           |  |             |   |            |   |         |   |               |   | 8             |   |               |   |       |       |  |   |            |       |  |   | 215  |   |  |   | 223    |      
|Dividends                                                        |                                                                           |  |             |   |            |   |         |   |               |   |              |   |               |   | (893   | )     |  |   |            |       |  |   |     |   |  |   | (893   | )    
|                                                                 |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      
|Balance at December 31, 2001                                     |                                                                           |  | 2,502,145    |   |            |   | 2,502    |   |               |   | 14,136        |   |               |   | 11,342 |       |  |   | (275        | )     |  |   | (333 | ) |  |   | 27,372 |      

F-5



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY  CONTINUED
Years ended December 31, 2000, 2001 and 2002
(Dollars in thousands)

|                                                                                                           |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |       | 
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- |  | ------------ | - | ---------- | - | -------- | - | ------------- | - | ------------- | - | ------------- | - | ------ | ----- |  | - | ----------- | ----- |  | - | ---- | - |  | - | ------ | ----- | 
|                                                                                                           |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   | Accumulated |       |  |   |      |   |  |   |       
|                                                                                                           |                                                                           |  | Common stock |   | Additional |   |          |   |               |   | other         |   | Common        |   | Total 
|                                                                                                           |                                                                           |  |              |   | paid-in    |   | Retained |   | comprehensive |   | stock in      |   | shareholders'
|                                                                                                           |                                                                           |  | Shares       |   | Amount     |   | capital  |   | earnings      |   | income (loss) |   | treasury      |   | equity
|                                                                                                           |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |       
|Comprehensive income:                                                                                      |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      
|                                                                                                           | Net earnings                                                              |  |              |  |            |   | $        |  |               |   | $             |  |               |   | $      | 4,278 |  |   | $           |      |  |   | $    |  |  |   | $      | 4,278 | 
|                                                                                                           | Unrealized gain on securities, net of
tax and reclassification adjustment |  |              |  |            |   |          |  |               |   |               |  |               |   |        |      |  |   |             | 1,887 |  |   |      |  |  |   |        | 1,887 | 
|                                                                                                           |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      
|Comprehensive income                                                                                       |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   | 6,165  |      
|Issuance of common stock upon
exercise of employee stock options                                           |                                                                           |  | 6,291        |   |            |   | 6        |   |               |   | 47            |   |               |   |       |       |  |   |            |       |  |   |     |   |  |   | 53     |      
|Issuance of common stock related to the
acquisition of The Bryan-College Station
Financial Holding Company |                                                                           |  | 137,703      |   |            |   | 138      |   |               |   | 2,477         |   |               |   |       |       |  |   |            |       |  |   |     |   |  |   | 2,615  |      
|Compensation related to grant of treasury
stock to employees                                               |                                                                           |  |             |   |            |   |         |   |               |   | 5             |   |               |   |       |       |  |   |            |       |  |   | 45   |   |  |   | 50     |      
|Sale of treasury stock                                                                                     |                                                                           |  |             |   |            |   |         |   |               |   | 18            |   |               |   |       |       |  |   |            |       |  |   | 171  |   |  |   | 189    |      
|Dividends                                                                                                  |                                                                           |  |             |   |            |   |         |   |               |   |              |   |               |   | (1,026 | )     |  |   |            |       |  |   |     |   |  |   | (1,026 | )    
|                                                                                                           |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      
|Balance at December 31, 2002                                                                               |                                                                           |  | 2,646,139    |   |            | $ | 2,646    |   |               | $ | 16,683        |   |               | $ | 14,594 |       |  | $ | 1,612       |       |  | $ | (117 | ) |  | $ | 35,418 |      
|                                                                                                           |                                                                           |  |              |   |            |   |          |   |               |   |               |   |               |   |        |       |  |   |             |       |  |   |      |   |  |   |        |      

The
accompanying notes are an integral part of this statement.

F-6



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(Dollars in thousands)

|                                      |                                                                                                                     |                                                                                |                                                    |          |        |         |      |         |       |         |   |         |     |         |  
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------------------------- | -------- | ------ | ------- | ---- | ------- | ----- | ------- | - | ------- | --- | ------- | -
|                                      |                                                                                                                     |                                                                                |                                                    |          | 2002   |         | 2001 |         | 2000 
|                                      |                                                                                                                     |                                                                                |                                                    |          |        |         |      |         |      
|Cash flows from operating activities: |                                                                                                                     |                                                                                |                                                    |          |        |         |      |         |       |         |   |        
|                                      | Net earnings                                                                                                        |                                                                                | $                                                  | 4,278    |        |         | $    | 3,224   |       |         | $ | 3,037   |    
|                                      | Adjustments to reconcile net earnings to net cash provided by
operating activities:                                 |                                                                                |                                                    |          |        |         |      |         |       |         |   |         |    
|                                      |                                                                                                                     | Provision for loan losses                                                      |                                                    |          | 1,900  |         |      |         | 925   |         |   |         | 293 |        
|                                      |                                                                                                                     | Depreciation and amortization                                                  |                                                    |          | 2,198  |         |      |         | 1,330 |         |   |         | 834 |        
|                                      |                                                                                                                     | Noncash compensation expense                                                   |                                                    |          | 50     |         |      |         | 105   |         |   |         |    |        
|                                      |                                                                                                                     | Loss (gain) on sale of premises, equipment and other real estate               |                                                    |          | 1      |         |      |         | (16   | )       |   |         | (55 | )      
|                                      |                                                                                                                     | Realized (gain) loss, net, on sale of available-for-sale securities            |                                                    |          | (1,457 | )       |      |         | (340  | )       |   |         | 44  |        
|                                      |                                                                                                                     | Amortization of premium, net of accretion of discounts
on securities           |                                                    |          | 497    |         |      |         | 139   |         |   |         | 28  |        
|                                      |                                                                                                                     | Write-down of other real estate                                                |                                                    |          | 123    |         |      |         | 1     |         |   |         | 8   |        
|                                      |                                                                                                                     | Impairment on mortgage servicing rights                                        |                                                    |          | 446    |         |      |         |      |         |   |         |    |        
|                                      |                                                                                                                     | Funding of deferred compensation plan                                          |                                                    |          | (3,000 | )       |      |         |      |         |   |         |    |        
|                                      |                                                                                                                     | Changes in assets and liabilities, net of effects resulting
from acquisitions: |                                                    |          |        |         |      |         |       |         |   |         |     |        
|                                      |                                                                                                                     |                                                                                | Decrease (increase) in accrued interest receivable |          |        | 33      |      |         |       | 115     |   |         |     | (359    | )
|                                      |                                                                                                                     |                                                                                | (Increase) decrease in loans held for sale         |          |        | (30,502 | )    |         |       | 2,852   |   |         |     | (82     | )
|                                      |                                                                                                                     |                                                                                | Increase in mortgage servicing rights              |          |        | (2,432  | )    |         |       | (1,002  | ) |         |     | (462    | )
|                                      |                                                                                                                     |                                                                                | Increase in other assets                           |          |        | (1,403  | )    |         |       | (1,551  | ) |         |     | (794    | )
|                                      |                                                                                                                     |                                                                                | Increase (decrease) in other liabilities           |          |        | (339    | )    |         |       | 1,207   |   |         |     | 544     |  
|                                      |                                                                                                                     |                                                                                |                                                    |          |        |         |      |         |       |         |   |        
|                                      |                                                                                                                     |                                                                                | Net cash (used) provided by operating activities   |          |        | (29,607 | )    |         |       | 6,989   |   |         |     | 3,036   |  
|Cash flows from investing activities: |                                                                                                                     |                                                                                |                                                    |          |        |         |      |         |       |         |   |        
|                                      | Net increase in cash resulting from acquisitions                                                                    |                                                                                |                                                    | 18,194   |        |         |      |        |       |         |   | 30,523  |    
|                                      | Maturities of interest-bearing deposits in other financial
institutions, net of effects resulting from acquisitions |                                                                                |                                                    |         |        |         |      |        |       |         |   | 2,070   |    
|                                      | Proceeds from sales of available-for-sale securities                                                                |                                                                                |                                                    | 109,448  |        |         |      | 22,426  |       |         |   | 17,207  |    
|                                      | Proceeds from principal repayments of available-for-sale securities                                                 |                                                                                |                                                    | 18,429   |        |         |      | 11,475  |       |         |   | 5,015   |    
|                                      | Proceeds from maturities and calls of available-for-sale securities                                                 |                                                                                |                                                    | 100      |        |         |      | 7,550   |       |         |   | 1,420   |    
|                                      | Proceeds from maturities and calls of held-to-maturity securities                                                   |                                                                                |                                                    |         |        |         |      |        |       |         |   | 55      |    
|                                      | Purchases of available-for-sale securities, net of effects
resulting from acquisitions                              |                                                                                |                                                    | (145,640 | )      |         |      | (74,707 | )     |         |   | (6,201  | )  
|                                      | Net increase in loans, net of the effects resulting from acquisitions                                               |                                                                                |                                                    | (23,956  | )      |         |      | (38,981 | )     |         |   | (62,631 | )  
|                                      |                                                                                                                     |                                                                                |                                                    |          |        |         |      |         |      
|                                      | Proceeds from sales of premises, equipment and other real estate                                                    |                                                                                |                                                    | 228      |        |         |      | 211     |       |         |   | 265     |    
|                                      | Purchases of premises, equipment and other real estate, net of effects
resulting from acquisitions                  |                                                                                |                                                    | (4,335   | )      |         |      | (4,998  | )     |         |   | (4,478  | )  
|                                      |                                                                                                                     |                                                                                |                                                    |          |        |         |      |         |       |         |   |        
|                                      |                                                                                                                     |                                                                                | Net cash used in investing activities              |          |        | (27,532 | )    |         |       | (77,024 | ) |         |     | (16,755 | )

F-7



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS  CONTINUED
Year ended December 31,
(Dollars in thousands)

|                                               |                                                                                    |                                                      |        |          |         |      |        |          |        |   |        |         |        | 
|---------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------------------- | ------ | -------- | ------- | ---- | ------ | -------- | ------ | - | ------ | ------- | ------ | 
|                                               |                                                                                    |                                                      |        | 2002     |         | 2001 |        | 2000    
|                                               |                                                                                    |                                                      |        |          |         |      |        |         
|Cash flows from financing activities:          |                                                                                    |                                                      |        |          |         |      |        |          |        |   |        |        
|                                               | Net increase in deposits, net of the effects resulting from acquisitions           |                                                      | $      | 3,396    |         |      | $      | 39,380   |        |   | $      | 38,462  |       
|                                               | Change in federal funds purchased, net of the effects resulting
from acquisitions  |                                                      |        | 19,085   |         |      |        | 647      |        |   |        | (3,960  | )     
|                                               | Net proceeds from issuance of common stock upon exercise of
employee stock options |                                                      |        | 53       |         |      |        | 138      |        |   |        |        |       
|                                               | Issuance of common stock                                                           |                                                      |        |         |         |      |        |         |        |   |        | 1,093   |       
|                                               | Proceeds from borrowings                                                           |                                                      |        | 146,367  |         |      |        | 171,500  |        |   |        | 26,878  |       
|                                               | Proceeds from issuance of capital securities of trust                              |                                                      |        |         |         |      |        |         |        |   |        | 7,000   |       
|                                               | Repayment of borrowings                                                            |                                                      |        | (122,654 | )       |      |        | (141,395 | )      |   |        | (45,115 | )     
|                                               | Repayment of subordinated notes and debentures                                     |                                                      |        | (388     | )       |      |        |         |        |   |        |        |       
|                                               | Purchase of treasury stock                                                         |                                                      |        |         |         |      |        | (417     | )      |   |        | (281    | )     
|                                               | Sale of treasury stock                                                             |                                                      |        | 189      |         |      |        | 223      |        |   |        | 471     |       
|                                               | Dividends paid                                                                     |                                                      |        | (1,001   | )       |      |        | (838     | )      |   |        | (763    | )     
|                                               |                                                                                    |                                                      |        |          |         |      |        |          |        |   |        |        
|                                               |                                                                                    | Net cash provided by financing activities            |        |          | 45,047  |      |        |          | 69,238 |   |        |         | 23,785 | 
|                                               |                                                                                    |                                                      |        |          |         |      |        |          |        |   |        |        
|                                               |                                                                                    | Net (decrease) increase in cash and cash equivalents |        |          | (12,092 | )    |        |          | (797   | ) |        |         | 10,066 | 
|Cash and cash equivalents at beginning of year |                                                                                    |                                                      | 32,666 |          |         |      | 33,463 |          |        |   | 23,397 |        
|                                               |                                                                                    |                                                      |        |          |         |      |        |          |        |   |        |        
|Cash and cash equivalents at end of year       |                                                                                    | $                                                    | 20,574 |          |         | $    | 32,666 |          |        | $ | 33,463 |        
|                                               |                                                                                    |                                                      |        |          |         |      |        |          |        |   |        |        

The accompanying notes are an integral part of these statements.

F-8



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |  | A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follow. The policies
conform to accounting principles generally accepted in the United States of
America and to general practices within the banking industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 1. General                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Texas United Bancshares, Inc. (the Company or the Parent) is a Texas
corporation and a financial holding company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The Company operates eighteen banking centers and four loan production
offices in Central Texas. The Companys primary sources of revenue are
derived from investing in various securities and granting loans primarily
to customers in Central Texas. Although the Company has a diversified loan
portfolio, a substantial portion of its debtors ability to honor their
contracts is dependent on the economy in Central Texas.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | 2. Principles of Consolidation and Investment in Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Texas United Nevada, Inc. (TUNI), State
Bank (the Bank), Third Coast Wealth Advisors, Inc. (Third Coast) and TXUI
Statutory Trust I (the Trust) (collectively referred to as the Company).
All significant intercompany transactions and balances have been
eliminated in the consolidated report of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | 3. Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | 4. Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held-to-maturity, trading, or
available-for-sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are
classified as held-to-maturity and measured at amortized cost in the
financial statements only if management has the positive intent and
ability to hold those securities to maturity. Securities that are bought
and held principally for the purpose of selling them in the near term are
classified as trading and measured at fair value in the financial
statements with unrealized gains and losses included in earnings.
Investments not classified as either held-to-maturity or trading are
classified as available-for-sale and measured at fair value in the
financial statements with unrealized gains and losses reported, net of
tax, as a component of accumulated other comprehensive income (loss).



| |  | Gains and losses on the sale of securities are determined using the
specific-identification method.                                                                                                                                                                                              
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their carrying value that are other
than temporary result in write-downs of the individual securities to their
fair value. The related write-downs are included in earnings as realized
losses.

F-9



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued



| |  | Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 5. Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Loans for which management has the ability and intent to hold for the
foreseeable future or until maturity or pay off are reported at the
principal amount outstanding, net of charge-offs, unearned discounts,
purchase discounts and an allowance for loan losses. Unearned discounts on
installment loans are recognized using a method which approximates a level
yield over the term of the loans. Interest on other loans is calculated
using the simple interest method on the daily balance of the principal
amount outstanding.                                                                                                                                                                                                                                                                                  
|
| |  | A loan is identified as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the
loan agreement. A loan is not considered impaired during a period of delay
in payment if the Company expects to collect all amounts due, including
interest past due. The Company generally considers a period of delay in
payment to include delinquency up to 90 days. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loans effective interest rate or based on the fair value
of the collateral if the loan is collateral-dependent. If the measure of
the impaired loan is less than the recorded investment in the loan, an
impairment charge is recognized through the provision for loan losses.
|
| |  | The accrual of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received. Loans are returned to accrual
status when payments are brought current and, in managements judgment, the
loan will continue to pay as agreed.                                                                                                                                                                                                                                                                                                                                         
|
| |  | 6. Allowance for Loan Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes that collectibility of the principal
is unlikely.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The allowance is an amount that management believes will be adequate to
absorb losses inherent in existing loans and commitments to extend credit,
based on evaluations of the collectibility and prior loss experience of
loans and commitments to extend credit. The evaluations take into
consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans and current and anticipated economic conditions that may affect the
borrowers ability to pay.                                                                                                                                                                                                                                                                       
|
| |  | 7. Loans Held for Sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



| |  | Loans held for sale are carried at
the lower aggregate cost or market value. Market value is determined
by current investor yield requirements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------

F-10



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED(Dollars in thousands, except per share amounts)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued



| |  | 8. Transfers and Servicing of Financial Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which replaces SFAS No. 125 of the same title. This statement
revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but carries over most of SFAS No. 125s provisions without
reconsideration. This statement was effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and was effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000.                                                                
|
| |  | In connection with securitizations or transfers, certain retained
interests, including Mortgage Servicing Rights (MSR), are recorded at their
allocated carrying value based on their relative fair value and are
amortized in proportion to, and over the period of, estimated future net
servicing income. Initially and at subsequent measurement dates, fair
value is determined by computing the present value of the estimated cash
flows retained, using the dates that such cash flows are expected to be
released to the Company, at a discount rate considered to be commensurate
with the risks associated with the cash flows. The amounts and timing of
the cash flows are estimated after considering various economic factors
including prepayment, delinquency, default and loss assumptions. Valuation
of retained interests in securitizations may also involve the use of quoted
market prices on same or similar securities.
|
| |  | The Company assesses impairment of the MSR based on the fair value of those
rights on a stratum-by-stratum basis, with any impairment recognized
through a valuation allowance for each impaired stratum. The portfolio is
stratified based on risk characteristics such as life, interest rate and
balance of underlying loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | 9. Premises and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line basis over the estimated
useful life of each type of asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | 10. Advertising Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of
direct-response advertising are capitalized and amortized over the period
during which future benefits are expected to be received.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | 11. Other Real Estate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Real estate acquired by foreclosure is recorded at the lower of the fair
value at the date of foreclosure or acquisition, or the book value of the
loan. After foreclosure, management periodically performs valuations and
the real estate is carried at the lower of carrying amount or fair value
less cost to sell. Operating expenses of such properties, net of related
income, and gains and losses on their disposition are included in other
expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-11



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED(Dollars in thousands, except per share amounts)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued



| |  | 12. Goodwill and Core Deposit Intangibles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at the dates of acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Core deposit intangibles, which represents the net present value of the
future economic benefits related to purchased deposits, are amortized on an
accelerated basis over their estimated benefit period, which is eight
years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The Company accounts for goodwill and core deposit intangibles in
accordance with SFAS 142, which was adopted on January 1, 2002. SFAS 142
supercedes APB Opinion No. 17, Intangible Assets. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to
their acquisition (i.e., the post-acquisition accounting). The most
significant changes made by SFAS 142 are: (1) goodwill and indefinite
lived intangible assets will no longer be amortized, (2) goodwill will be
tested for impairment at least annually at the reporting unit level, (3)
the amortization period of intangible assets with finite lives will no
longer be limited to forty years, and (4) intangible assets deemed to have
an indefinite life will be tested for impairment at least annually using a
two step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of the
fiscal year. Any impairment loss resulting from the transitional
impairment tests will be reflected as a cumulative effect of a change in
accounting principle. The second step of the goodwill impairment test
measures the amount of the impairment loss, if any, and must be completed
by the end of the fiscal year.
|
| |  | Intangible assets that have finite lives continue to be subject to
amortization. In addition, the Company must evaluate the remaining useful
life each reporting period to determine whether events and circumstances
warrant a revision of the remaining period of amortization. If the
estimate of an intangible assets remaining life is changed, the remaining
carrying amount of the intangible asset is amortized prospectively over
that revised remaining useful life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | 13. Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The Company files a consolidated Federal income tax return. By agreement
with the Parent, the Bank, Third Coast and TUNI record a provision or benefit
for Federal income taxes on the same basis as if they had filed a separate
Federal income tax return. The asset and liability method of accounting is
used for income taxes where deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. When management determines that
it is more likely than not that a deferred tax asset will not be realized, a
valuation allowance must be established. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.                                                                                                                                                                                                 

F-12



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED(Dollars in thousands, except per share amounts)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued



| |  | 14. Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Basic earnings per common share is calculated by dividing net income
available for common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share is
calculated by dividing net earnings available for common shareholders by
the weighted average number of common and dilutive potential common shares.
The effect of stock options are considered in earnings per share
calculations if dilutive, using the treasury stock method.                                                 
|
| |  | 15. Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The Company has two stock-based employee compensation plans, which are
described more fully in Note R. The Company applies APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations in
accounting for its plan. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 (SFAS 123), Accounting for
Stock-Based Compensation(with the assumptions described in Note R), to its
stock-based employee plans.

|                    |                                                                                                                                                                      |  |      |       |      |  |      |       |  |  |   |       | 
|------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                    |                                                                                                                                                                      |  | 2002 |       | 2001 |  | 2000
|                    |                                                                                                                                                                      |  |      |       |      |  |     
|                    |                                                                                                                                                                      |  |     |       |      |  |     |       |  |  |   |      
|                    | Net income as reported                                                                                                                                               |  | $    | 4,278 |      |  | $    | 3,224 |  |  | $ | 3,037 | 
|                    | Add: Stock-based employee compensation expense
included in reported net income, net of related tax
effects                                                           |  |      |      |      |  |      | 105   |  |  |   |      | 
|                    | Deduct: Total stock-based employee compensation
expense determined under fair value based method
for awards granted, modified or settled, net of related
tax effects |  |      | 29    |      |  |      | 57    |  |  |   | 70    | 
|                    |                                                                                                                                                                      |  |      |       |      |  |      |       |  |  |   |      
|                    | Pro forma net income                                                                                                                                                 |  | $    | 4,249 |      |  | $    | 3,272 |  |  | $ | 2,967 | 
|                    |                                                                                                                                                                      |  |      |       |      |  |      |       |  |  |   |      
|Earnings per share: |                                                                                                                                                                      |  |      |       |      |  |      |       |  |  |   |      
|                    | Basic  as reported                                                                                                                                                  |  | $    | 1.68  |      |  | $    | 1.29  |  |  | $ | 1.25  | 
|                    |                                                                                                                                                                      |  |      |       |      |  |      |       |  |  |   |      
|                    | Basic  pro forma                                                                                                                                                    |  | $    | 1.67  |      |  | $    | 1.31  |  |  | $ | 1.23  | 
|                    |                                                                                                                                                                      |  |      |       |      |  |      |       |  |  |   |      
|                    | Diluted  as reported                                                                                                                                                |  | $    | 1.60  |      |  | $    | 1.24  |  |  | $ | 1.19  | 
|                    |                                                                                                                                                                      |  |      |       |      |  |      |       |  |  |   |      
|                    | Diluted  pro forma                                                                                                                                                  |  | $    | 1.59  |      |  | $    | 1.26  |  |  | $ | 1.16  | 
|                    |                                                                                                                                                                      |  |      |       |      |  |      |       |  |  |   |      



| |  | 16. Off-Balance Sheet Financial Instruments                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In the ordinary course of business, the Company enters into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they
are funded or related fees are incurred or received.

F-13



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED(Dollars in thousands, except per share amounts)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued



| |  | 17. Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In preparing the financial statements in conformity with accounting
principles generally accepted in the United States of America, management
is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
|
| |  | 18. Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Certain reclassifications of prior year amounts have been made to conform
to the current year presentation.                                                                                                                                                                                                                                                                                                                                                    

NOTE B - NEW PRONOUNCEMENTS



| |  | Accounting for Asset Retirement Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June 2001, the FASB issued SFAS No. 143 (SFAS 143), Accounting for Asset
Retirement Obligations. This statement requires entities to record a
liability for the estimated retirement and removal costs of assets used in
their business. The liability is recorded at its fair value, with a
corresponding asset which is depreciated over the remaining useful life of
the long-lived asset to which the liability relates. Period expenses will
also be recognized for changes in the original value of the liability as a
result of the passage of time and revisions in the undiscounted cash flows
required to satisfy the obligation. The provisions of SFAS 143 are
effective for fiscal years beginning after June 15, 2002. The Company
anticipates that adoption of SFAS 143 will not have a material effect on
the financial statements of the Company.                                                                                                                                                                                                                                                            
|
| |  | In August 2001, the FASB issued SFAS No. 144 (SFAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses issues
relating to the implementation of SFAS No. 121 (SFAS 121), Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, and develops a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. The Company adopted
the provisions of SFAS 144 on January 1, 2002. Management believes SFAS
144 does not have a material effect on the Companys consolidated results
of operations, financial position or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Accounting for Debt Extinguishments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In April 2002, the FASB issued SFAS No. 145 (SFAS 145), Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Among other provisions, SFAS 145 rescinds SFAS No.
4, Reporting Gains and Losses from Extinguishment of Debt. Accordingly,
gains or losses from extinguishment of debt should not be reported as
extraordinary items unless the extinguishment qualifies as an extraordinary
item under the criteria of Accounting Principles Board Opinion No. 30 (APB
30), Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. Gains or losses from
extinguishment of debt that do not meet the criteria of APB 30 should be
reclassified to income from continuing operations in all prior periods
presented. The provisions of SFAS 145 will be effective for fiscal years
beginning after May 15, 2002. The Company
anticipates that adoption of SFAS 145 will not have a material effect on
the financial statements of the Company.

F-14



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE B - NEW PRONOUNCEMENTS  Continued



| |  | Accounting for Costs Associated with Exit or Disposal Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires entities to
recognize costs associated with exit or disposal activities when
liabilities are incurred rather than when the entity commits to an exit or
disposal plan, as currently required. Examples of costs covered by this
guidance include one-time employee termination benefits, costs to terminate
contracts other than capital leases, costs to consolidate facilities or
relocate employees and certain other exit or disposal activities. This
statement is effective for fiscal years beginning after December 31, 2002,
and will impact any exit or disposal activities the Company initiates after
that date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Acquisitions of Certain Financial Institutions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | In October 2002, the FASB issued SFAS 147. This statement provides
interpretive guidance on the application of the purchase method of
acquisitions of financial institutions. Except for transactions between
two or more mutual enterprises, SFAS 147 removes acquisitions of financial
institutions from the scope of SAFS No. 72 (SFAS 72), Accounting for
Certain Acquisitions of Banking and Thrift Institutions, and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution is Acquired in a Business
Combination Accounted for by the Purchase Method. SFAS 147 requires that
those transactions be accounted in accordance with SFAS No. 141, Business
Combinationsand SFAS 142. Thus, the requirement of SFAS 72 to recognize
(and subsequently amortize) any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, SFAS 147
amends SFAS 144 to include in its scope long-term customer relationship
intangible assets of financial institutions such as depositor and borrower
relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted
cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS 144 requires for other long-lived assets
that are held and used. As further disclosed in Note I, the Company will
no longer amortize approximately $400,000 related to unidentifiable
intangible assets acquired in connection with previous acquisitions. The
provisions of the Statement were effective for acquisitions on or after
October 1, 2002. Transition provisions for previously recognized
unidentifiable intangible assets were effective October 1, 2002. If the
transaction that gave rise to the unidentifiable intangible asset was a
business combination, the carrying amount of that assets shall be
reclassified to goodwill as of the later of the date of acquisition or the
date that SFAS 142 is applied in its entirety, which was January 1, 2002
for the Company. Any amortization of the unidentifiable intangible asset
recorded from the date of adoption of SFAS 142 to the date of adoption of
SFAS 147 shall be removed. During 2002, the Company reclassified $3.5
million in unidentifiable intangible assets to goodwill and reversed
$300,000 in amortization expense.

F-15



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE B - NEW PRONOUNCEMENTS  Continued



| |  | Stock-Based Employee Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In December 2002, the FASB issued SFAS No. 148 (SFAS 148), Accounting for
Stock-Based Compensation  Transition and Disclosure  an Amendment of FASB
Statement No. 123, to provide alternative transition methods for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the pro-forma effect on reported
results of applying the fair value based method for entities which use the
intrinsic value method of accounting. This statement is effective for
financial statements for fiscal years ending after December 15, 2002 and is
effective for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2002 with earlier
application permitted. The Company does not plan a change to the
fair-value based method of accounting for stock-based employee compensation
and has included the disclosure requirements of SFAS 148 in the
accompanying notes to the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Accounting for Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a
guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
Company previously did not record a liability when guaranteeing obligations
unless it became probable that the Company would have to perform under the
guarantee. Interpretation 45 applies prospectively to guarantees the
Company issues or modifies subsequent to December 31, 2002, but has certain
disclosure requirements effective for interim and annual periods ending
after December 15, 2002. The Company issues guarantees in the normal
course of business. The Company is currently assessing and quantifying the
effect that adoption of FIN 45 will have on its 2003 financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Variable Interest Entities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, for certain entities which do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not have
the characteristics of a controlling financial interest (variable interest
entities). Variable interest entities will be required to be consolidated
by their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the entitys
expected losses, receives a majority of its expected returns, or both, as a
result of holding variable interests, which are ownership, contractual, or
other pecuniary interests in an entity. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. FIN 46 applies
to public enterprises as of the beginning of the applicable interim or annual
period. The Company currently does not have an ownership interest in any
entities which meet the definition of a variable interest entity which are
not consolidated in the accompanying financial statements, and therefore does
not expect the adoption of FIN 46 to have a material impact on its 2003
financial statements.

F-16



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE B - NEW PRONOUNCEMENTS  Continued



| |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, Revenue Arrangements with Multiple Deliverables.
The consensus provides that revenue arrangements with multiple deliverables
should be divided into separate units of accounting if certain criteria are
met. The consideration for the arrangement should be allocated to the
separate units of accounting based on their relative fair values, with
different provisions if the fair value of all deliverables are not known or
if the fair value is contingent on delivery of specified items or
performance conditions. Applicable revenue recognition criteria should be
considered separately for each separate unit of accounting. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, Accounting
Changes. The Company has not determined the effect of adoption of EITF on
its financial statements or the method of adoption it will use.

NOTE C  BUSINESS ACQUISITIONS AND COMBINATIONS



| |  | On July 31, 2002, the Company completed the acquisition of The
Bryan-College Station Financial Holding Company and its subsidiaries
(Bryan-College Station). In exchange for all of the issued and
outstanding stock of Bryan-College Station, the Company issued 137,703
shares of its common stock and assumed $3,629 in outstanding
debentures. The three locations of First Federal Savings Bank (First
Federal), Bryan-College Stations wholly-owned subsidiary, became banking
centers of State Bank. On July 31, 2002, Bryan-College Station reported
total consolidated assets of $79,908, total loans of $57,535,
total cash of $19,089, property and equipment of $1,817,
$73,835 in deposits, and $2,253 in other liabilities. The excess of
the cost over fair value of the assets acquired of $2,543 is included in
goodwill in the accompanying balance sheet.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On September 29, 2000, the Company purchased the stock of Third Coast
Wealth Advisors, Inc. (Third Coast), an investment consulting firm. The
acquisition has been accounted for as a purchase, therefore Third Coasts
results of operations are included in the consolidated financial statements
from the date of acquisition. The acquisition resulted in the Company
acquiring fixed assets with a fair value of $10. The excess of the cost
over the fair value of the assets acquired of $240 is included in goodwill
in the accompanying balance sheet.                                                                                                                                                                                                                                                                                                                  
|
| |  | On September 7, 2000, the Bank purchased certain assets and assumed certain
liabilities of two branches of Texas Guaranty Bank. The purchase and
assumption resulted in the Bank acquiring $447 in cash, $3,696 in loans and
$37,877 in deposits. The purchase price was allocated based on the fair
value of the assets acquired and
liabilities assumed, and the excess of cost of the fair value of the assets and liabilities acquired of $3,212 is
included in goodwill in the accompanying balance sheet.                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The following unaudited pro forma information assumes the acquisition of
Bryan-College Station occurred on January 1, 2002:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                             |  |   |        | 
|---------------------------- |  | - | ------ | 
|Interest income              |  | $ | 36,098 | 
|Net earnings                 |  |   | 3,808  | 
|Earnings per share (basic)   |  |   | 1.49   | 
|Earnings per share (diluted) |  |   | 1.43   | 

F-17



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE D  RESERVE REQUIREMENTS



| |  | Cash and balances maintained at the Federal Reserve of approximately $418
and $1,524 satisfy regulatory reserve requirements at December 31, 2002 and
2001.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE E - SECURITIES



| |  | The securities have been classified in the consolidated balance sheet
according to managements intent. The carrying amount of securities and
their approximate fair values are as follows at December 31, 2002 and 2001:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |                            |      |         |           |  |            |       |            |  |       |       |     |  |   |         |        |  | 
|------------------------------ | -------------------------- | ---- | ------- | --------- |  | ---------- | ----- | ---------- |  | ----- | ----- | --- |  | - | ------- | ------ |  | 
|                               |                            |      |         |           |  |            |       | Gross      |  | Gross |       |     |  |  
|                               |                            |      |         | Amortized |  | unrealized |       | unrealized |  | Fair 
|                               |                            |      |         | cost      |  | gains      |       | losses     |  | value
|                               |                            |      |         |           |  |            |       |            |  |      
|                               |                            | 2002 |         |           |  |            |       |            |  |       |       |     |  |   |         |        |  | 
|Available-for-sale securities: |                            |      |         |           |  |            |       |            |  |       |       |     |  |   |         |       
|                               | Municipal securities       |      | $       | 13,555    |  |            | $     | 758        |  |       | $     |    |  |   | $       | 14,313 | 
|                               | U. S. Agency securities    |      |         | 33,027    |  |            |       | 726        |  |       |       |    |  |   |         | 33,753 | 
|                               | Mortgage-backed securities |      |         | 79,886    |  |            |       | 1,113      |  |       |       | 154 |  |   |         | 80,845 | 
|                               | Other                      |      |         | 3,229     |  |            |       |           |  |       |       |    |  |   |         | 3,229  | 
|                               |                            |      |         |           |  |            |       |            |  |       |       |     |  |   |         |       
|                               |                            | $    | 129,697 |           |  | $          | 2,597 |            |  | $     | 154   |     |  | $ | 132,140 |       
|                               |                            |      |         |           |  |            |       |            |  |       |       |     |  |   |         |       
|                               |                            | 2001 |         |           |  |            |       |            |  |       |       |     |  |   |         |        |  | 
|Available-for-sale securities: |                            |      |         |           |  |            |       |            |  |       |       |     |  |   |         |       
|                               | Municipal securities       |      | $       | 26,637    |  |            | $     | 254        |  |       | $     | 235 |  |   | $       | 26,656 | 
|                               | U. S. Agency securities    |      |         | 20,777    |  |            |       | 9          |  |       |       | 264 |  |   |         | 20,522 | 
|                               | Mortgage-backed securities |      |         | 60,344    |  |            |       | 365        |  |       |       | 546 |  |   |         | 60,163 | 
|                               | Other                      |      |         | 2,536     |  |            |       |           |  |       |       |    |  |   |         | 2,536  | 
|                               |                            |      |         |           |  |            |       |            |  |       |       |     |  |   |         |       
|                               |                            | $    | 110,294 |           |  | $          | 628   |            |  | $     | 1,045 |     |  | $ | 109,877 |       
|                               |                            |      |         |           |  |            |       |            |  |       |       |     |  |   |         |       



| |  | Other securities include investments in Federal Home Loan Bank (FHLB) stock
of $3,005 and $2,351 at December 31, 2002 and 2001. The FHLB stock is
restricted, as it is a required investment under the Banks borrowing
agreement with the FHLB.                                            
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Gross realized gains on sales of available-for-sale securities were $1,584,
$447 and $19 for the years ended December 31, 2002, 2001 and 2000. Gross
realized losses on sales of available-for-sale securities were $127, $107
and $63 for the years ended December 31, 2002, 2001 and 2000.

F-18



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE E  SECURITIES  Continued



| |  | The following table shows the contractual maturity distribution of the
investment portfolio at December 31, 2002. Contractual maturities may
differ from expected maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     |  |                               |         |            |  |   |         | 
|------------------------------------ |  | ----------------------------- | ------- | ---------- |  | - | ------- | 
|                                     |  | Available-for-sale securities
|                                     |  |                              
|                                     |  | Amortized cost                |         | Fair value
|                                     |  |                               |         |           
|Due in one year or less              |  | $                             |        |            |  | $ |        | 
|Due from one to five years           |  |                               | 38,630  |            |  |   | 39,761  | 
|Due from five to ten years           |  |                               | 7,952   |            |  |   | 8,305   | 
|Due after ten years                  |  |                               |        |            |  |   |        | 
|Mortgage-backed and other securities |  |                               | 83,115  |            |  |   | 84,074  | 
|                                     |  |                               |         |            |  |   |         | 
|                                     |  | $                             | 129,697 |            |  | $ | 132,140 | 
|                                     |  |                               |         |            |  |   |         | 



| |  | During 2001, the Company transferred held-to-maturity securities to the
available-for-sale category as permitted by the transition rules upon
adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The securities transferred had a book value of $8,528 and a
net unrealized gain at the date of transfer of $149.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Securities with an aggregate book value of approximately $57,623 and
$63,036 at December 31, 2002 and 2001, were pledged as collateral to secure
public deposits.                                                                                                                                                                                     

NOTE F - LOANS

Major classifications of loans are as follows at December 31:

|             |                        |                           |         |         |        |      |         |         |        |  
|------------ | ---------------------- | ------------------------- | ------- | ------- | ------ | ---- | ------- | ------- | ------ | -
|             |                        |                           |         | 2002    |        | 2001
|             |                        |                           |         |         |        |     
|Commercial   |                        | $                         | 62,391  |         |        | $    | 53,401  |        
|Real estate: |                        |                           |         |         |        |      |         |        
|             | 1-4 family residential |                           |         | 149,471 |        |      |         | 114,663 |       
|             | Commercial mortgage    |                           |         | 62,014  |        |      |         | 35,886  |       
|             | Other                  |                           |         | 18,269  |        |      |         | 23,970  |       
|Consumer     |                        |                           | 60,516  |         |        |      | 46,270  |        
|             |                        |                           |         |         |        |      |         |        
|             |                        |                           | 352,661 |         |        |      | 274,190 |        
|             | Less:                  |                           |         |         |        |      |         |         |       
|             |                        | Unearned discounts        |         |         | (20    | )    |         |         | (62    | )
|             |                        | Allowance for loan losses |         |         | (3,296 | )    |         |         | (1,754 | )
|             |                        |                           |         |         |        |      |         |        
|             |                        | $                         | 349,345 |         |        | $    | 272,374 |        
|             |                        |                           |         |         |        |      |         |        

F-19



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE F  LOANS  Continued



| |  | Impaired loans were approximately $623 and $380 at December 31, 2002 and
2001. The reduction in interest income associated with these impaired
loans was insignificant. The valuation allowance established for impaired
loans is not significant. There were no commitments to lend additional
funds to borrowers whose loans were classified as impaired.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Outstanding loans to directors, significant shareholders and executive
officers of the Company and to their related business interests aggregated
$804 and $1,138 at December 31, 2002 and 2001.                                                                                                                                                           
|
| |  | Following is an analysis of activity with respect to these amounts for the
years ended December 31:                                                                                                                                                                                                                                                        

|                       |  |      |        |      |  |   |        |  
|---------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                       |  | 2002 |        | 2001
|                       |  |      |        |     
|Balance at January 1   |  | $    | 1,138  |      |  | $ | 1,549  |  
|New loans              |  |      | 1,654  |      |  |   | 2,387  |  
|Repayments             |  |      | (1,988 | )    |  |   | (2,798 | )
|                       |  |      |        |      |  |   |        |  
|Balance at December 31 |  | $    | 804    |      |  | $ | 1,138  |  
|                       |  |      |        |      |  |   |        |  



| |  | In managements opinion, all such loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other customers and did not involve
more than a normal risk of collectibility or present other unfavorable
features.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE G - ALLOWANCE FOR LOAN LOSSES



| |  | Changes in the allowance for loan losses were as follows for the years
ended December 31:
| |  | -----------------------------------------------------------------------------------------

|                                            |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                            |  | 2002 |        | 2001 |  | 2000
|                                            |  |      |        |      |  |     
|Balance at January 1                        |  | $    | 1,754  |      |  | $    | 1,590  |   |  | $ | 1,737  |  
|Provision                                   |  |      | 1,900  |      |  |      | 925    |   |  |   | 293    |  
|Charge-offs                                 |  |      | (2,052 | )    |  |      | (1,383 | ) |  |   | (1,638 | )
|Recoveries                                  |  |      | 954    |      |  |      | 622    |   |  |   | 1,198  |  
|Balance acquired from Bryan-College Station |  |      | 740    |      |  |      |       |   |  |   |       |  
|                                            |  |      |        |      |  |      |        |   |  |   |        |  
|Balance at December 31                      |  | $    | 3,296  |      |  | $    | 1,754  |   |  | $ | 1,590  |  
|                                            |  |      |        |      |  |      |        |   |  |   |        |  

F-20



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE H - PREMISES AND EQUIPMENT



| |  | Premises and equipment are summarized as follows at December 31:
| |  | ----------------------------------------------------------------

|                                  |  |              |   |      |        |      |        |  |        |   |        | 
|--------------------------------- |  | ------------ | - | ---- | ------ | ---- | ------ |  | ------ | - | ------ | 
|                                  |  | Estimated    |   |      |        |      |        |  |        |  
|                                  |  | useful lives |   | 2002 |        | 2001
|                                  |  |              |   |      |        |     
|Land                              |  |              |  |      |        | $    | 2,648  |  |        | $ | 1,857  | 
|Buildings and improvements        |  | 10-40 years  |   |      | 16,669 |      |        |  | 13,731 |  
|Furniture, fixtures and equipment |  | 3-10 years   |   |      | 12,291 |      |        |  | 9,825  |  
|                                  |  |              |   |      |        |      |        |  |        |   |        | 
|                                  |  |              |   |      |        |      | 31,608 |  |        |   | 25,413 | 
|Less accumulated depreciation     |  |              |   |      |        |      | 8,641  |  |        |   | 7,029  | 
|                                  |  |              |   |      |        |      |        |  |        |   |        | 
|                                  |  |              |   |      |        |      | 22,967 |  |        |   | 18,384 | 
|Construction in progress          |  |              |   |      |        |      | 396    |  |        |   | 498    | 
|                                  |  |              |   |      |        |      |        |  |        |   |        | 
|                                  |  |              |   |      |        | $    | 23,363 |  |        | $ | 18,882 | 
|                                  |  |              |   |      |        |      |        |  |        |   |        | 



| |  | Included in other assets are other real estate and repossessed assets of
$421 and $38 at December 31, 2002 and 2001.
| |  | --------------------------------------------------------------------------------------------------------------------

NOTE I  GOODWILL AND LONG-LIVED ASSETS



| |  | In 2002, the Company adopted SFAS 142. SFAS 142 addresses the financial
accounting and reporting for goodwill and other acquired intangible assets.
In particular, SFAS 142 mandates a fair value approach to assessing the
potential impairment of goodwill and other intangibles with indeterminable
lives as previously discussed in Note A(12). No impairment was noted as of
the date of adoption or at December 31, 2002. Goodwill amortization
expense of approximately $508 and $287 was recorded in fiscal years 2001
and 2000. No amortization was recorded in fiscal year 2002 following
adoption of SFAS 142.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following reconciliation summarizes the pro-forma impact that the
adoption of SFAS 142 would have had on the Companys net income had it
been consistently applied to all periods:                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                |                                 |                       |       |       |      |      |       |       |      |   |       |       |      | 
|------------------------------- | ------------------------------- | --------------------- | ----- | ----- | ---- | ---- | ----- | ----- | ---- | - | ----- | ----- | ---- | 
|                                |                                 |                       |       | 2002  |      | 2001 |       | 2000 
|                                |                                 |                       |       |       |      |      |       |      
|Net earnings, as reported       |                                 | $                     | 4,278 |       |      | $    | 3,224 |       |      | $ | 3,037 |      
|Add back: Goodwill amortization |                                 |                       |      |       |      |      | 508   |       |      |   | 287   |      
|                                |                                 |                       |       |       |      |      |       |       |      |   |       |      
|                                | Adjusted net earnings           |                       | $     | 4,278 |      |      | $     | 3,732 |      |   | $     | 3,324 |     
|                                |                                 |                       |       |       |      |      |       |       |      |   |       |      
|Basic earnings per share:       |                                 |                       |       |       |      |      |       |       |      |   |       |      
|                                | Net earnings, as reported       |                       | $     | 1.68  |      |      | $     | 1.29  |      |   | $     | 1.25  |     
|                                | Add back: Goodwill amortization |                       |       |      |      |      |       | 0.21  |      |   |       | 0.12  |     
|                                |                                 |                       |       |       |      |      |       |       |      |   |       |      
|                                |                                 | Adjusted net earnings |       | $     | 1.68 |      |       | $     | 1.50 |   |       | $     | 1.37 | 
|                                |                                 |                       |       |       |      |      |       |       |      |   |       |      

F-21



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE I  GOODWILL AND LONG-LIVED ASSETS  Continued

|                            |                                 |                       |   |      |      |      |   |      |      |  |   |      |      | 
|--------------------------- | ------------------------------- | --------------------- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                            |                                 |                       |   | 2002 |      | 2001 |   | 2000
|                            |                                 |                       |   |      |      |      |   |     
|Diluted earnings per share: |                                 |                       |   |      |      |      |   |      |      |  |   |     
|                            | Net earnings, as reported       |                       | $ | 1.60 |      |      | $ | 1.24 |      |  | $ | 1.19 |     
|                            | Add back: Goodwill amortization |                       |   |     |      |      |   | 0.20 |      |  |   | 0.12 |     
|                            |                                 |                       |   |      |      |      |   |      |      |  |   |     
|                            |                                 | Adjusted net earnings |   | $    | 1.60 |      |   | $    | 1.44 |  |   | $    | 1.31 | 
|                            |                                 |                       |   |      |      |      |   |      |      |  |   |     



| |  | The gross carrying amount of intangible assets and associated amortization at
December 31, 2002 is presented in the following table:
| |  | ------------------------------------------------------------------------------------------------------------------------------------

|                             |                           |  |          |       |                |  |   |       | 
|---------------------------- | ------------------------- |  | -------- | ----- | -------------- |  | - | ----- | 
|                             |                           |  | Gross    |       | Accumulated   
|                             |                           |  | carrying |       | amortization  
|                             |                           |  | amount   |       | and impairment
|                             |                           |  |          |       |               
|Amortized intangible assets: |                           |  |          |       |                |  |   |      
|                             | Mortgage servicing rights |  | $        | 4,053 |                |  | $ | 1,176 | 
|                             | Core deposit intangibles  |  |          | 564   |                |  |   | 52    | 



| |  | 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 December 31, 2002. Future amortization expense may be
significantly different depending upon changes in the mortgage servicing
portfolio, mortgage interest rates and market conditions.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table shows the current period amortization and impairment
and estimated future amortization for intangible assets:                                                                                                                                                                                                                               

|                                         |      |   |     |           |     |              |    |       |     |   |     |  |     | 
|---------------------------------------- | ---- | - | --- | --------- | --- | ------------ | -- | ----- | --- | - | --- |  | --- | 
|                                         |      |   |     | Mortgage  |     |              |    |      
|                                         |      |   |     | servicing |     | Core deposit |    |      
|                                         |      |   |     | rights    |     | intangibles  |    | Total
|                                         |      |   |     |           |     |              |    |      
|Year ended December 31, 2002 (actual)    |      | $ | 831 |           |     | $            | 52 |       |     | $ | 883 | 
|Estimate for the year ended December 31, |      |   |     |           |     |              |    |       |     |   |     | 
|                                         | 2003 |   |     |           | 496 |              |    |       | 119 |   |     |  | 615 | 
|                                         | 2004 |   |     |           | 496 |              |    |       | 103 |   |     |  | 599 | 
|                                         | 2005 |   |     |           | 442 |              |    |       | 88  |   |     |  | 530 | 
|                                         | 2006 |   |     |           | 395 |              |    |       | 72  |   |     |  | 467 | 
|                                         | 2007 |   |     |           | 395 |              |    |       | 56  |   |     |  | 451 | 

F-22



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE J  MORTGAGE SERVICING RIGHTS



| |  | The activity in the Companys MSR was as follows for the years ended
December 31:
| |  | ---------------------------------------------------------------------------------

|                       |  |      |       |      |  |      |       |   |  |   |      |  
|---------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                       |  | 2002 |       | 2001 |  | 2000
|                       |  |      |       |      |  |     
|Balance at January 1   |  | $    | 1,349 |      |  | $    | 467   |   |  | $ | 192  |  
|Additions              |  |      | 2,359 |      |  |      | 1,002 |   |  |   | 462  |  
|Amortization           |  |      | (385  | )    |  |      | (120  | ) |  |   | (187 | )
|Impairment write-down  |  |      | (446  | )    |  |      |      |   |  |   |     |  
|                       |  |      |       |      |  |      |       |   |  |   |      |  
|Balance at December 31 |  | $    | 2,877 |      |  | $    | 1,349 |   |  | $ | 467  |  
|                       |  |      |       |      |  |      |       |   |  |   |      |  



| |  | Prior to 2002, there has not been any impairment of MSRs. During 2002,
none of the established impairment valuation allowance was reversed.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2002, the loan servicing portfolio with capitalized MSR
totaled $137,653 compared with $83,456 at December 31, 2001.       

NOTE K  ADVERTISING



| |  | Direct-response advertising costs consist of pre-approved credit card
applications and are capitalized and amortized. Amortization is computed
on a straight-line basis over a period of the expected benefit based on
history of similar promotions. Capitalized direct-response advertising
costs are included in other assets on the accompanying balance sheets and
totaled $721 and $246 at December 31, 2002 and 2001. Amortization of
capitalized direct-response advertising for 2002, 2001 and 2000 was $89,
$-0- and $-0-.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE L  INTEREST-BEARING DEPOSITS



| |  | The types of accounts and their respective balances included in
interest-bearing deposits are as follows at December 31,:
| |  | -------------------------------------------------------------------------------------------------------------------------

|                                                    |  |      |         |      |  |   |         | 
|--------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                    |  | 2002 |         | 2001
|                                                    |  |      |         |     
|NOW accounts and interest-bearing checking accounts |  | $    | 117,775 |      |  | $ | 95,545  | 
|Savings                                             |  |      | 26,198  |      |  |   | 18,488  | 
|Money market                                        |  |      | 39,725  |      |  |   | 35,341  | 
|Certificates of deposit and IRAs                    |  |      | 186,927 |      |  |   | 154,338 | 
|                                                    |  |      |         |      |  |   |         | 
|                                                    |  | $    | 370,625 |      |  | $ | 303,712 | 
|                                                    |  |      |         |      |  |   |         | 

F-23



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE L  INTEREST-BEARING DEPOSITS  Continued



| |  | The aggregate amount of certificates of deposit, each with a minimum
denomination of $100, was approximately $53,095 and $46,006 at December 31,
2002 and 2001. At December 31, 2002, the scheduled maturities of
certificates of deposit and IRAs are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |   |         | 
|------------------- |  | - | ------- | 
|2003                |  | $ | 139,950 | 
|2004                |  |   | 30,294  | 
|2005                |  |   | 7,322   | 
|2006                |  |   | 1,791   | 
|2007 and thereafter |  |   | 7,570   | 
|                    |  |   |         | 
|                    |  | $ | 186,927 | 
|                    |  |   |         | 



| |  | Deposits of executive officers, significant shareholders and directors were
$2,492 and $6,887 (including time deposits of $951 and $3,388) at December
31, 2002 and 2001.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE M  BORROWINGS



| |  | The Company has multiple advances of short and long-term borrowings which
have been made in accordance with an Agreement for Advance that was
entered into in 1998 with the Federal Home Loan Bank. The borrowings have
interest rates varying from 2.0% to 5.9% at December 31, 2002. The
borrowings are collateralized by security agreements and pledge
assignments.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Aggregate maturities of borrowings for the five years following December
31, 2002 are as follows:                                                                                                                                                                                                                                                                        

|             |  |        |        | 
|------------ |  | ------ | ------ | 
|Year ending  |  |        |        | 
|December 31, |  | Amount
|             |  |       
|2003         |  | $      | 25,718 | 
|2004         |  |        | 2,846  | 
|2005         |  |        | 15,940 | 
|2006         |  |        | 6,037  | 
|2007         |  |        | 9,990  | 
|Thereafter   |  |        | 2,414  | 
|             |  |        |        | 
|             |  | $      | 62,945 | 
|             |  |        |        | 



| |  | During 2001, the Company entered into a $1,000 revolving credit line with a
bank. The line of credit was increased to $10.0 million in February 2002.
Any borrowings under the facility bear interest at the Federal Funds rate
plus 2.25% and are collateralized by the outstanding common stock of TUNI.
The credit facility expires in February 2003. There was $5,250 and $-0-
outstanding under this line of credit at December 31, 2002 and 2001. The
line of credit agreement contains certain covenants, including maintaining
certain financial ratios.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE N  SUBORDINATED NOTES AND DEBENTURES



| |  | Subordinated notes and debentures consist of 3,241 units, which were
assumed in the acquisition of Bryan-College Station. Each unit consists of
a $1 debenture and nine detachable warrants exercisable at an exercise
price of $42.79 per share. At December 31, 2002, debentures total $3,241,
bear an interest rate of 11.5%, and mature on March 31, 2003. The warrants
expire on March 31, 2003. The Companys debentures require quarterly
interest payments of approximately $105.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE O  COMPANY OBLIGATED
MANDITORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUST



| |  | In September 2000, the Company formed TXUI Statutory Trust I, a
trust formed under the laws of the State of Connecticut (the Trust). The
Trust issued $7.0
million of 10.60%
Capital Securities
and invested the
proceeds thereof in
the 10.60% Junior
Subordinated
Deferrable Interest
Debentures (the
Junior Subordinated
Debentures) issued
by the Company.
Distributions of
interest are due
semi-annually. The
Junior Subordinated
Debentures will
mature on September
7, 2030, which date
may be shortened to
a date not earlier
than September 7,
2010, if certain
conditions are met
(including the
Company having
received prior
approval of the
Federal Reserve).
The Capital Securities will be subject to mandatory redemption
if the Junior Subordinated Debentures are repaid by
the Company. The Junior Subordinated Debentures may
be prepaid if certain events occur, including a
change in the tax status, a change in the Trusts
status under the Investment Company Act of 1940 or
regulatory capital treatment of the Capital
Securities. In each case, redemption will be made
at par, plus the accrued and unpaid distributions
thereon through the redemption date.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE P  INCOME TAXES



| |  | The tax effects
of temporary
differences that
give rise to
significant portions
of the deferred tax
assets and deferred
tax liabilities are
presented below at
December 31:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          |                                                  |                        |        |        |        |      |        |      |      |  
|------------------------- | ------------------------------------------------ | ---------------------- | ------ | ------ | ------ | ---- | ------ | ---- | ---- | -
|                          |                                                  |                        |        | 2002   |        | 2001
|                          |                                                  |                        |        |        |        |     
|Deferred tax assets:      |                                                  |                        |        |        |        |      |        |     
|                          | Net operating loss carryforward                  |                        | $      | 163    |        |      | $      | 200  |     
|                          | Unrealized loss on available-for-sale
securities |                        |        |       |        |      |        | 142  |     
|                          | Deferred compensation                            |                        |        | 241    |        |      |        | 143  |     
|                          | Accrued compensation settlement                  |                        |        | 172    |        |      |        |     |     
|                          | Provision for loan losses                        |                        |        | 744    |        |      |        | 177  |     
|                          | Accrued expenses not currently deductible        |                        |        | 102    |        |      |        | 102  |     
|                          |                                                  |                        |        |        |        |      |        |     
|                          |                                                  |                        | 1,422  |        |        |      | 764    |     
|Deferred tax liabilities: |                                                  |                        |        |        |        |      |        |     
|                          | Unrealized gain on available-for-sale securities |                        |        | (831   | )      |      |        |     |     
|                          | Depreciation and amortization differences        |                        |        | (1,143 | )      |      |        | (749 | )   
|                          | Accrued mortgage servicing rights income         |                        |        | (978   | )      |      |        | (459 | )   
|                          | Federal Home Loan Bank stock dividend            |                        |        | (199   | )      |      |        | (84  | )   
|                          |                                                  |                        |        |        |        |      |        |     
|                          |                                                  |                        | (3,151 | )      |        |      | (1,292 | )   
|                          |                                                  |                        |        |        |        |      |        |     
|                          |                                                  | Net deferred liability |        | $      | (1,729 | )    |        | $    | (528 | )
|                          |                                                  |                        |        |        |        |      |        |     

F-25



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE P  INCOME TAXES  Continued



| |  | The reconciliation between the Companys effective income tax rate and the
statutory federal income tax rate is as follows at December 31:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------

|                                      |  |      |       |      |  |      |        |    |  |  |        |   
|------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | -- |  |  | ------ | --
|                                      |  | 2002 |       | 2001 |  | 2000
|                                      |  |      |       |      |  |     
|Statutory federal income tax rate     |  |      | 34.00 | %    |  |      | 34.00  | %  |  |  | 34.00  | % 
|Tax-exempt interest                   |  |      | (4.09 | )%   |  |      | (13.41 | )% |  |  | (16.14 | )%
|Tax-exempt earnings on life insurance |  |      | (1.77 | )%   |  |      | (1.81  | )% |  |  | (2.09  | )%
|Other                                 |  |      | (.45  | )%   |  |      | .80    | %  |  |  | (4.11  | )%
|                                      |  |      |       |      |  |      |        |    |  |  |        |   
|Effective income tax rate             |  |      | 27.69 | %    |  |      | 19.58  | %  |  |  | 11.66  | % 
|                                      |  |      |       |      |  |      |        |    |  |  |        |   



| |  | The Company has loss carryforwards totaling approximately $478 that may be
offset against future taxable income. If not used, the carryforwards will
expire in 2006 and 2007.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE Q  COMMITMENTS AND CONTINGENCIES



| |  | In the normal course of business, the Company is party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheet.                                                                                                                                                                                                                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. Commitments to extend credit totaled $38,905
and $36,100 at December 31, 2002 and 2001, which includes $787 and $447 of
outstanding standby letters of credit. The Company does not anticipate any
material losses as a result of these commitments.                                                                                                                                                                                                 
|
| |  | Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract and
have fixed expiration dates or other termination clauses. Some of the
commitments are expected to expire without being drawn upon, so that the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customers credit worthiness on a
case-by-case basis. The extension of credit, is based on managements
credit evaluation of the counter-party. Collateral held varies but may
include accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
|
| |  | Standby letters of credit and financial guarantees are written conditional
commitments issued by the Company to guarantee the performance of a
customer to a third party. The credit risk involved and collateral
required in issuing letters of credit are essentially the same as those
involved in extending loan facilities to customers.                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The Company is involved in certain claims and lawsuits occurring in the
normal course of business. Management, after consultation with outside
legal counsel, does not believe that the outcome of these actions would
have a material impact on the financial statements of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                       

F-26



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE Q  COMMITMENTS AND CONTINGENCIES  Continued



| |  | The Company leases certain premises and equipment under cancelable and
noncancelable lease arrangements. Total rentals charged to operating
expenses were $375, $156 and $92 in the years ended December 31, 2002, 2001
and 2000. At December 31, 2002, future lease commitments under
noncancelable leases are $357, $265, $46, $20 and $-0- over the next five
years.                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has instituted a self-insurance program for employees major
medical coverages. Claims under the self-insurance program are insured for
amounts greater than $40 per employee. The aggregate annual self-insurance
amount varies based on participant levels and was limited to approximately
$1,032 as of December 31, 2001. Claims are accrued as incurred and the
total expense under the program was $1,002, $906 and $754 in 2002, 2001 and
2000.

NOTE R  BENEFIT PLANS



| |  | Stock Option Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has nonqualified common stock option agreements with two
executive officers (one of which is also a director). Options granted
under the agreements have a ten year term and vest and become exercisable
at 20% each year for five years. The exercise price of the options granted
under the agreements was the market value at the date of grant. No options
were granted, exercised, forfeited, or expired under these agreements
during 2002 or 2001.                                                                                                                                                                                                                                                                                                                                       
|
| |  | During 1998, the Board of Directors adopted the Texas United Bancshares,
Inc. 1998 Incentive Stock Option Plan (the 1998 Plan). Under the 1998
Plan, 225,000 shares of common stock are reserved for qualified Incentive
Stock Options, of which 11,179 shares are available for future grants at
December 31, 2002. Options granted under the 1998 Plan have a maximum term
of ten years and become exercisable under the terms of the respective
option agreements. The exercise price of the options granted under the
1998 Plan may not be less than the fair market value of the shares on the
date the option is granted, unless a person owns 10% or more of the common
stock of the Company, in which case it may not be less than 110% of the
fair market value of the shares on the date of grant.
|
| |  | A summary of the Companys stock option activity, and related information
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                 |  |         |         |                |  |          |       |                |  |         |         |                |  |   |       |  |  |          |         |  |  |   |       | 
|-------------------------------- |  | ------- | ------- | -------------- |  | -------- | ----- | -------------- |  | ------- | ------- | -------------- |  | - | ----- |  |  | -------- | ------- |  |  | - | ----- | 
|                                 |  | 2002    |         | 2001           |  | 2000    
|                                 |  |         |         |                |  |         
|                                 |  |         |         |                |  | Weighted |       |                |  |         |         | Weighted       |  |   |       |  |  | Weighted
|                                 |  |         |         |                |  | average  |       |                |  |         |         | average        |  |   |       |  |  | average 
|                                 |  | Options |         | exercise price |  | Options  |       | exercise price |  | Options |         | exercise price
|                                 |  |         |         |                |  |          |       |                |  |         |         |               
|Outstanding at beginning of year |  |         | 215,785 |                |  | $        | 9.16  |                |  |         | 221,035 |                |  | $ | 8.67  |  |  |          | 215,085 |  |  | $ | 8.46  | 
|Granted                          |  |         | 10,141  |                |  |          | 20.56 |                |  |         | 12,500  |                |  |   | 17.00 |  |  |          | 5,950   |  |  |   | 16.17 | 
|Exercised                        |  |         | (6,291  | )              |  |          | 8.64  |                |  |         | (16,080 | )              |  |   | 8.60  |  |  |          |        |  |  |   |      | 
|Forfeited                        |  |         | (892    | )              |  |          | 19.73 |                |  |         | (1,670  | )              |  |   | 8.60  |  |  |          |        |  |  |   |      | 
|                                 |  |         |         |                |  |          |       |                |  |         |         |                |  |   |       |  |  |          |         |  |  |   |       | 
|Outstanding at end of year       |  |         | 218,743 |                |  |          | 8.76  |                |  |         | 215,785 |                |  |   | 9.16  |  |  |          | 221,035 |  |  |   | 8.67  | 
|                                 |  |         |         |                |  |          |       |                |  |         |         |                |  |   |       |  |  |          |         |  |  |   |       | 
|Exercisable at end of year       |  |         | 198,735 |                |  |          | 8.76  |                |  |         | 184,068 |                |  |   | 8.45  |  |  |          | 135,860 |  |  |   | 8.26  | 
|                                 |  |         |         |                |  |          |       |                |  |         |         |                |  |   |       |  |  |          |         |  |  |   |       | 

F-27



---



##### Table of Contents



Texas United Bancshares, Inc. and
Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE R  BENEFIT PLANS  Continued

The following table summarizes the weighted average fair value
and exercise price per share of options granted during the years ended December 31:

|                                                     |  |            |      |                |  |            |       |                |  |            |      |                |  |   |       |  |  |   |      |  |  |   |       | 
|---------------------------------------------------- |  | ---------- | ---- | -------------- |  | ---------- | ----- | -------------- |  | ---------- | ---- | -------------- |  | - | ----- |  |  | - | ---- |  |  | - | ----- | 
|                                                     |  | 2002       |      | 2001           |  | 2000      
|                                                     |  |            |      |                |  |           
|                                                     |  | Weighted   |      | Weighted       |  | Weighted   |       | Weighted       |  | Weighted   |      | Weighted      
|                                                     |  | average    |      | average        |  | average    |       | average        |  | average    |      | average       
|                                                     |  | fair value |      | exercise
price |  | fair value |       | exercise
price |  | fair value |      | exercise
price
|                                                     |  |            |      |                |  |            |       |                |  |            |      |               
|Exercise price equals market
price at date of grant  |  | $          | 7.92 |                |  | $          | 19.00 |                |  | $          | 3.02 |                |  | $ | 17.00 |  |  | $ | 3.75 |  |  | $ | 16.17 | 
|Exercise price exceeds market
price at date of grant |  |            | 4.68 |                |  |            | 27.39 |                |  |            |     |                |  |   |      |  |  |   |     |  |  |   |      | 

The following table summarizes significant ranges
of outstanding and exercisable options at December 31, 2002:

|               |  |                     |         |                     |  |                  |      |          |  |                |       |  |  |          |         |  |  |   |       | 
|-------------- |  | ------------------- | ------- | ------------------- |  | ---------------- | ---- | -------- |  | -------------- | ----- |  |  | -------- | ------- |  |  | - | ----- | 
|               |  | Options outstanding |         | Options exercisable
|               |  |                     |         |                    
|               |  |                     |         |                     |  | Weighted average |      | Weighted |  |                |       |  |  | Weighted
|Range of       |  |                     |         |                     |  | remaining life   |      | average  |  |                |       |  |  | average 
|exercise price |  | Options             |         | (in years)          |  | exercise price   |      | Options  |  | exercise price
|               |  |                     |         |                     |  |                  |      |          |  |               
|$5.00-$7.50    |  |                     | 33,750  |                     |  |                  | 3.89 |          |  | $              | 5.78  |  |  |          | 33,750  |  |  | $ | 5.78  | 
|$8.60-$12.00   |  |                     | 157,294 |                     |  |                  | 5.67 |          |  |                | 9.02  |  |  |          | 157,294 |  |  |   | 9.02  | 
|$16.00-$19.00  |  |                     | 26,100  |                     |  |                  | 8.62 |          |  |                | 17.47 |  |  |          | 7,691   |  |  |   | 16.62 | 
|$19.00-$28.50  |  |                     | 1,599   |                     |  |                  | 3.58 |          |  |                | 27.39 |  |  |          |        |  |  |   |      | 
|               |  |                     |         |                     |  |                  |      |          |  |                |       |  |  |          |         |  |  |   |       | 
|               |  |                     | 218,743 |                     |  |                  |      |          |  |                |       |  |  |          | 198,735 |  |  |   |       | 
|               |  |                     |         |                     |  |                  |      |          |  |                |       |  |  |          |         |  |  |   |       | 



| |  | The fair value of the options at the date of grant was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|               |  |          |      |           |  |           |      |   |  |  |      |  
|-------------- |  | -------- | ---- | --------- |  | --------- | ---- | - |  |  | ---- | -
|               |  | 2002     |      | 2001      |  | 2000     
|               |  |          |      |           |  |          
|Expected life  |  | 10 years |      | 7.0 years |  | 7.0 years
|Interest rate  |  |          | 2.99 | %         |  |           | 4.89 | % |  |  | 6.48 | %
|Volatility     |  |          | 40   | %         |  |           | 0.00 | % |  |  | 0.00 | %
|Dividend yield |  |          | 2.29 | %         |  |           | 1.88 | % |  |  | 1.88 | %

Stock Appreciation Rights Agreements

The terms of stock appreciation rights agreements (Agreements) grant
certain key employees, directors, and advisors of the Company rights to the
appreciation in the fair value (as defined in the Agreements) of a stated
number of shares of common stock of the Company. The rights become fully
vested and are exercisable under the terms of the respective Agreements.
The appreciation is payable in whole shares of Company stock valued at fair
market value on the date of exercise or at the sole discretion of the
Company, solely in cash or a combination of cash and stock. The Agreements
terminate on the earliest of: a) ten years from the date of grant, b) the
date the employee terminates employment with the Company, if the Company
requests the employees resignation, c) ninety days after the employee
terminates employment with the Company, when termination is the employees
decision, or d) the date one year after the employees death or disability.
The number of rights issued under the Agreements as of December 31, 2002,
2001 and 2000 were 44,775, 44,775 and 35,475. Operations are charged or
credited for the aggregate appreciation or depreciation of the rights.
During 2002, 2001 and 2000, the Company expensed $78, $91 and $44 related
to the agreements.

F-28



---



##### Table of Contents



Texas United Bancshares, Inc. and
Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE R  BENEFIT PLANS  Continued



| |  | 401(k) Profit Sharing Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has a 401(k) Profit Sharing Plan (the Plan) that covers
substantially all of its employees. Employees contribute to the Plan
through payroll deductions. The Company may match participant
contributions at a rate determined annually by the Board of Directors.
Additionally, the Company may make a discretionary contribution as
determined by the Board of Directors. Total contributions accrued or paid
for the period ended December 31, 2002, 2001 and 2000 are approximately
$216, $332 and $323.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Deferred Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | The Company and the Bank have entered into Deferred Compensation Agreements
with certain directors and key employees. Under one group of plans, a
participant may elect to defer up to 20% of their compensation. Under
another group of plans, a participant may elect to defer 100% of their
compensation. Under both of these groups of plans, the Company and each of
the banks have agreed to accrue interest on the deferral account balance at
an annual rate equal to 10% per year, compounded monthly. Participants
become vested in the interest credited to their account at the rate of 10%
per plan year, such that at the end of 10 years, the participant is 100%
vested.                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Under a third plan, the participant receives permanent life insurance
coverage. Under this plan, the Company shall pay the primary benefit in
ten equal installments commencing on the first day of the month following
the participants termination of employment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | All plans have been informally funded by insurance policies that are fully
funded. The earnings of the insurance policies exceeded compensation
charges by approximately $82, $53 and $61 for the years ended December 31,
2002, 2001 and 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Incentive Compensation
Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The Bank has adopted incentive compensation plans that cover all officers
and employees that were employees for the entire plan year (employee plans)
and all directors who have served one full year as of the end of the plan
year and who do not serve as employees of the bank (director plans). Under
the employee plans, the officers and employees are entitled to an amount
equal to 50% of earnings in excess of the pre-tax earnings threshold or the
plan limits as established by each plan. The pre-tax earnings threshold is
established each year by the Board of Directors and is subject to
adjustment for extraordinary occurrences. The remaining earnings in excess
of the pre-tax earnings threshold are considered to be allocated to the
shareholders. Under the director plans, the eligible directors are
entitled to an amount equal to 20% of the amount considered to be allocated
to the shareholders. Total compensation accrued was $550, $660 and $435
for the years ended December 31, 2002, 2001 and 2000.
|
| |  | Resignation Settlement Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



| |  | In connection with the acquisition of Bryan-College Station, the Company
assumed a liability related to a settlement agreement with a former
executive officer of Bryan-College Station. The settlement agreement calls
for lifetime monthly payments of approximately $6. A liability of
approximately $523 is accrued as of December 31, 2002. This liability is
recorded in other liabilities on the accompanying balance sheet and has
been determined based on actuarial assumptions.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-29



---



##### Table of Contents



Texas United Bancshares, Inc. and
Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE S - REGULATORY MATTERS



| |  | The Company and the Bank are subject to various regulatory capital
requirements administered by state and federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Companys and the
Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative measures of
the Companys and the Banks assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Companys and the Banks capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 2002 and 2001, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions category. The Companys and the Banks actual capital
amounts and ratios are also presented in the table.                                                                                                                                                                                                                                                                                                                                            

|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  |  |      |  
|------------------------ | ----------------------------------------- | ----------------------------- |  | ------ | ------ | ----------------- |  | ----------------- | ----- | ----- |  | ----------- | -------- | ----------------- |  |  | ---- | - |  | ----------------- | -------- |  |  |  | ---- | -
|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  | To be well       
|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  | capitalized under
|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  | For capital |          | prompt corrective
|                         |                                           |                               |  | Actual |        | adequacy purposes |  | action provisions
|                         |                                           |                               |  |        |        |                   |  |                  
|                         |                                           |                               |  | Amount |        | Ratio             |  | Amount            |       | Ratio |  | Amount      |          | Ratio            
|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                  
|As of December 31, 2002: |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  | 
|                         | Total Capital (to Risk Weighted Assets):  |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  |  |     
|                         |                                           | Texas United Bancshares, Inc. |  | $      | 33,871 |                   |  |                   | 8.83  | %     |  |             | 3$30,687 |                   |  |  | 38.0 | % |  |                   | N/A      |  |  |  |      |  
|                         |                                           | The Bank                      |  | $      | 40,093 |                   |  |                   | 10.43 | %     |  |             | 3$30,752 |                   |  |  | 38.0 | % |  |                   | 3$38,440 |  |  |  | 10.0 | %
|                         | Tier 1 Capital (to Risk Weighted Assets): |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  |  |     
|                         |                                           | Texas United Bancshares, Inc. |  | $      | 30,575 |                   |  |                   | 7.97  | %     |  |             | 3$15,345 |                   |  |  | 34.0 | % |  |                   | N/A      |  |  |  |      |  
|                         |                                           | The Bank                      |  | $      | 36,797 |                   |  |                   | 9.57  | %     |  |             | 3$15,380 |                   |  |  | 34.0 | % |  |                   | 3$23,070 |  |  |  | 6.0  | %
|                         | Tier 1 Capital (to Average Assets):       |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  |  |     
|                         |                                           | Texas United Bancshares, Inc. |  | $      | 30,575 |                   |  |                   | 5.49  | %     |  |             | 3$16,708 |                   |  |  | 34.0 | % |  |                   | N/A      |  |  |  |      |  
|                         |                                           | The Bank                      |  | $      | 36,797 |                   |  |                   | 6.69  | %     |  |             | 3$16,501 |                   |  |  | 34.0 | % |  |                   | 3$27,501 |  |  |  | 5.0  | %

F-30



---



##### Table of Contents



Texas United Bancshares, Inc. and
Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE S - REGULATORY MATTERS  Continued

|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  |  |      |  
|------------------------ | ----------------------------------------- | ----------------------------- |  | ------ | ------ | ----------------- |  | ----------------- | ----- | ----- |  | ----------- | -------- | ----------------- |  |  | ---- | - |  | ----------------- | -------- |  |  |  | ---- | -
|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  | To be well       
|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  | capitalized under
|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  | For capital |          | prompt corrective
|                         |                                           |                               |  | Actual |        | adequacy purposes |  | action provisions
|                         |                                           |                               |  |        |        |                   |  |                  
|                         |                                           |                               |  | Amount |        | Ratio             |  | Amount            |       | Ratio |  | Amount      |          | Ratio            
|                         |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                  
|As of December 31, 2001: |                                           |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  | 
|                         | Total Capital (to Risk Weighted Assets):  |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  |  |     
|                         |                                           | Texas United Bancshares, Inc. |  | $      | 29,426 |                   |  |                   | 10.80 | %     |  |             | 3$27,244 |                   |  |  | 38.0 | % |  |                   | N/A      |  |  |  |      |  
|                         |                                           | The Bank                      |  | $      | 27,962 |                   |  |                   | 10.20 | %     |  |             | 3$21,920 |                   |  |  | 38.0 | % |  |                   | 3$27,405 |  |  |  | 10.0 | %
|                         | Tier 1 Capital (to Risk Weighted Assets): |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  |  |     
|                         |                                           | Texas United Bancshares, Inc. |  | $      | 27,672 |                   |  |                   | 10.16 | %     |  |             | 3$10,898 |                   |  |  | 34.0 | % |  |                   | N/A      |  |  |  |      |  
|                         |                                           | The Bank                      |  | $      | 26,208 |                   |  |                   | 9.56  | %     |  |             | 3$10,960 |                   |  |  | 34.0 | % |  |                   | 3$16,440 |  |  |  | 6.0  | %
|                         | Tier 1 Capital (to Average Assets):       |                               |  |        |        |                   |  |                   |       |       |  |             |          |                   |  |  |      |   |  |                   |          |  |  |  |     
|                         |                                           | Texas United Bancshares, Inc. |  | $      | 27,672 |                   |  |                   | 6.49  | %     |  |             | 3$12,792 |                   |  |  | 34.0 | % |  |                   | N/A      |  |  |  |      |  
|                         |                                           | The Bank                      |  | $      | 26,208 |                   |  |                   | 6.13  | %     |  |             | 3$12,825 |                   |  |  | 34.0 | % |  |                   | 3$21,374 |  |  |  | 5.0  | %

NOTE T - SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION

Cash paid during the years ended December 31 for:

|                                                       |                                                             |  |      |        |      |  |      |        |  |  |   |        | 
|------------------------------------------------------ | ----------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                       |                                                             |  | 2002 |        | 2001 |  | 2000
|                                                       |                                                             |  |      |        |      |  |     
|                                                       | Interest                                                    |  | $    | 10,595 |      |  | $    | 13,002 |  |  | $ | 10,594 | 
|                                                       | Income taxes                                                |  | $    | 1,629  |      |  | $    | 600    |  |  | $ | 985    | 
|Noncash operating, investing and financing activities: |                                                             |  |      |        |      |  |      |        |  |  |   |       
|                                                       | Dividends payable included in other liabilities             |  | $    | 291    |      |  | $    | 266    |  |  | $ | 211    | 
|                                                       | Common stock issued in connection with
business acquisition |  | $    | 2,615  |      |  | $    |       |  |  | $ | 200    | 
|                                                       | Real estate acquired in satisfaction of loans               |  | $    | 65     |      |  | $    | 64     |  |  | $ | 110    | 

NOTE U - FAIR VALUES OF FINANCIAL INSTRUMENTS



| |  | The fair values of financial instruments are based on managements
estimates and do not purport to represent the aggregate net fair value of
the Company. Further, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely
among different financial institutions and which are subject to change.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following methods and assumptions were used by the Company in
estimating financial instrument fair values:                                                                                                                                                                                                                                                      
|
| |  |     Cash and cash equivalents, federal funds purchased/sold                                                                                                                                                                                                                                                                                                        



| |  | The balance sheet carrying amount approximates fair value.
| |  | ----------------------------------------------------------

F-31



---



##### Table of Contents



Texas United Bancshares, Inc. and
Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE U - FAIR VALUES OF FINANCIAL INSTRUMENTS  Continued



| |  | Securities to be held-to-maturity and securities available-for-sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   | Fair values for investment securities are based on quoted market prices or quotations received from securities
dealers. If quoted market prices are not available, fair value estimates may be based on quoted market prices of
similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |   | Fair values of loans are estimated for segregated groupings of loans with similar financial characteristics.
Loans are segregated by type such as commercial, commercial real estate, residential mortgage and consumer loans.
Each of these categories is further subdivided into fixed and adjustable rate loans and performing and
nonperforming loans. The fair value of performing loans is calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk
inherent in the various types of loans. The fair value of nonperforming loans is estimated at the value of the
underlying collateral.
|
| |  | Deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |   | The fair value of demand deposits, such as noninterest-bearing demand deposits and interest-bearing transaction
accounts such as savings, NOW and money market accounts are equal to the amount payable on demand as of December
31, 2002 and 2001 (i.e. their carrying amounts).                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |   | The fair value of demand deposits is defined as the amount payable, and prohibits adjustment for any value derived
from the expected retention of such deposits for a period of time. That value, commonly referred to as the core
deposit base intangible, is neither included in the following fair value amounts nor recorded as an intangible
asset in the balance sheet.                                                                                                                                                                                                                                                                                                                            
|
| |   | The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The
discount rate used represents rates currently offered for deposits of similar remaining maturities. The carrying
amount of accrued interest payable approximates its fair value.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Borrowings and company obligated manditorily redeemable capital securities of subsidiary trust                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |   | The fair value of borrowings and company obligated manditorily
redeemable capital securities of subsidiary trust are determined by
dividing the borrowings into groups having similar characteristics.
The future cash flows of each grouping are then discounted using
current period end market rates for similar borrowings.                                                                                                                                                                                                                                                                                                                                                                          

|
|
|
|
|

F-32



---



##### Table of Contents



Texas United Bancshares, Inc. and
Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE U - FAIR VALUES OF FINANCIAL INSTRUMENTS  Continued



| |  | Off-balance-sheet instruments                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   | Estimated fair values for the Companys off-balance-sheet instruments
are based on fees, net of related expenses, currently charged to enter
into similar agreements, considering the remaining terms of the
agreements and the counterparties credit standing.

The following table presents the carrying amounts and fair values of the
Companys financial instruments at December 31:

|                       |                                                                                 |                                                        |   |          |         |       |   |          |         |       |   |         |         |  |   |         |         | 
|---------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------ | - | -------- | ------- | ----- | - | -------- | ------- | ----- | - | ------- | ------- |  | - | ------- | ------- | 
|                       |                                                                                 |                                                        |   | 2002     |         | 2001 
|                       |                                                                                 |                                                        |   |          |         |      
|                       |                                                                                 |                                                        |   | Carrying |         | Fair  |   | Carrying |         | Fair 
|                       |                                                                                 |                                                        |   | amount   |         | value |   | amount   |         | value
|                       |                                                                                 |                                                        |   |          |         |       |   |          |         |      
|Financial assets:      |                                                                                 |                                                        |   |          |         |       |   |          |         |       |   |         |         |  |   |        
|                       | Cash and due from banks                                                         |                                                        | $ | 20,574   |         |       | $ | 20,574   |         |       | $ | 21,466  |         |  | $ | 21,466  |        
|                       | Federal funds sold                                                              |                                                        |   |         |         |       |   |         |         |       |   | 11,200  |         |  |   | 11,200  |        
|                       | Securities available-for-sale                                                   |                                                        |   | 132,140  |         |       |   | 132,140  |         |       |   | 109,877 |         |  |   | 109,877 |        
|                       | Loans held for sale                                                             |                                                        |   | 33,674   |         |       |   | 33,674   |         |       |   | 817     |         |  |   | 817     |        
|                       | Loans, net                                                                      |                                                        |   | 349,345  |         |       |   | 356,895  |         |       |   | 272,374 |         |  |   | 288,184 |        
|Financial liabilities: |                                                                                 |                                                        |   |          |         |       |   |          |         |       |   |         |         |  |   |        
|                       | Deposits                                                                        |                                                        |   |          |         |       |   |          |         |       |   |         |         |  |   |         |        
|                       | Noninterest-bearing                                                             |                                                        | $ | 82,294   |         |       | $ | 82,294   |         |       | $ | 71,976  |         |  | $ | 71,976  |        
|                       |                                                                                 | Interest-bearing transaction and
money market accounts |   |          | 183,698 |       |   |          | 183,698 |       |   |         | 149,374 |  |   |         | 149,374 | 
|                       |                                                                                 | Certificates of deposit                                |   |          | 186,927 |       |   |          | 190,021 |       |   |         | 154,338 |  |   |         | 156,466 | 
|                       | Federal funds purchased                                                         |                                                        |   | 19,732   |         |       |   | 19,732   |         |       |   | 647     |         |  |   | 647     |        
|                       | Borrowings                                                                      |                                                        |   | 62,945   |         |       |   | 63,920   |         |       |   | 39,232  |         |  |   | 39,348  |        
|                       | Subordinated notes and debentures                                               |                                                        |   | 3,241    |         |       |   | 3,241    |         |       |   |        |         |  |   |        |        
|                       | Company obligated manditorily redeemable
capital securities of subsidiary trust |                                                        |   | 7,000    |         |       |   | 8,492    |         |       |   | 7,000   |         |  |   | 7,830   |        

F-33



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE V - EARNINGS PER SHARE



| |  | The following data show the amounts used in computing earnings per share
(EPS) and the weighted average number of shares of dilutive potential
common stock at December 31:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                         |  |                       |       |      |     |      |       |      |     |   |       |  |     | 
|---------------------------------------------------------------------------------------- |  | --------------------- | ----- | ---- | --- | ---- | ----- | ---- | --- | - | ----- |  | --- | 
|                                                                                         |  |                       |       | 2002 |     | 2001 |       | 2000
|                                                                                         |  |                       |       |      |     |      |       |     
|Net earnings available to common stockholders used in basic and
diluted EPS              |  | $                     | 4,278 |      |     | $    | 3,224 |      |     | $ | 3,037 | 
|                                                                                         |  |                       |       |      |     |      |       |      |     |   |       | 
|Weighted average common shares used in basic EPS (000s)                                 |  |                       | 2,551 |      |     |      | 2,495 |      |     |   | 2,435 | 
|Effect of dilutive securities:                                                           |  |                       |       |      |     |      |       |      |     |   |       | 
|                                                                                         |  | Stock options (000s) |       |      | 115 |      |       |      | 101 |   |       |  | 107 | 
|                                                                                         |  |                       |       |      |     |      |       |      |     |   |       | 
|Weighted average common and potential dilutive common shares
used in diluted EPS (000s) |  |                       | 2,666 |      |     |      | 2,596 |      |     |   | 2,542 | 
|                                                                                         |  |                       |       |      |     |      |       |      |     |   |       | 



| |  | Options to purchase 1,599, 12,500 and 750 shares of common stock in 2002, 2001 and 2000
were not included in the computation of diluted EPS because the option
exercise price did not exceed the average market price of the common stock.
The computation of
diluted EPS in 2002 did not include warrants to purchase 29,169 shares of
common stock because the warrant exercise price did not exceed the average
market price of the common stock. There were no such warrants outstanding
in 2001 and 2000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE W  COMPREHENSIVE INCOME



| |  | Comprehensive income includes net earnings plus other comprehensive income.
The Companys other comprehensive income consists of unrealized gains or
losses on securities.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Other comprehensive income (loss) and its tax effects are as follows for
the year ended December 31:                                                                      

|                                 |                                                                      |        |            |        |     |        |            |      |   |   |       |     | 
|-------------------------------- | -------------------------------------------------------------------- | ------ | ---------- | ------ | --- | ------ | ---------- | ---- | - | - | ----- | --- | 
|                                 |                                                                      |        | Before tax |        | Tax |        | Net of tax
|2002                             |                                                                      | amount |            | effect |     | amount
|                                 |                                                                      |        |            |        |     |       
|Unrealized losses on securities: |                                                                      |        |            |        |     |        |            |      |   |   |       |    
|                                 | Holding gains arising
during period                                  |        | $          | 1,402  |     |        | $          | (476 | ) |   | $     | 926 | 
|                                 | Plus: reclassification adjustment for
gains included in net earnings |        |            | 1,457  |     |        |            | (496 | ) |   |       | 961 | 
|                                 |                                                                      |        |            |        |     |        |            |      |   |   |       |    
|Other comprehensive income       |                                                                      | $      | 2,859      |        |     | $      | (972       | )    |   | $ | 1,887 |    
|                                 |                                                                      |        |            |        |     |        |            |      |   |   |       |    
|Unrealized losses on securities: |                                                                      |        |            |        |     |        |            |      |   |   |       |    
|                                 | Holding gains arising
during period                                  |        | $          | 249    |     |        | $          | (85  | ) |   | $     | 164 | 
|                                 | Plus: reclassification adjustment for
gains included in net earnings |        |            | 340    |     |        |            | (116 | ) |   |       | 224 | 
|                                 |                                                                      |        |            |        |     |        |            |      |   |   |       |    
|Other comprehensive income       |                                                                      | $      | 589        |        |     | $      | (201       | )    |   | $ | 388   |    
|                                 |                                                                      |        |            |        |     |        |            |      |   |   |       |    

F-34



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE X  PARENT-ONLY FINANCIAL STATEMENTS

Texas United Bancshares, Inc.
(Parent Only)BALANCE SHEETS
December 31,

|                                     |                                             |   |        |        |      |   |        |        |  
|------------------------------------ | ------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | -
|                                     |                                             |   | 2002   |        | 2001
|                                     |                                             |   |        |        |     
|ASSETS                               |                                            
|Cash and cash equivalents            |                                             | $ | 888    |        |      | $ | 461    |       
|Core deposit premium                 |                                             |   | 512    |        |      |   |       |       
|Goodwill                             |                                             |   | 2,532  |        |      |   |       |       
|Other assets                         |                                             |   | 2,505  |        |      |   | 2,126  |       
|Investment in subsidiaries           |                                             |   | 45,469 |        |      |   | 32,818 |       
|                                     |                                             |   |        |        |      |   |        |        |  
|                                     |                                             |   | $      | 51,906 |      |   | $      | 35,405 |  
|                                     |                                             |   |        |        |      |   |        |        |  
|LIABILITIES AND SHAREHOLDERS EQUITY |                                            
|Dividends payable                    |                                             | $ | 291    |        |      | $ | 266    |       
|Junior subordinated debentures       |                                             |   | 7,210  |        |      |   | 7,210  |       
|Subordinated notes and debentures    |                                             |   | 3,241  |        |      |   |       |       
|Borrowings                           |                                             |   | 5,250  |        |      |   |       |       
|Other liabilities                    |                                             |   | 496    |        |      |   | 557    |       
|                                     |                                             |   |        |        |      |   |        |       
|                                     | Total liabilities                           |   |        | 16,488 |      |   |        | 8,033  |  
|Commitments and contingencies        |                                             |   |       |        |      |   |       |       
|Shareholders equity:                |                                             |   |        |        |      |   |        |       
|                                     | Preferred stock                             |   |        |       |      |   |        |       |  
|                                     | Common stock                                |   |        | 2,646  |      |   |        | 2,502  |  
|                                     | Additional paid-in capital                  |   |        | 16,683 |      |   |        | 14,136 |  
|                                     | Retained earnings                           |   |        | 14,594 |      |   |        | 11,342 |  
|                                     | Accumulated other comprehensive gain (loss) |   |        | 1,612  |      |   |        | (275   | )
|                                     |                                             |   |        |        |      |   |        |       
|                                     |                                             |   | 35,535 |        |      |   | 27,705 |       
|                                     | Less
common stock in treasury - at cost     |   |        | 117    |      |   |        | 333    |  
|                                     |                                             |   |        |        |      |   |        |       
|                                     |                                             |   | 35,418 |        |      |   | 27,372 |       
|                                     |                                             |   |        |        |      |   |        |       
|                                     |                                             | $ | 51,906 |        |      | $ | 35,405 |       
|                                     |                                             |   |        |        |      |   |        |       

F-35



---



##### Table of Contents



Texas United Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED(Dollars in thousands, except per share amounts)

NOTE X - PARENT-ONLY FINANCIAL
STATEMENTS - Continued

Texas United Bancshares, Inc.
(Parent Only)STATEMENTS OF EARNINGS
Year ended December 31,

|                                       |                                                                   |                                                    |        |      |        |      |        |      |        |   |       |     |        |  
|-------------------------------------- | ----------------------------------------------------------------- | -------------------------------------------------- | ------ | ---- | ------ | ---- | ------ | ---- | ------ | - | ----- | --- | ------ | -
|                                       |                                                                   |                                                    |        | 2002 |        | 2001 |        | 2000
|                                       |                                                                   |                                                    |        |      |        |      |        |     
|Income                                 |                                                                   | $                                                  |       |      |        | $    |       |      |        | $ |      |    
|Costs and expenses                     |                                                                  
|                                       | Salaries and benefits                                             |                                                    |        | 88   |        |      |        | 494  |        |   |       | 328 |       
|                                       | Interest expense                                                  |                                                    |        | 985  |        |      |        | 792  |        |   |       | 484 |       
|                                       | General and administrative                                        |                                                    |        | 431  |        |      |        | 363  |        |   |       | 310 |       
|                                       |                                                                   |                                                    |        |      |        |      |        |      |        |   |       |    
|                                       |                                                                   | Total expenses                                     |        |      | (1,504 | )    |        |      | (1,649 | ) |       |     | (1,122 | )
|Other income                           |                                                                   |                                                    | 66     |      |        |      | 319    |      |        |   | 201   |    
|                                       |                                                                   |                                                    |        |      |        |      |        |      |        |   |       |    
|                                       | Loss before income taxes and equity
in net earnings of subsidiary |                                                    | (1,438 | )    |        |      | (1,330 | )    |        |   | (921  | )  
|                                       | Current income tax benefit                                        |                                                    |        | 530  |        |      |        | 423  |        |   |       | 305 |       
|                                       |                                                                   |                                                    |        |      |        |      |        |      |        |   |       |    
|                                       |                                                                   | Loss before equity in net
earnings of subsidiaries |        |      | (908   | )    |        |      | (907   | ) |       |     | (616   | )
|Equity in net earnings of subsidiaries |                                                                   |                                                    | 5,186  |      |        |      | 4,131  |      |        |   | 3,653 |    
|                                       |                                                                   |                                                    |        |      |        |      |        |      |        |   |       |    
|                                       |                                                                   | NET EARNINGS                                       |        | $    | 4,278  |      |        | $    | 3,224  |   |       | $   | 3,037  |  
|                                       |                                                                   |                                                    |        |      |        |      |        |      |        |   |       |    

F-36



---



##### Table of Contents



Texas United Bancshares, Inc. and
Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
December 31, 2002 and 2001(Dollars in thousands, except per share amounts)

NOTE X - PARENT-ONLY FINANCIAL
STATEMENTS - Continued

Texas United Bancshares, Inc.
(Parent Only)STATEMENTS OF CASH FLOWS
Year ended December 31,

|                                                     |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |        |        |      |        |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------- | ---------------------------------------- | ------------------------------------------------ | ------ | ---- | ------ | ----- | ------ | ---- | ----- | ------ | ------ | ---- | ------ | -
|                                                     |                                                                                    |                                    |                                          |                                                  |        | 2002 |        | 2001  |        | 2000
|                                                     |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |     
|Cash flows from operating activities:                |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |       
|                                                     | Net earnings                                                                       |                                    | $                                        | 4,278                                            |        |      | $      | 3,224 |        |      | $     | 3,037  |       
|                                                     | Adjustments to reconcile net earnings to net cash
used in operating activities:    |                                    |                                          |                                                  |        |      |        |       |        |      |       |       
|                                                     |                                                                                    | Earnings of subsidiary             |                                          |                                                  | (5,186 | )    |        |       | (4,131 | )    |       |        | (3,653 | )   
|                                                     |                                                                                    | Noncash compensation expense       |                                          |                                                  | 50     |      |        |       | 105    |      |       |        |       |     
|                                                     |                                                                                    | Amortization                       |                                          |                                                  | 66     |      |        |       |       |      |       |        |       |     
|                                                     |                                                                                    | Changes in assets and liabilities: |                                          |                                                  |        |      |        |       |        |      |       |        |        |     
|                                                     |                                                                                    |                                    | Increase in other assets                 |                                                  |        | (284 | )      |       |        | (128 | )     |        |        | (414 | )     
|                                                     |                                                                                    |                                    | Increase (decrease) in other liabilities |                                                  |        | (952 | )      |       |        | 522  |       |        |        | (30  | )     
|                                                     |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |       
|                                                     |                                                                                    |                                    |                                          | Net cash used by operating activities            |        |      | (2,028 | )     |        |      | (408  | )      |        |      | (1,060 | )
|Cash flows from investing activities:                |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |       
|                                                     | Net cash used in acquisitions                                                      |                                    |                                          |                                                 |        |      |        |      |        |      |       | (250   | )     
|                                                     | Dividend from subsidiaries                                                         |                                    |                                          | 500                                              |        |      |        | 1,500 |        |      |       | 300    |       
|                                                     | Cash used to fund operations of subsidiary                                         |                                    |                                          |                                                 |        |      |        | (121  | )      |      |       |       |       
|                                                     | Capital contribution to subsidiaries                                               |                                    |                                          | (1,500                                           | )      |      |        |      |        |      |       | (2,260 | )     
|                                                     | Cash paid in business combination, net of cash acquired                            |                                    |                                          | (648                                             | )      |      |        |      |        |      |       |       |       
|                                                     |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |        |       
|                                                     |                                                                                    |                                    |                                          | Net cash provided (used) by investing activities |        |      | (1,648 | )     |        |      | 1,379 |        |        |      | (2,210 | )
|Cash flows from financing activities:                |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |       
|                                                     | Net proceeds from issuance of common stock upon
exercise of employee stock options |                                    |                                          | 53                                               |        |      |        | 138   |        |      |       |       |       
|                                                     | Issuance of common stock                                                           |                                    |                                          |                                                 |        |      |        |      |        |      |       | 1,093  |       
|                                                     | Borrowings, net of repayments                                                      |                                    |                                          | 5,250                                            |        |      |        |      |        |      |       | (4,300 | )     
|                                                     | Payment of subordinated notes and debentures                                       |                                    |                                          | (388)                                            |        |      |        |      |        |      |       |       |       
|                                                     | Purchase of treasury stock                                                         |                                    |                                          |                                                 |        |      |        | (417  | )      |      |       | (281   | )     
|                                                     | Sale of treasury stock                                                             |                                    |                                          | 189                                              |        |      |        | 223   |        |      |       | 471    |       
|                                                     | Payment of dividends                                                               |                                    |                                          | (1,001                                           | )      |      |        | (838  | )      |      |       | (763   | )     
|                                                     | Proceeds from issuance of junior subordinated debentures                           |                                    |                                          |                                                 |        |      |        |      |        |      |       | 7,000  |       
|                                                     |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |       
|                                                     |                                                                                    |                                    |                                          | Net cash (used) provided by financing activities |        |      | 4,103  |       |        |      | (894  | )      |        |      | 3,220  |  
|                                                     |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |       
|Net increase (decrease) in cash and cash equivalents |                                                                                    |                                    | 427                                      |                                                  |        |      | 77     |       |        |      | (50   | )     
|Cash and cash equivalents at beginning of year       |                                                                                    |                                    | 461                                      |                                                  |        |      | 384    |       |        |      | 434   |       
|                                                     |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |       
|Cash and cash equivalents at end of year             |                                                                                    | $                                  | 888                                      |                                                  |        | $    | 461    |       |        | $    | 384   |       
|                                                     |                                                                                    |                                    |                                          |                                                  |        |      |        |       |        |      |       |       

F-37



---



##### Table of Contents






EXHIBIT INDEX

|        |        |                        |                                                                                                                                                                                                                                                                                                                               
|------- | ------ | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                       
|Number  |        | Description of Exhibit
|        |        |                       
|        | 2.1    |                        | Agreement and Plan of Reorganization between Texas United
Bancshares, Inc. and The Bryan-College Station Financial Holding
Company, as amended, dated November 5, 2001 (incorporated herein by
reference to Exhibit 2.1 to the Registration Statement on Form S-4
(Registration No. 333-84644) (the Registration Statement))
|        |        |                        |                                                                                                                                                                                                                                                                                                                               
|        | 3.1    |                        | Articles of Incorporation of Texas United, as amended (incorporated
herein by reference to Exhibit 3.1 to the Registration Statement)                                                                                                                                                                                         
|        |        |                       
|        | 3.2    |                        | Bylaws of Texas United (incorporated herein by reference to Exhibit
3.2 to the Registration Statement)                                                                                                                                                                                                                        
|        |        |                       
|        | 4.1    |                        | Specimen certificate representing shares of Texas United common
stock (incorporated herein by reference to Exhibit 4.1 to the
Registration Statement)                                                                                                                                                                         
|        |        |                       
|        | 4.2*   |                        | Indenture dated September 7, 2000 by and between Texas United
Bancshares, Inc. and State Street Bank and Trust Company of
Connecticut, National Association with respect to the Junior
Subordinated Deferrable Interest Debentures of Texas United
Bancshares, Inc.                                                           
|        |        |                       
|        | 10.1  |                        | Texas United Bancshares, Inc. 1998 Incentive Stock Option Plan
(incorporated herein by reference to Exhibit 10.1 to the
Registration Statement)                                                                                                                                                                               
|        |        |                       
|        | 10.2  |                        | Form of Nonqualified Stock Option Agreement (incorporated herein by
reference to Exhibit 10.2 to the Registration Statement)                                                                                                                                                                                                  
|        |        |                       
|        | 10.3  |                        | Texas United Bancshares, Inc. Stock Appreciation Rights Plan
(incorporated herein by reference to Exhibit 10.3 to the
Registration Statement)                                                                                                                                                                                 
|        |        |                       
|        | 10.4  |                        | Form of Deferred Compensation Agreement (incorporated herein by
reference to Exhibit 10.4 to the Registration Statement)                                                                                                                                                                                                      
|        |        |                       
|        | 10.5  |                        | Form of Executive Deferred Compensation Agreement (incorporated
herein by reference to Exhibit 10.5 to the Registration Statement)                                                                                                                                                                                            
|        |        |                       
|        | 21.1   |                        | Subsidiaries of Texas United (incorporated herein by reference to
Exhibit 21.1 to the Registration Statement)                                                                                                                                                                                                                 
|        |        |                       
|        | 23.1** |                        | Consent of Grant Thornton LLP, independent auditors of Texas United                                                                                                                                                                                                                                                           
|        |        |                       
|        | 99.1** |                        | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                                                                                                                                                             
|        |        |                       
|        | 99.2** |                        | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                                                                                                                                                             



---

|*  |  | This Exhibit is not filed herewith because it meets the exclusion set
forth in Section 601(b)(4)(iii)(A) of Regulation S-K and the Company hereby
agrees to furnish a copy thereof to the Commission upon request.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|  
|** |  | Filed herewith.                                                                                                                                                                                                   
|  
|  |  | Management contract or compensatory plan or arrangement.