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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the Fiscal Year ended December 31,
    2003                                             
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-49928



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Texas United Bancshares, Inc.

(Exact name of registrant as specified in its
charter)


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

202 W. Colorado

La Grange, Texas 78945


(Address of principal executive offices
including zip code)


(979) 968-8451

(Registrants telephone number, including
area code)




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

None


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

Common Stock, par value $1.00 per
share


(Title of class)




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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          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 þ

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.     þ

As of March 15, 2004, the number of
outstanding shares of Common Stock, par value $1.00 per
share, was 4,004,221. The aggregate market value of the
shares of Common Stock held by non-affiliates based on the
closing price of the Common Stock on the Nasdaq National Market
on June 30, 2003, the last business day of the
registrants most recently completed second fiscal quarter,
of $21.48 per share, was approximately $50.1 million.



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|------- | --------
|Item 1. | Business

General

Texas United Bancshares, Inc. (Texas
United) is a bank holding company formed in June 1998 as a
result of the merger of South Central Texas
Bancshares, Inc. with and into Premier
Bancshares, Inc. At the effective date of the merger, the
resulting company changed its name to Texas United
Bancshares, Inc. 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 operated as a subsidiary of Texas
United under the name Third Coast Wealth Advisors and was sold
in October 2003. 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.

In July 2002, Texas United acquired The
Bryan-College Station Holding Company and its wholly owned
subsidiary, First Federal Savings Bank (First
Federal) located in Bryan, Texas. The three locations of
First Federal became branches of State Bank.

In addition to these acquisitions, Texas United
has opened six de novo banking centers between May 1999
and December 2002 in Schulenburg, Tomball, Cedar Park, Austin,
Lexington, and Liberty Hill, Texas.

On October 15, 2003, Texas United effected a
three-for-two stock split in the form of a 50% stock dividend
payable to shareholders of record on October 1, 2003. Texas
United issued approximately 1.3 million shares in
connection with the stock split. All share and per share
information contained in this document has been restated to
reflect this stock split.

Recent Developments

On February 5, 2004, State Bank acquired
100% of Community Home Loan, Inc. (CHL) and
operates CHL as a subsidiary of State Bank. CHL is a mortgage
bank domiciled in Houston, Texas. Based upon financial
information as of December 31, 2003, State Bank acquired
$11.1 million in assets and assumed $10.1 million in
liabilities. Initial consideration paid was $300,000 in cash and
$200,000 in Texas United common stock. Additional consideration
will be paid annually through 2007 based upon the achievement of
performance objectives. If all objectives are obtained, State
Bank would pay an aggregate of an additional $1.3 million.

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, 2003, Texas United maintained
approximately 52,600 separate deposit accounts and 30,600
separate loan accounts and approximately 19.2% of Texas
Uniteds total deposits were non-interest bearing demand
deposits. For the period ended December 31, 2003, Texas
Uniteds average cost of funds was 1.85%.

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Texas United has been an active mortgage lender,
with 1-4 family residential (including loans held for sale)
and commercial mortgage loans comprising 67.4% of the Texas
Uniteds total loans outstanding as of December 31,
2003. 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
sales of brokerage, mutual funds, annuities, and other insurance
products through third party vendors. The deposits of State Bank
are insured by the Bank Insurance Fund (BIF) of the
Federal Deposit Insurance Corporation (FDIC).

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.

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Employees

As of December 31, 2003, Texas United and
State Bank had 313 full-time equivalent employees, 103 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.

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

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efficiency, that outweigh such possible adverse
effects as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.


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 serves 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 are 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, 2003, Texas
Uniteds ratio of Tier 1 capital to total
risk-weighted assets was 9.54% and its ratio of total capital to
total risk-weighted assets was 10.47%.

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

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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, 2003, Texas
Uniteds leverage ratio was 6.46%.


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). 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.

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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 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 Federal Reserve has also issued Regulation W
which codifies prior regulations under Sections 23A and 23B
of the Federal Reserve Act and interpretive guidance with
respect to affiliate transactions.

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

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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 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, 2003, State
Banks ratio of Tier 1 capital to total risk-weighted
assets was 9.72% and its ratio of total capital to total
risk-weighted assets was 10.65%.

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, 2003, State Banks ratio of
Tier 1 capital to average total assets (leverage ratio) was
6.56%.

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

7



---



##### 



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.


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 0.17% 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 2004, both the BIF
and SAIF rates were 0.0154% 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.

8



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##### 



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, 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.



| |                           
| | --------------------------
| | Sarbanes-Oxley Act of 2002

In June 2003, the Securities and Exchange
Commission adopted final rules under Section 404 of the
Sarbanes-Oxley Act of 2002 (SOX). Commencing with its 2004
Annual Report on Form 10-K, Texas United will be required
to include a report of management on Texas Uniteds
internal control over financial reporting if Texas United meets
the accelerated filing requirement as defined in SOX. Otherwise,
the filing requirement will begin with Texas Uniteds 2005
Annual Report on Form 10-K. The internal control report
must include a statement of managements responsibility for
establishing and maintaining adequate control over financial
reporting as of year-end; of the framework used by management to
evaluate the effectiveness of Texas Uniteds internal
control over financial reporting; and that Texas Uniteds
independent accounting firm has issued an attestation report on
managements assessment of Texas Uniteds internal
control over financial reporting, which report is also required
to be filed as part of the Annual Report.

9



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##### 





| |                                         
| | ----------------------------------------
| | 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 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 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.



|        |           
|------- | ----------
|Item 2. | Facilities

Texas United conducts business at eighteen full
service banking locations and three 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 three
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
two 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 location:

|          |  |                        |  |                        |        | 
|--------- |  | ---------------------- |  | ---------------------- | ------ | 
|          |  |                        |  | Deposits at           
|Location  |  | Address                |  | December 31, 2003     
|          |  |                        |  |                       
|          |  |                        |  | (Dollars in thousands)
|La Grange |  | 202 W. Colorado        |  | $                      | 87,712 | 
|          |  | La Grange, Texas 78945 |  |                        |        | 
|Flatonia  |  | 205 East South Main    |  |                        | 35,803 | 
|          |  | Flatonia, Texas 78941  |  |                        |        | 
|Gonzales  |  | 508 St. Louis          |  |                        | 37,648 | 
|          |  | Gonzales, Texas 78629  |  |                        |        | 
|Weimar    |  | 201 N. Center Street   |  |                        | 11,301 | 
|          |  | Weimar, Texas 78962    |  |                        |        | 

10



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##### 



|                |  |                              |  |                        |        | 
|--------------- |  | ---------------------------- |  | ---------------------- | ------ | 
|                |  |                              |  | Deposits at           
|Location        |  | Address                      |  | December 31, 2003     
|                |  |                              |  |                       
|                |  |                              |  | (Dollars in thousands)
|New Braunfels   |  | 844 North Loop 37            |  | $                      | 25,678 | 
|                |  | New Braunfels, Texas 78131   |  |                        |        | 
|Schulenburg     |  | 301 Bucek St.                |  |                        | 26,336 | 
|                |  | Schulenburg, Texas 78956     |  |                        |        | 
|Dime Box        |  | Bowes & Highway 141          |  |                        | 15,945 | 
|                |  | Dime Box, Texas 77853        |  |                        |        | 
|Tomball         |  | 620 W. Main St.              |  |                        | 20,696 | 
|                |  | Tomball, Texas 77377-0170    |  |                        |        | 
|Pleasanton      |  | 1112 W. Oaklawn Drive        |  |                        | 20,731 | 
|                |  | Pleasanton, Texas 78064      |  |                        |        | 
|Hempstead       |  | 1250 Austin Street           |  |                        | 54,680 | 
|                |  | Hempstead, Texas 77445       |  |                        |        | 
|Waller          |  | 31250 FM 2920                |  |                        | 39,715 | 
|                |  | Waller, Texas 77484          |  |                        |        | 
|Cedar Park      |  | 650 E. Whitestone Blvd.      |  |                        | 16,595 | 
|                |  | Cedar Park, Texas 78613      |  |                        |        | 
|Austin          |  | 12730 Research Blvd.         |  |                        | 11,251 | 
|                |  | Austin, Texas 78759          |  |                        |        | 
|Lexington       |  | 8933 N. Hwy 77               |  |                        | 6,178  | 
|                |  | Lexington, Texas 78747       |  |                        |        | 
|Bryan Main      |  | 2900 Texas Avenue            |  |                        | 62,573 | 
|                |  | Bryan, Texas 77802           |  |                        |        | 
|Bryan North     |  | 1500 N. Texas Avenue         |  |                        | 8,198  | 
|                |  | Bryan, Texas 77803           |  |                        |        | 
|College Station |  | 2202 Longmire                |  |                        | 14,813 | 
|                |  | College Station, Texas 77840 |  |                        |        | 
|Liberty Hill    |  | 101 Bronco Blvd.             |  |                        | 5,778  | 
|                |  | Liberty Hill, Texas 78942    |  |                        |        | 
|Houston LPO     |  | 10333 Richmond               |  |                        |       | 
|                |  | Houston, Texas 77042         |  |                        |        | 
|Temple LPO      |  | 1210 West Avenue A           |  |                        |       | 
|                |  | Temple, Texas 76504          |  |                        |        | 
|Austin LPO      |  | 11921 N. Mopac Expressway,   |  |                        |       | 
|                |  | Suite 100                    |  |                        |        | 
|                |  | Austin, Texas 78759          |  |                        |        | 



|        |                  
|------- | -----------------
|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.

11



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##### 





|        |                                                        
|------- | -------------------------------------------------------
|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 2003.

PART II.



|        |                                                            
|------- | -----------------------------------------------------------
|Item 5. | Market of Common Equity and Related
    Stockholder Matters

Texas Uniteds Common Stock began trading on
July 31, 2002 and is listed on the Nasdaq National Market
System under the symbol TXUI. Prior to July 31,
2002, Texas Uniteds Common Stock was not publicly traded,
and there was no active trading market for the Common Stock. As
of March 15, 2004, there were 4,004,221 shares issued
and outstanding and approximately 1,070 holders of record of the
Texas United Common Stock. The number of beneficial owners is
unknown to Texas United at this time.

The high and low closing prices by quarter for
the 2003 and 2002 fiscal years (adjusted to give effect to the
three-for-two stock split effective October 15, 2003) were
as follows:

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2003           |  | High |       | Low
|               |  |      |       |    
|First quarter  |  | $    | 12.61 |     |  | $ | 11.13 | 
|Second quarter |  |      | 15.20 |     |  |   | 12.27 | 
|Third quarter  |  |      | 17.67 |     |  |   | 14.17 | 
|Fourth quarter |  |      | 17.44 |     |  |   | 15.34 | 

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2002           |  | High |       | Low
|               |  |      |       |    
|First quarter  |  |      | N/A   |     |  |   | N/A   | 
|Second quarter |  |      | N/A   |     |  |   | N/A   | 
|Third quarter  |  | $    | 15.33 |     |  | $ | 12.66 | 
|Fourth quarter |  |      | 14.00 |     |  |   | 12.17 | 

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 Common Stock since
inception in 1998, and paid quarterly dividends aggregating
$0.07 per share in 2003 and $0.07 per share in 2002,
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 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 (adjusted to give
effect to the three-for-two stock split effective
October 15, 2003) were as follows:

|               |  |      |      |      |  |   |      | 
|-------------- |  | ---- | ---- | ---- |  | - | ---- | 
|               |  | 2003 |      | 2002
|               |  |      |      |     
|First quarter  |  | $    | 0.07 |      |  | $ | 0.07 | 
|Second quarter |  |      | 0.07 |      |  |   | 0.07 | 
|Third quarter  |  |      | 0.07 |      |  |   | 0.07 | 
|Fourth quarter |  |      | 0.07 |      |  |   | 0.07 | 

Securities Authorized for Issuance Under
Equity Compensation Plans

The Company currently has stock options
outstanding. The following table provides information as of
December 31, 2003 (adjusted to give effect to the
three-for-two stock split effective October 15, 2003)

12



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##### 



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 in
|Plan Category                                                  |  | Warrants and Rights     |         | Outstanding Options |  | Column (a))            
|                                                               |  |                         |         |                     |  |                        
|Equity compensation plans approved by security
    holders     |  |                         | 236,964 | (1)                 |  | $                       | 7.07 |  |  |  | 15,331 | 
|Equity compensation plans not approved by
    security holders |  |                         | 50,625  | (2)                 |  |                         | 3.85 |  |  |  |       | 
|                                                               |  |                         |         |                     |  |                         |      |  |  |  |        | 
|Total                                                          |  |                         | 287,589 |                     |  | $                       | 6.51 |  |  |  | 15,331 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 2,398 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 $18.26.                                                                                                       
|   
|(2) | 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
    terminate ten years from the date of grant.



|        |                                         
|------- | ----------------------------------------
|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, 2003. 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 Texas
Uniteds consolidated financial statements and the notes
thereto. The consolidated financial statements as of
December 31, 2003 and 2002 and for each of the three years
in the period ended December 31, 2003 and the report
thereon of Grant Thornton LLP are included elsewhere in this
document. 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,   
|                                                        |  |                                              
|                                                        |  | 2003                                          |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                        |  |                                               |        |      |  |      |        |      |  |     
|                                                        |  |                                              
|                                                        |  | (Dollars in thousands, except per share data)
|Income Statement Data:                                  |  |                                               |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Interest income                                         |  | $                                             | 36,701 |      |  | $    | 32,406 |      |  | $    | 29,894 |  |  | $ | 25,355 |  |  | $ | 19,664 | 
|Interest expense                                        |  |                                               | 10,478 |      |  |      | 10,373 |      |  |      | 13,064 |  |  |   | 11,482 |  |  |   | 8,314  | 
|                                                        |  |                                               |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Net interest income                                     |  |                                               | 26,223 |      |  |      | 22,033 |      |  |      | 16,830 |  |  |   | 13,873 |  |  |   | 11,350 | 
|Provision for loan losses                               |  |                                               | 2,900  |      |  |      | 1,900  |      |  |      | 925    |  |  |   | 293    |  |  |   | 188    | 
|                                                        |  |                                               |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Net interest income after provision for loan
    losses |  |                                               | 23,323 |      |  |      | 20,133 |      |  |      | 15,905 |  |  |   | 13,580 |  |  |   | 11,162 | 
|Noninterest income                                      |  |                                               | 13,804 |      |  |      | 11,671 |      |  |      | 7,865  |  |  |   | 5,308  |  |  |   | 3,852  | 
|Noninterest expense                                     |  |                                               | 29,992 |      |  |      | 25,888 |      |  |      | 19,761 |  |  |   | 15,450 |  |  |   | 11,198 | 
|                                                        |  |                                               |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Income before taxes                                     |  |                                               | 7,135  |      |  |      | 5,916  |      |  |      | 4,009  |  |  |   | 3,438  |  |  |   | 3,816  | 
|Provision for income taxes                              |  |                                               | 1,894  |      |  |      | 1,638  |      |  |      | 785    |  |  |   | 401    |  |  |   | 642    | 
|                                                        |  |                                               |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Net income                                              |  | $                                             | 5,241  |      |  | $    | 4,278  |      |  | $    | 3,224  |  |  | $ | 3,037  |  |  | $ | 3,174  | 
|                                                        |  |                                               |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 

13



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##### 



|                                                                 |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------------- |  | --------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                 |  |                                              
|                                                                 |  | As of and for the Years Ended December 31,   
|                                                                 |  |                                              
|                                                                 |  | 2003                                          |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                                 |  |                                               |         |      |  |      |         |      |  |     
|                                                                 |  |                                              
|                                                                 |  | (Dollars in thousands, except per share data)
|Common Share Data(1):                                            |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic earnings per share                                         |  | $                                             | 1.31    |      |  | $    | 1.12    |      |  | $    | 0.86    |   |  | $ | 0.83    |   |  | $ | 0.88    |  
|Diluted earnings per share                                       |  |                                               | 1.26    |      |  |      | 1.07    |      |  |      | 0.83    |   |  |   | 0.79    |   |  |   | 0.85    |  
|Book value per share                                             |  |                                               | 9.49    |      |  |      | 8.94    |      |  |      | 7.35    |   |  |   | 6.62    |   |  |   | 5.54    |  
|Tangible book value per share(2)                                 |  |                                               | 7.13    |      |  |      | 6.43    |      |  |      | 5.50    |   |  |   | 4.66    |   |  |   | 4.63    |  
|Cash dividends declared per share                                |  |                                               | 0.28    |      |  |      | 0.28    |      |  |      | 0.24    |   |  |   | 0.21    |   |  |   | 0.20    |  
|Dividend payout ratio                                            |  |                                               | 20.5    | %    |  |      | 24.0    | %    |  |      | 27.9    | % |  |   | 25.6    | % |  |   | 22.7    | %
|Weighted average shares outstanding (basic) (in
    thousands)   |  |                                               | 3,984   |      |  |      | 3,826   |      |  |      | 3,742   |   |  |   | 3,652   |   |  |   | 3,606   |  
|Weighted average shares outstanding (diluted) (in
    thousands) |  |                                               | 4,151   |      |  |      | 3,998   |      |  |      | 3,894   |   |  |   | 3,813   |   |  |   | 3,714   |  
|Shares outstanding at end of period (in thousands)               |  |                                               | 4,002   |      |  |      | 3,960   |      |  |      | 3,724   |   |  |   | 3,717   |   |  |   | 3,583   |  
|Balance Sheet Data (at period end):                              |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total assets                                                     |  | $                                             | 637,684 |      |  | $    | 587,272 |      |  | $    | 453,839 |   |  | $ | 379,772 |   |  | $ | 313,109 |  
|Securities                                                       |  |                                               | 184,547 |      |  |      | 132,140 |      |  |      | 109,877 |   |  |   | 75,831  |   |  |   | 91,869  |  
|Loans (including loans held for sale)                            |  |                                               | 384,331 |      |  |      | 386,315 |      |  |      | 274,945 |   |  |   | 239,641 |   |  |   | 173,797 |  
|Allowance for loan losses                                        |  |                                               | 3,893   |      |  |      | 3,296   |      |  |      | 1,754   |   |  |   | 1,590   |   |  |   | 1,737   |  
|Total deposits                                                   |  |                                               | 501,136 |      |  |      | 452,919 |      |  |      | 375,688 |   |  |   | 336,308 |   |  |   | 259,969 |  
|Borrowings                                                       |  |                                               | 71,875  |      |  |      | 62,945  |      |  |      | 39,232  |   |  |   | 9,127   |   |  |   | 27,364  |  
|Total shareholders equity                                       |  |                                               | 37,987  |      |  |      | 35,418  |      |  |      | 27,372  |   |  |   | 24,604  |   |  |   | 19,846  |  
|Selected Financial Ratios and Other
    Data:                    |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Performance Ratios and Other Data:                               |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Return on average assets                                         |  |                                               | 0.86    | %    |  |      | 0.86    | %    |  |      | 0.77    | % |  |   | 0.90    | % |  |   | 1.14    | %
|Return on average equity                                         |  |                                               | 14.12   |      |  |      | 13.53   |      |  |      | 12.07   |   |  |   | 14.18   |   |  |   | 15.61   |  
|Net interest margin(3)                                           |  |                                               | 4.83    |      |  |      | 5.04    |      |  |      | 4.68    |   |  |   | 4.70    |   |  |   | 4.56    |  
|Efficiency ratio(4)                                              |  |                                               | 73.10   |      |  |      | 74.99   |      |  |      | 72.70   |   |  |   | 73.40   |   |  |   | 70.50   |  
|Asset Quality Ratios(5):                                         |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Nonperforming assets to total loans and other
    real estate    |  |                                               | 0.59    | %    |  |      | 0.52    | %    |  |      | 0.20    | % |  |   | 0.50    | % |  |   | 0.74    | %
|Net loan charge-offs to average loans                            |  |                                               | 0.35    |      |  |      | 0.34    |      |  |      | 0.29    |   |  |   | 0.22    |   |  |   | 0.16    |  
|Allowance for loan losses to total loans                         |  |                                               | 1.01    |      |  |      | 0.85    |      |  |      | 0.64    |   |  |   | 0.66    |   |  |   | 1.00    |  
|Allowance for loan losses to nonperforming
    loans(6)          |  |                                               | 195.82  |      |  |      | 197.48  |      |  |      | 334.73  |   |  |   | 156.80  |   |  |   | 181.50  |  
|Capital Ratios(7):                                               |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Leverage ratio                                                   |  |                                               | 6.46    | %    |  |      | 5.49    | %    |  |      | 6.49    | % |  |   | 6.82    | % |  |   | 6.07    | %
|Average shareholders equity to average
    total assets         |  |                                               | 6.07    |      |  |      | 6.35    |      |  |      | 6.42    |   |  |   | 6.33    |   |  |   | 7.33    |  
|Tier 1 risk-based capital ratio                                  |  |                                               | 9.54    |      |  |      | 7.97    |      |  |      | 10.16   |   |  |   | 10.19   |   |  |   | 9.85    |  
|Total risk-based capital ratio                                   |  |                                               | 10.47   |      |  |      | 8.83    |      |  |      | 10.80   |   |  |   | 10.84   |   |  |   | 10.78   |  



---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Adjusted for a five-for-one stock split effective
    January 15, 2000 and a three-for-two stock split effective
    October 15, 2003.     
|   
|(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.                                                              

14



---



##### 





|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Calculated by dividing total noninterest expense,
    excluding securities losses and credit loss provisions, by net
    interest income plus noninterest income. 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.                                                                            



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

Special Cautionary Notice Regarding
Forward-looking Statements

Certain of the matters in this document and in
documents incorporated by reference herein, including under the
caption Managements Discussion and Analysis of
Financial Condition and Results of Operations, may
constitute 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. Texas United
cautions you that a number of important events could cause
actual results to differ materially from those currently
anticipated in any forward-looking statement. These possible
events or factors include, without limitation:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | deposit attrition, operating costs, customer loss
    and business disruption are greater than we expect;                                               
|
| |  | competitive factors including product and pricing
    pressures among financial services organizations may increase;                                    
|
| |  | any future acquisitions are more difficult to
    integrate than expected;                                                                              
|
| |  | 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.

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.

15



---



##### 



For the Years
Ended December 31, 2003, 2002 and 2001

Overview

Texas United generates the majority of its
revenue from interest on loans, service charges on customer
accounts and income from investment securities. The revenues are
offset by interest expense paid on deposits and other borrowings
and non-interest expense such as administrative and occupancy
expenses. Net interest income is the difference between interest
income on earning assets such as loans and securities and
interest expense on liabilities such as deposits and borrowings
which are used to fund those assets. Net interest income is
Texas Uniteds largest source of revenue, representing
71.5% of total revenue during 2003. The level of interest rates
and the volume and mix of earning assets and interest bearing
liabilities impact net interest income and margin. The low rate
environment has slightly impacted Texas Uniteds net
interest margin, however, Texas United has recognized net
interest income due an increase in the volume of earning assets.
The net interest margins were 4.83%, 5.04%, and 4.68% for the
years ended December 31, 2003, 2002 and 2001, respectively.

Two principal components of Texas Uniteds
growth strategy are internal growth and strategic merger
transactions. Texas United did not have an acquisition or open
any additional banking centers during 2003. Texas United
acquired The Bryan-College Station Holding Company, Bryan,
Texas, in 2002 and Community Home Loan, Inc., a mortgage
company domiciled in Houston, Texas, in February 2004. Texas
United intends to seek additional expansion opportunities. Texas
United has opened six de novo banking centers
between May 1999 and December 2002.

Net income was $5.2 million,
$4.3 million, and $3.2 million and diluted earnings
per common share was $1.26, $1.07, and $0.83 for the years ended
December 31, 2003, 2002 and 2001, respectively. The
increase in net income was primarily the result of increased
volumes in earning assets and non-interest income. The Company
posted returns on average assets of 0.86%, 0.86%, and 0.77% and
returns on average equity of 14.12%, 13.53%, and 12.07% for the
years ended December 31, 2003, 2002 and 2001, respectively.

Total assets, deposits and shareholders
equity increased in each comparison period. Total loans at
December 31, 2003 decreased $2.0 million from their
level at December 31, 2002, primarily due to a decrease in
loans held for sale. Total assets at December 31, 2003,
2002 and 2001 were $637.7 million, $587.3 million, and
$453.8 million, respectively. Total loans at
December 31, 2003, 2002 and 2001 were $384.3 million,
$386.3 million, and $274.9 million, respectively.
Total deposits at December 31, 2003, 2002 and 2001 were
$501.1 million, $452.9 million, and
$375.7 million, respectively. Shareholders equity at
December 31, 2003, 2002 and 2001 was $38.0 million,
$35.4 million, and $27.4 million, 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 Texas Uniteds control. Please refer to the
subsequent discussion of Allowance for Loan Losses
below as well as

16



---



##### 



Note A to the consolidated financial
statements in this annual report on Form 10-K for
additional insight into managements approach and
methodology in estimating the allowance for loan losses.


Mortgage Servicing Rights Assets 
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 on Form 10-K for additional insight into
managements approach in estimating transfers and servicing
of financial assets.

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.

2003 versus 2002.Net interest income increased from $22.0 million in 2002 to
$26.2 million in 2003, a $4.2 million or 19.1%
increase. The net interest margin was 4.83% and 5.04% and the
net interest spread was 4.57% and 4.72% for 2003 and 2002,
respectively. Due to a lower interest rate environment in 2003,
cost of funds decreased by 51 basis points on higher volume
of deposits and other borrowings. The yield on average earning
assets decreased by 66 basis points on higher volumes of
both loans and investment securities.

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.

17



---



##### 



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. All average balances are daily average
balances and nonaccruing loans have been included in the table
as loans carrying a zero yield.

|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |       |      | 
|---------------------------------------- | -------------------------------------------------- | ----------------------------------------------- | ------ | -------- | ------- | ------- | ------ | ----------- | ------ | -------- | ---- | ------- | ---- | ----------- | ------ | -------- | ------- | ------- | ------ | ------ | ------ |  | ---- | ----- | ---- |  | ------ | ------- | ------- | - | ------ | ------ | ------ |  | ---- | ----- | ---- | 
|                                         |                                                    |                                                
|                                         |                                                    | Year Ended December 31,                        
|                                         |                                                    |                                                
|                                         |                                                    |                                                 |        |          |         |        
|                                         |                                                    | 2003                                            |        | 2002     |         | 2001   
|                                         |                                                    |                                                 |        |          |         |        
|                                         |                                                    | 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                                              |                                                 | $      | 376,988  |         |         | $      | 30,295      |        |          |      | 8.04    | %    |             | $      | 319,452  |         |         | $      | 26,569 |        |  |      | 8.32  | %    |  | $      | 264,129 |         |   | $      | 24,486 |        |  |      | 9.27  | %   
|                                         | Taxable securities                                 |                                                 |        | 153,624  |         |         |        | 5,866       |        |          |      | 3.82    |      |             |        | 95,629   |         |         |        | 5,027  |        |  |      | 5.26  |      |  |        | 60,428  |         |   |        | 3,895  |        |  |      | 6.45  |     
|                                         | Non-taxable securities                             |                                                 |        | 11,891   |         |         |        | 532         |        |          |      | 4.47    |      |             |        | 18,903   |         |         |        | 759    |        |  |      | 4.02  |      |  |        | 27,441  |         |   |        | 1,154  |        |  |      | 4.21  |     
|                                         | Federal funds sold                                 |                                                 |        | 734      |         |         |        | 8           |        |          |      | 1.09    |      |             |        | 2,974    |         |         |        | 51     |        |  |      | 1.71  |      |  |        | 7,847   |         |   |        | 359    |        |  |      | 4.57  |     
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|                                         | Total interest-earning assets                      |                                                 |        | 543,237  |         |         |        | 36,701      |        |          |      | 6.76    |      |             |        | 436,958  |         |         |        | 32,406 |        |  |      | 7.42  |      |  |        | 359,845 |         |   |        | 29,894 |        |  |      | 8.31  |     
|                                         | Less allowance for loan losses                     |                                                 |        | 3,631    |         |         |        |             |        |          |      |         |      |             |        | 2,759    |         |         |        |        |        |  |      |       |      |  |        | 1,697   |         |   |        |        |        |  |      |       |     
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|                                         |                                                    | Total interest-earning assets, net of allowance |        |          | 539,606 |         |        |             |        |          |      |         |      |             |        |          | 434,199 |         |        |        |        |  |      |       |      |  |        |         | 358,148 |   |        |        |        |  |      |       |      | 
|Non-earning assets                       |                                                    |                                                 | 72,039 |          |         |         |        |             |        |          |      |         |      |             | 63,339 |          |         |         |        |        |        |  |      |       |      |  | 57,997 |         |         |   |        |        |        |  |      |      
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|                                         |                                                    | Total assets                                    |        | $        | 611,645 |         |        |             |        |          |      |         |      |             |        | $        | 497,538 |         |        |        |        |  |      |       |      |  |        | $       | 416,145 |   |        |        |        |  |      |       |      | 
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Interest-bearing liabilities:            |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|                                         | Interest-bearing demand deposits                   |                                                 | $      | 125,622  |         |         | $      | 1,313       |        |          |      | 1.05    | %    |             | $      | 105,237  |         |         | $      | 1,564  |        |  |      | 1.49  | %    |  | $      | 82,422  |         |   | $      | 1,943  |        |  |      | 2.36  | %   
|                                         | Savings and money market accounts                  |                                                 |        | 79,216   |         |         |        | 855         |        |          |      | 1.08    |      |             |        | 61,788   |         |         |        | 909    |        |  |      | 1.47  |      |  |        | 51,753  |         |   |        | 1,348  |        |  |      | 2.60  |     
|                                         | Time deposits                                      |                                                 |        | 190,175  |         |         |        | 5,318       |        |          |      | 2.80    |      |             |        | 167,293  |         |         |        | 5,584  |        |  |      | 3.34  |      |  |        | 155,418 |         |   |        | 8,192  |        |  |      | 5.27  |     
|                                         | Federal funds purchased and other borrowings       |                                                 |        | 75,884   |         |         |        | 2,246       |        |          |      | 2.96    |      |             |        | 43,513   |         |         |        | 1,574  |        |  |      | 3.62  |      |  |        | 19,342  |         |   |        | 789    |        |  |      | 4.08  |     
|                                         | Junior subordinated deferrable interest debentures |                                                 |        | 7,164    |         |         |        | 746         |        |          |      | 10.41   |      |             |        | 7,000    |         |         |        | 742    |        |  |      | 10.60 |      |  |        | 7,000   |         |   |        | 792    |        |  |      | 11.31 |     
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|                                         |                                                    | Total interest-bearing liabilities              |        |          | 478,061 |         |        |             | 10,478 |          |      |         | 2.19 |             |        |          | 384,831 |         |        |        | 10,373 |  |      |       | 2.70 |  |        |         | 315,935 |   |        |        | 13,064 |  |      |       | 4.14 | 
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|Noninterest-bearing liabilities:         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|                                         | Demand deposits                                    |                                                 |        | 89,695   |         |         |        |             |        |          |      |         |      |             |        | 75,322   |         |         |        |        |        |  |      |       |      |  |        | 67,611  |         |   |        |        |        |  |      |       |     
|                                         | Other liabilities                                  |                                                 |        | 6,777    |         |         |        |             |        |          |      |         |      |             |        | 5,775    |         |         |        |        |        |  |      |       |      |  |        | 5,887   |         |   |        |        |        |  |      |       |     
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|                                         | Total liabilities                                  |                                                 |        | 574,533  |         |         |        |             |        |          |      |         |      |             |        | 465,928  |         |         |        |        |        |  |      |       |      |  |        | 389,433 |         |   |        |        |        |  |      |       |     
|                                         | Shareholders equity                               |                                                 |        | 37,112   |         |         |        |             |        |          |      |         |      |             |        | 31,610   |         |         |        |        |        |  |      |       |      |  |        | 26,712  |         |   |        |        |        |  |      |       |     
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|                                         |                                                    | Total liabilities and shareholders equity      |        | $        | 611,645 |         |        |             |        |          |      |         |      |             |        | $        | 497,538 |         |        |        |        |  |      |       |      |  |        | $       | 416,145 |   |        |        |        |  |      |       |      | 
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|Net interest income                      |                                                    |                                                 |        |          |         | $       | 26,223 |             |        |          |      |         |      |             |        |          |         | $       | 22,033 |        |        |  |      |       |      |  |        |         |         | $ | 16,830 |        |        |  |      |      
|                                         |                                                    |                                                 |        |          |         |         |        |             |        |          |      |         |      |             |        |          |         |         |        |        |        |  |      |       |      |  |        |         |         |   |        |        |        |  |      |      
|Net interest spread                      |                                                    |                                                 |        |          |         |         |        |             |        |          | 4.57 | %       |      |             |        |          |         |         |        |        |        |  | 4.72 | %     |      |  |        |         |         |   |        |        |        |  | 4.17 | %    
|Net interest margin                      |                                                    |                                                 |        |          |         |         |        |             |        |          | 4.83 | %       |      |             |        |          |         |         |        |        |        |  | 5.04 | %     |      |  |        |         |         |   |        |        |        |  | 4.68 | %    

18



---



##### 



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,
|                                              |                                                    |                         
|                                              |                                                    |                          |       |              
|                                              |                                                    | 2003 vs. 2002            |       | 2002 vs. 2001
|                                              |                                                    |                          |       |              
|                                              |                                                    |                          |       |               |  |                     |        |       
|                                              |                                                    | Increase (Decrease)      |       |               |  | Increase (Decrease) |        |       
|                                              |                                                    | Due To                   |       |               |  | Due To              |        |       
|                                              |                                                    |                          |       |               |  |                     |        |       
|                                              |                                                    | Volume                   |       | Rate          |  | Total               |        | Volume |   | Rate |       | Total
|                                              |                                                    |                          |       |               |  |                     |        |        |   |      |       |      
|                                              |                                                    |                         
|                                              |                                                    | (Dollars in thousands)  
|Interest-earning assets:                      |                                                    |                          |       |               |  |                     |        |        |   |      |       |       |   |   |       |       |   |   |        |        |   |   |        |       
|                                              | Loans                                              |                          | $     | 4,626         |  |                     | $      | (900   | ) |      | $     | 3,726 |   |   | $     | 4,602 |   |   | $      | (2,519 | ) |   | $      | 2,083  |  
|                                              | Securities                                         |                          |       | 1,988         |  |                     |        | (1,376 | ) |      |       | 612   |   |   |       | 1,203 |   |   |        | (466   | ) |   |        | 737    |  
|                                              | Federal funds sold                                 |                          |       | 7             |  |                     |        | (50    | ) |      |       | (43   | ) |   |       | (83   | ) |   |        | (225   | ) |   |        | (308   | )
|                                              |                                                    |                          |       |               |  |                     |        |        |   |      |       |       |   |   |       |       |   |   |        |        |   |   |        |       
|Total increase (decrease) in interest income  |                                                    |                          | 6,621 |               |  |                     | (2,326 | )      |   |      | 4,295 |       |   |   | 5,722 |       |   |   | (3,210 | )      |   |   | 2,512  |       
|Interest-bearing liabilities:                 |                                                    |                          |       |               |  |                     |        |        |   |      |       |       |   |   |       |       |   |   |        |        |   |   |        |       
|                                              | Interest-bearing demand deposits                   |                          |       | 214           |  |                     |        | (465   | ) |      |       | (251  | ) |   |       | 340   |   |   |        | (719   | ) |   |        | (379   | )
|                                              | Savings and money market accounts                  |                          |       | 188           |  |                     |        | (242   | ) |      |       | (54   | ) |   |       | 148   |   |   |        | (587   | ) |   |        | (439   | )
|                                              | Time deposits                                      |                          |       | 641           |  |                     |        | (907   | ) |      |       | (266  | ) |   |       | 397   |   |   |        | (3,005 | ) |   |        | (2,608 | )
|                                              | Junior subordinated deferrable interest debentures |                          |       | 17            |  |                     |        | (13    | ) |      |       | 4     |   |   |       |      |   |   |        | (50    | ) |   |        | (50    | )
|                                              | Federal funds purchased and other borrowings       |                          |       | 958           |  |                     |        | (286   | ) |      |       | 672   |   |   |       | 875   |   |   |        | (90    | ) |   |        | 785    |  
|                                              |                                                    |                          |       |               |  |                     |        |        |   |      |       |       |   |   |       |       |   |   |        |        |   |   |        |       
|Total increase (decrease) in interest expense |                                                    |                          | 2,018 |               |  |                     | (1,913 | )      |   |      | 105   |       |   |   | 1,760 |       |   |   | (4,451 | )      |   |   | (2,691 | )     
|                                              |                                                    |                          |       |               |  |                     |        |        |   |      |       |       |   |   |       |       |   |   |        |        |   |   |        |       
|Increase (decrease) in net interest income    |                                                    | $                        | 4,603 |               |  | $                   | (413   | )      |   | $    | 4,190 |       |   | $ | 3,962 |       |   | $ | 1,241  |        |   | $ | 5,203  |       
|                                              |                                                    |                          |       |               |  |                     |        |        |   |      |       |       |   |   |       |       |   |   |        |        |   |   |        |       



| |                          
| | -------------------------
| | 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 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, 2003, 2002
and 2001, Texas United recorded provisions for loan losses of
$2.9 million, $1.9 million, and $925,000,
respectively. Texas United increased its provisions made in 2003
by $1.0 million primarily due to growth in the loan
portfolio, changes in the Central Texas economy and the increase
of $1.2 million in net loan charge-offs in 2003 compared
with 2002. 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.



| |                   
| | ------------------
| | 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 sources of income derived from net gains on the
sale of securities. Noninterest income for the year ended
December 31, 2003 was $13.8 million, an increase of
$2.1 million or 17.9% from $11.7 million in 2002. The
increase was primarily due to an increase in fees resulting from
a larger deposit base over which fees were collected, partially
offset by a decrease in mortgage servicing income and a decrease
in net gains on the sale of securities. For the year ended
December 31, 2003, mortgage servicing revenue was
$2.2 million, a decrease of $200,000 or 8.3% from
$2.4 million in 2002. Texas United added approximately
$108.8 million in the servicing portfolio as a result of
selling mortgage loans where servicing is retained. Although
Texas United increased its mortgage servicing portfolio during
2003, mortgage serving revenue was down from 2002 due to a lower
rate environment. Net gains on the sale of securities for the
year ended December 31, 2003 was $1.2 million, a
decrease of $300,000

19



---



##### 



or 20.0% from $1.5 million in 2002. The net
gains on the sale of securities are primarily due to the
repositioning of the investment portfolio to shorten the
duration and take advantage of holding gains.


Noninterest income was $11.7 million for the
year ended December 31, 2002 compared with
$7.9 million for the year ended December 31, 2001, an
increase of $3.8 million or 48.1%, which also resulted from
a larger deposit base and net gain on the sale of securities.
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. Texas United added
approximately $54.2 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,
|                                    |                          |                         
|                                    |                          | 2003                     |       | 2002   |  | 2001
|                                    |                          |                          |       |        |  |     
|                                    |                          |                         
|                                    |                          | (Dollars in thousands)  
|Service charges on deposit accounts |                          | $                        | 6,753 |        |  | $    | 5,826 |        |  | $ | 4,555 |      
|Mortgage servicing revenue          |                          |                          | 2,247 |        |  |      | 2,359 |        |  |   | 1,002 |      
|Net gain on sale of securities      |                          |                          | 1,244 |        |  |      | 1,457 |        |  |   | 340   |      
|Net gain on sale of loans           |                          |                          | 1,148 |        |  |      | 142   |        |  |   | 242   |      
|Other noninterest income            |                          |                          | 2,412 |        |  |      | 1,887 |        |  |   | 1,726 |      
|                                    |                          |                          |       |        |  |      |       |        |  |   |       |      
|                                    | Total noninterest income |                          | $     | 13,804 |  |      | $     | 11,671 |  |   | $     | 7,865 | 
|                                    |                          |                          |       |        |  |      |       |        |  |   |       |      



| |                    
| | -------------------
| | Noninterest Expense

For the years ended December 31, 2003, 2002
and 2001, noninterest expense totaled $30.0 million,
$25.9 million, and $19.8 million, respectively. The
15.8% increase in 2003 was primarily the result of start-up
costs associated with new lending programs, the loss associated
with the sale of Third Coast and the full year effect of
employee compensation and benefits and non-staff expenses from
the Bryan-College Station acquisition. In addition, based upon
an independent valuation of the mortgage servicing rights, a net
relief on impairment of $183,000 was recorded in 2003 and
included in mortgage servicing expense. Texas United had a
$263,000 impairment allowance recorded against its mortgage
servicing rights at December 31, 2003. 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 30.8% increase in noninterest expense in 2002
was primarily the result of the start-up costs associated with
new lending programs, the opening of the Trust department,
conversion costs and enhancements to the data processing system,
an impairment charge to mortgage serving rights, increased
marketing costs, and merger related expenses related to the
Bryan-College Station acquisition. Texas Uniteds
efficiency ratios, calculated by dividing total noninterest
expenses (excluding securities losses) by net interest income
plus noninterest income, were 73.10% in 2003, 74.99% in 2002 and
72.70% in 2001.

20



---



##### 



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

|                                   |                               |                            |        |       |        |      |        |       |        |   |       |       |        | 
|---------------------------------- | ----------------------------- | -------------------------- | ------ | ----- | ------ | ---- | ------ | ----- | ------ | - | ----- | ----- | ------ | 
|                                   |                               | 2003                       |        | 2002  |        | 2001
|                                   |                               |                            |        |       |        |     
|                                   |                               |                           
|                                   |                               | (Dollars in thousands)    
|Employee compensation and benefits |                               | $                          | 16,689 |       |        | $    | 12,602 |       |        | $ | 9,877 |      
|Non-staff expenses:                |                               |                            |        |       |        |      |        |       |        |   |       |      
|                                   | Net occupancy expense         |                            |        | 1,868 |        |      |        | 1,744 |        |   |       | 1,063 |       
|                                   | Depreciation and amortization |                            |        | 2,295 |        |      |        | 1,621 |        |   |       | 1,330 |       
|                                   | Legal and professional fees   |                            |        | 544   |        |      |        | 330   |        |   |       | 393   |       
|                                   | Data processing               |                            |        | 1,045 |        |      |        | 1,041 |        |   |       | 377   |       
|                                   | Goodwill amortization         |                            |        |      |        |      |        |      |        |   |       | 508   |       
|                                   | Advertising                   |                            |        | 610   |        |      |        | 1,159 |        |   |       | 500   |       
|                                   | Mortgage servicing expense    |                            |        | 620   |        |      |        | 831   |        |   |       | 120   |       
|                                   | Other                         |                            |        | 6,321 |        |      |        | 6,560 |        |   |       | 5,593 |       
|                                   |                               |                            |        |       |        |      |        |       |        |   |       |      
|                                   |                               | Total non-staff expenses   |        |       | 13,303 |      |        |       | 13,286 |   |       |       | 9,884  | 
|                                   |                               |                            |        |       |        |      |        |       |        |   |       |      
|                                   |                               | Total noninterest expenses |        | $     | 29,992 |      |        | $     | 25,888 |   |       | $     | 19,761 | 
|                                   |                               |                            |        |       |        |      |        |       |        |   |       |      

Employee compensation and benefits expense for
the year ended December 31, 2003 was $16.7 million, an
increase of $4.1 million or 32.5% over the
$12.6 million for 2002. The increase was primarily due to
the staffing of new business lines, the addition of commercial
and mortgage lenders, and the full year effect of the
acquisition of Bryan-College Station and opening the Liberty
Hill banking center in December 2002. 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 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 2001. The number of
full-time equivalent employees was 313 at December 31, 2003
compared with 315 at December 31, 2002, a decrease of
0.06%. The number of full time equivalent employees was 233 at
December 31, 2001.

Non-staff expenses for the year ended
December 31, 2003 and 2002 was $13.3 million.
Non-staff expenses for the year ended December 31, 2002
increased $3.4 million or 34.3% over $9.9 million for
2001. The increase 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 $31,000 in 2003,
$27,800 in 2002, and $42,000 in 2001.



| |             
| | ------------
| | 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 $300,000 to
$1.9 million for the year ended December 31, 2003 from
$1.6 million for 2002. 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 2001 was
$785,000. The effective tax rates in 2003, 2002 and 2001 were
26.5%, 27.7%, and 19.6%, 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. This
has no effect on income tax rate or expense.

21



---



##### 





| |                    
| | -------------------
| | 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 Financial Condition  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 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 or at any subsequent
annual evaluation date. Amortization expense related to goodwill
was $0, $0 and $508,000 for the years ended December 31,
2003, 2002 and 2001, respectively.

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
$384.3 million at December 31, 2003, a decrease of
$2.0 million or 0.5% from $386.3 million at
December 31, 2002 primarily due to a $29.9 million
decrease in loans held for sale. Loans, other than loans held
for sale, increased by $27.9 million at December 31,
2003 compared to December 31, 2002. Loan growth occurred
primarily in commercial mortgage loans, which increased
$53.0 million in 2003 compared with 2002. During 2003, the
Company added four new commercial lenders which is attributed to
this increase. Loans comprised 70.7% of average earning assets
at December 31, 2003 compared with 88.4% at
December 31, 2002. The average yield decreased 0.28% to
8.04% at December 31, 2003 compared to 8.32% at
December 31, 2002.

Total loans increased by $111.4 million or
approximately 40.5% to $386.3 million at December 31,
2002 from $274.9 million at December 31, 2001. At
closing, Texas United acquired $57.8 million in loans in
connection with the Bryan-College Station acquisition in 2002.
This represents 51.9% of the total loan growth from 2002
compared to 2001. The average yield decreased 0.95% to 8.32% at
December 31, 2002 compared to 9.27% at December 31,
2001.

22



---



##### 



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

|                          |                        |                        |        |         |  |        |      |         |   |   |        |         |  |  |      |       |  
|------------------------- | ---------------------- | ---------------------- | ------ | ------- |  | ------ | ---- | ------- | - | - | ------ | ------- |  |  | ---- | ----- | -
|                          |                        |                       
|                          |                        | December 31,          
|                          |                        |                       
|                          |                        |                        |        |        
|                          |                        | 2003                   |        | 2002   
|                          |                        |                        |        |        
|                          |                        | Amount                 |        | Percent |  | Amount |      | Percent
|                          |                        |                        |        |         |  |        |      |        
|                          |                        |                       
|                          |                        | (Dollars in thousands)
|Commercial and industrial |                        | $                      | 63,793 |         |  |        | 16.6 | %       |   | $ | 62,391 |         |  |  | 16.2 | %    
|Real estate:              |                        |                        |        |         |  |        |      |         |   |   |        |         |  |  |      |      
|                          | 1-4 family residential |                        |        | 140,020 |  |        |      | 36.4    |   |   |        | 149,471 |  |  |      | 38.7  |  
|                          | Commercial mortgages   |                        |        | 115,033 |  |        |      | 29.9    |   |   |        | 62,014  |  |  |      | 16.0  |  
|                          | Held for sale          |                        |        | 3,810   |  |        |      | 1.0     |   |   |        | 33,674  |  |  |      | 8.7   |  
|                          | Other                  |                        |        | 8,488   |  |        |      | 2.2     |   |   |        | 18,269  |  |  |      | 4.7   |  
|Consumer                  |                        |                        | 53,187 |         |  |        | 13.9 |         |   |   | 60,496 |         |  |  | 15.7 |      
|                          |                        |                        |        |         |  |        |      |         |   |   |        |         |  |  |      |      
|                          | Total loans            |                        | $      | 384,331 |  |        |      | 100.0   | % |   | $      | 386,315 |  |  |      | 100.0 | %
|                          |                        |                        |        |         |  |        |      |         |   |   |        |         |  |  |      |      
|Allowance for loan losses |                        |                        | 3,893  |         |  |        |      |         |   |   | 3,296  |         |  |  |      |      
|                          |                        |                        |        |         |  |        |      |         |   |   |        |         |  |  |      |      
|                          | Net loans              |                        | $      | 380,438 |  |        |      |         |   |   | $      | 383,019 |  |  |      |       |  
|                          |                        |                        |        |         |  |        |      |         |   |   |        |         |  |  |      |      

|                          |                        |                        |        |         |  |        |      |         |   |        |        |         |  |  |      |       |   |   |        |         |  |  |      |       |  
|------------------------- | ---------------------- | ---------------------- | ------ | ------- |  | ------ | ---- | ------- | - | ------ | ------ | ------- |  |  | ---- | ----- | - | - | ------ | ------- |  |  | ---- | ----- | -
|                          |                        |                       
|                          |                        | December 31,          
|                          |                        |                       
|                          |                        |                        |        |         |  |       
|                          |                        | 2001                   |        | 2000    |  | 1999  
|                          |                        |                        |        |         |  |       
|                          |                        | Amount                 |        | Percent |  | Amount |      | Percent |   | Amount |        | Percent
|                          |                        |                        |        |         |  |        |      |         |   |        |        |        
|                          |                        |                       
|                          |                        | (Dollars in thousands)
|Commercial and industrial |                        | $                      | 53,401 |         |  |        | 19.4 | %       |   | $      | 49,955 |         |  |  | 20.8 | %     |   | $ | 32,165 |         |  |  | 18.5 | %    
|Real estate:              |                        |                        |        |         |  |        |      |         |   |        |        |         |  |  |      |       |   |   |        |         |  |  |      |      
|                          | 1-4 family residential |                        |        | 114,663 |  |        |      | 41.7    |   |        |        | 78,404  |  |  |      | 32.7  |   |   |        | 51,786  |  |  |      | 29.8  |  
|                          | Commercial mortgages   |                        |        | 35,886  |  |        |      | 13.1    |   |        |        | 31,753  |  |  |      | 13.3  |   |   |        | 25,018  |  |  |      | 14.4  |  
|                          | Held for sale          |                        |        | 817     |  |        |      | 0.3     |   |        |        | 3,669   |  |  |      | 1.5   |   |   |        | 3,587   |  |  |      | 2.1   |  
|                          | Other                  |                        |        | 23,970  |  |        |      | 8.7     |   |        |        | 28,642  |  |  |      | 12.0  |   |   |        | 18,449  |  |  |      | 10.6  |  
|Consumer                  |                        |                        | 46,208 |         |  |        | 16.8 |         |   |        | 47,218 |         |  |  | 19.7 |       |   |   | 42,792 |         |  |  | 24.6 |      
|                          |                        |                        |        |         |  |        |      |         |   |        |        |         |  |  |      |       |   |   |        |         |  |  |      |      
|                          | Total loans            |                        | $      | 274,945 |  |        |      | 100.0   | % |        | $      | 239,641 |  |  |      | 100.0 | % |   | $      | 173,797 |  |  |      | 100.0 | %
|                          |                        |                        |        |         |  |        |      |         |   |        |        |         |  |  |      |       |   |   |        |         |  |  |      |      
|Allowance for loan losses |                        |                        | 1,754  |         |  |        |      |         |   |        | 1,590  |         |  |  |      |       |   |   | 1,737  |         |  |  |      |      
|                          |                        |                        |        |         |  |        |      |         |   |        |        |         |  |  |      |       |   |   |        |         |  |  |      |      
|                          | Net loans              |                        | $      | 273,191 |  |        |      |         |   |        | $      | 238,051 |  |  |      |       |   |   | $      | 172,060 |  |  |      |       |  
|                          |                        |                        |        |         |  |        |      |         |   |        |        |         |  |  |      |       |   |   |        |         |  |  |      |      

The primary lending focus of Texas United is on
1-4 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 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

23



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##### 



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.




| |                          
| | -------------------------
| | Commercial Mortgage 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.



| |                                
| | -------------------------------
| | 1-4 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 1-4 family 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, 2003, Texas Uniteds
1-4 family real estate loan portfolio was
$140.0 million, with $93.4 million repricing 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
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

24



---



##### 



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. 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.

25



---



##### 



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, 2003 are summarized in the following table:

|                                         |       |                        |         |            |  |            |        |         |  |   |        |        |  |   |         |         | 
|---------------------------------------- | ----- | ---------------------- | ------- | ---------- |  | ---------- | ------ | ------- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                                         |       |                       
|                                         |       | December 31, 2003     
|                                         |       |                       
|                                         |       |                        |         | After One  |  |           
|                                         |       | One Year               |         | Through    |  | After      |        |        
|                                         |       | Or Less                |         | Five Years |  | Five Years |        | Total  
|                                         |       |                        |         |            |  |            |        |        
|                                         |       |                       
|                                         |       | (Dollars in thousands)
|Commercial and industrial                |       | $                      | 52,897  |            |  | $          | 10,600 |         |  | $ | 296    |        |  | $ | 63,793  |        
|Real estate                              |       |                        | 138,086 |            |  |            | 94,887 |         |  |   | 34,378 |        |  |   | 267,351 |        
|Consumer                                 |       |                        | 24,116  |            |  |            | 28,234 |         |  |   | 837    |        |  |   | 53,187  |        
|                                         |       |                        |         |            |  |            |        |         |  |   |        |        |  |   |         |        
|                                         | Total |                        | $       | 215,099    |  |            | $      | 133,721 |  |   | $      | 35,511 |  |   | $       | 384,331 | 
|                                         |       |                        |         |            |  |            |        |         |  |   |        |        |  |   |         |        
|Loans with a predetermined interest rate |       | $                      | 59,685  |            |  | $          | 66,399 |         |  | $ | 34,846 |        |  | $ | 160,930 |        
|Loans with a floating interest rate      |       |                        | 155,414 |            |  |            | 67,322 |         |  |   | 665    |        |  |   | 223,401 |        
|                                         |       |                        |         |            |  |            |        |         |  |   |        |        |  |   |         |        
|                                         | Total |                        | $       | 215,099    |  |            | $      | 133,721 |  |   | $      | 35,511 |  |   | $       | 384,331 | 
|                                         |       |                        |         |            |  |            |        |         |  |   |        |        |  |   |         |        



| |                     
| | --------------------
| | 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 $2.3 million at
December 31, 2003 compared with $2.0 million at
December 31, 2002, an increase of $300,000 or 15.0%. The
increase was primarily due to the deterioration in the Central
Texas economy. Nonperforming assets were $2.0 million at
December 31, 2002 compared to $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 deterioration in the Central
Texas economy. The ratio of nonperforming assets to total loans
and other real estate was 0.59%, 0.52% and 0.20% at
December 31, 2003, 2002, and 2001, 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, 2003, 2002, and 2001. 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 accounts for impaired loans under
SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118,
Accounting by 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 based on the fair value of the
collateral if the loan is collateral-dependent.

26



---



##### 



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

|                                                              |                            |                        |       |       |  |      |      |       |  |      |      |     |  |   |      |       |  |   |      |       | 
|------------------------------------------------------------- | -------------------------- | ---------------------- | ----- | ----- |  | ---- | ---- | ----- |  | ---- | ---- | --- |  | - | ---- | ----- |  | - | ---- | ----- | 
|                                                              |                            |                       
|                                                              |                            | December 31,          
|                                                              |                            |                       
|                                                              |                            | 2003                   |       | 2002  |  | 2001 |      | 2000  |  | 1999
|                                                              |                            |                        |       |       |  |      |      |       |  |     
|                                                              |                            |                       
|                                                              |                            | (Dollars in thousands)
|Nonaccrual loans                                              |                            | $                      | 1,255 |       |  | $    | 709  |       |  | $    | 380  |     |  | $ | 680  |       |  | $ | 656  |      
|Accruing loans past due 90 days or more                       |                            |                        | 733   |       |  |      | 960  |       |  |      | 144  |     |  |   | 334  |       |  |   | 301  |      
|Restructured loans                                            |                            |                        |      |       |  |      |     |       |  |      |     |     |  |   |     |       |  |   |     |      
|Other real estate                                             |                            |                        | 273   |       |  |      | 356  |       |  |      | 38   |     |  |   | 188  |       |  |   | 321  |      
|                                                              |                            |                        |       |       |  |      |      |       |  |      |      |     |  |   |      |       |  |   |      |      
|                                                              | Total nonperforming assets |                        | $     | 2,261 |  |      | $    | 2,025 |  |      | $    | 562 |  |   | $    | 1,202 |  |   | $    | 1,278 | 
|                                                              |                            |                        |       |       |  |      |      |       |  |      |      |     |  |   |      |       |  |   |      |      
|Nonperforming assets to total loans and other
    real estate |                            |                        | 0.59  | %     |  |      | 0.52 | %     |  |      | 0.20 | %   |  |   | 0.50 | %     |  |   | 0.74 | %    



| |                          
| | -------------------------
| | 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.

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.

27



---



##### 



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, 2003, 2002 and 2001, Texas United had
$3.9 million, $6.6 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,
2003, Texas United had $5.1 million in loans classified as
substandard, or 1.33% of total loans compared with
$4.5 million, or 1.16% of total loans, at December 31,
2002. At December 31, 2001, Texas United had
$3.6 million in loans classified as substandard, or 1.31%
of total loans. The increase in 2003 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, 2003, 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 195.82%
at December 31, 2003.

At December 31, 2003, the allowance for loan
losses was $3.9 million or 1.01% of total loans. For the
year ended December 31, 2003, net loan charge-offs totaled
$2.3 million or 0.61% of average loans outstanding for the
period, compared with $1.1 million in net loan charge-offs
or 0.34% of average loans for the year ended December 31,
2002. During 2003, Texas United recorded a provision for loan
losses of $2.9 million compared with $1.9 million for
2002. The increase in the provision for 2003 is primarily due to
growth in the loan portfolio, changes in the Central Texas
economy and the increase of $1.2 million in net loan
charge-offs in 2003 compared with 2002. Texas United made a
provision for loan losses of $925,000 for 2001. At
December 31, 2002, the allowance for loan losses totaled
$3.3 million, or 0.85% of total loans. At December 31,
2001, the allowance for loan losses totaled $1.8 million or
0.63% of total loans.

28



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##### 



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

|                                                            |                           |                        |         |        |   |      |         |        |   |      |         |      |   |   |         |        |   |   |         |      |  
|----------------------------------------------------------- | ------------------------- | ---------------------- | ------- | ------ | - | ---- | ------- | ------ | - | ---- | ------- | ---- | - | - | ------- | ------ | - | - | ------- | ---- | -
|                                                            |                           |                       
|                                                            |                           | December 31,          
|                                                            |                           |                       
|                                                            |                           | 2003                   |         | 2002   |   | 2001 |         | 2000   |   | 1999
|                                                            |                           |                        |         |        |   |      |         |        |   |     
|                                                            |                           |                       
|                                                            |                           | (Dollars in thousands)
|Average loans outstanding                                   |                           | $                      | 376,988 |        |   | $    | 319,452 |        |   | $    | 264,129 |      |   | $ | 204,058 |        |   | $ | 140,025 |     
|                                                            |                           |                        |         |        |   |      |         |        |   |      |         |      |   |   |         |        |   |   |         |     
|Gross loans outstanding at end of period                    |                           | $                      | 384,331 |        |   | $    | 386,315 |        |   | $    | 274,945 |      |   | $ | 239,641 |        |   | $ | 173,797 |     
|                                                            |                           |                        |         |        |   |      |         |        |   |      |         |      |   |   |         |        |   |   |         |     
|Allowance for loan losses at beginning of period            |                           | $                      | 3,296   |        |   | $    | 1,754   |        |   | $    | 1,590   |      |   | $ | 1,737   |        |   | $ | 1,278   |     
|Provision for loan losses                                   |                           |                        | 2,900   |        |   |      | 1,900   |        |   |      | 925     |      |   |   | 293     |        |   |   | 188     |     
|Balance acquired from mergers                               |                           |                        |        |        |   |      | 740     |        |   |      |        |      |   |   |        |        |   |   | 492     |     
|Charge-offs:                                                |                           |                        |         |        |   |      |         |        |   |      |         |      |   |   |         |        |   |   |         |     
|                                                            | Commercial and industrial |                        |         | (916   | ) |      |         | (401   | ) |      |         | (389 | ) |   |         | (452   | ) |   |         | (351 | )
|                                                            | Real estate               |                        |         | (321   | ) |      |         | (117   | ) |      |         | (37  | ) |   |         | (41    | ) |   |         | (59  | )
|                                                            | Consumer                  |                        |         | (2,001 | ) |      |         | (1,528 | ) |      |         | (881 | ) |   |         | (1,145 | ) |   |         | (361 | )
|                                                            | Other                     |                        |         |       |   |      |         | (6     | ) |      |         | (76  | ) |   |         |       |   |   |         | (26  | )
|                                                            |                           |                        |         |        |   |      |         |        |   |      |         |      |   |   |         |        |   |   |         |     
|Total charge-offs                                           |                           |                        | (3,238  | )      |   |      | (2,052  | )      |   |      | (1,383  | )    |   |   | (1,638  | )      |   |   | (797    | )   
|Recoveries:                                                 |                           |                        |         |        |   |      |         |        |   |      |         |      |   |   |         |        |   |   |         |     
|                                                            | Commercial and industrial |                        |         | 153    |   |      |         | 261    |   |      |         | 153  |   |   |         | 364    |   |   |         | 218  |  
|                                                            | Real estate               |                        |         | 82     |   |      |         | 36     |   |      |         | 23   |   |   |         | 173    |   |   |         | 37   |  
|                                                            | Consumer                  |                        |         | 683    |   |      |         | 603    |   |      |         | 434  |   |   |         | 622    |   |   |         | 221  |  
|                                                            | Other                     |                        |         | 17     |   |      |         | 54     |   |      |         | 12   |   |   |         | 39     |   |   |         | 100  |  
|                                                            |                           |                        |         |        |   |      |         |        |   |      |         |      |   |   |         |        |   |   |         |     
|Total recoveries                                            |                           |                        | 935     |        |   |      | 954     |        |   |      | 622     |      |   |   | 1,198   |        |   |   | 576     |     
|                                                            |                           |                        |         |        |   |      |         |        |   |      |         |      |   |   |         |        |   |   |         |     
|Net loan charge-offs                                        |                           |                        | (2,303  | )      |   |      | (1,098  | )      |   |      | (761    | )    |   |   | (440    | )      |   |   | (221    | )   
|Allowance for loan losses at end of period                  |                           | $                      | 3,893   |        |   | $    | 3,296   |        |   | $    | 1,754   |      |   | $ | 1,590   |        |   | $ | 1,737   |     
|                                                            |                           |                        |         |        |   |      |         |        |   |      |         |      |   |   |         |        |   |   |         |     
|Ratio of allowance to end of period loans                   |                           |                        | 1.01    | %      |   |      | 0.85    | %      |   |      | 0.63    | %    |   |   | 0.66    | %      |   |   | 0.99    | %   
|Ratio of net loan charge-offs to average loans              |                           |                        | 0.61    | %      |   |      | 0.34    | %      |   |      | 0.29    | %    |   |   | 0.22    | %      |   |   | 0.16    | %   
|Ratio of allowance to end of period nonperforming
    loans |                           |                        | 195.82  | %      |   |      | 197.48  | %      |   |      | 334.73  | %    |   |   | 156.80  | %      |   |   | 181.50  | %   

29



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##### 



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.

|                                                        |                        |                        |       |            |  |        |       |            |  |        |       |            |  |        |       |            |  |        |       |            |  |  |       |      |  |   |       |     |  |  |       |      |  |   |       |     |  |  |       |      | 
|------------------------------------------------------- | ---------------------- | ---------------------- | ----- | ---------- |  | ------ | ----- | ---------- |  | ------ | ----- | ---------- |  | ------ | ----- | ---------- |  | ------ | ----- | ---------- |  |  | ----- | ---- |  | - | ----- | --- |  |  | ----- | ---- |  | - | ----- | --- |  |  | ----- | ---- | 
|                                                        |                        |                        |       |            |  |        |       |            |  |       
|                                                        |                        | 2003                   |       | 2002       |  | 2001   |       | 2000       |  | 1999  
|                                                        |                        |                        |       |            |  |        |       |            |  |       
|                                                        |                        |                        |       | 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                               |                        | $                      | 420   |            |  |        | 16.6  | %          |  | $      | 335   |            |  |        | 16.2  | %          |  | $      | 212   |            |  |  | 19.4  | %    |  | $ | 225   |     |  |  | 20.8  | %    |  | $ | 160   |     |  |  | 18.5  | %   
|Real estate:                                            |                        |                        |       |            |  |        |       |            |  |        |       |            |  |        |       |            |  |        |       |            |  |  |       |      |  |   |       |     |  |  |       |      |  |   |       |     |  |  |       |     
|                                                        | 1-4 family residential |                        |       | 240        |  |        |       | 36.4       |  |        |       | 258        |  |        |       | 38.7       |  |        |       | 123        |  |  |       | 41.7 |  |   |       | 135 |  |  |       | 32.7 |  |   |       | 153 |  |  |       | 29.8 | 
|                                                        | Commercial mortgage    |                        |       | 720        |  |        |       | 29.9       |  |        |       | 340        |  |        |       | 16.0       |  |        |       | 188        |  |  |       | 13.1 |  |   |       | 205 |  |  |       | 13.3 |  |   |       | 245 |  |  |       | 14.4 | 
|                                                        | Held for sale          |                        |       |           |  |        |       | 1.0        |  |        |       |           |  |        |       | 8.7        |  |        |       |           |  |  |       | 0.3  |  |   |       |    |  |  |       | 1.5  |  |   |       |    |  |  |       | 2.1  | 
|                                                        | Other                  |                        |       |           |  |        |       | 2.2        |  |        |       | 73         |  |        |       | 4.7        |  |        |       | 125        |  |  |       | 8.7  |  |   |       | 130 |  |  |       | 12.0 |  |   |       | 94  |  |  |       | 10.6 | 
|Consumer                                                |                        |                        | 426   |            |  |        | 13.9  |            |  |        | 715   |            |  |        | 15.7  |            |  |        | 476   |            |  |  | 16.8  |      |  |   | 375   |     |  |  | 19.7  |      |  |   | 434   |     |  |  | 24.6  |     
|Unallocated                                             |                        |                        | 2,087 |            |  |        |      |            |  |        | 1,575 |            |  |        |      |            |  |        | 630   |            |  |  |      |      |  |   | 520   |     |  |  |      |      |  |   | 651   |     |  |  |      |     
|                                                        |                        |                        |       |            |  |        |       |            |  |        |       |            |  |        |       |            |  |        |       |            |  |  |       |      |  |   |       |     |  |  |       |      |  |   |       |     |  |  |       |     
|Total allowance for loan losses                         |                        | $                      | 3,893 |            |  |        | 100.0 | %          |  | $      | 3,296 |            |  |        | 100.0 | %          |  | $      | 1,754 |            |  |  | 100.0 | %    |  | $ | 1,590 |     |  |  | 100.0 | %    |  | $ | 1,737 |     |  |  | 100.0 | %   
|                                                        |                        |                        |       |            |  |        |       |            |  |        |       |            |  |        |       |            |  |        |       |            |  |  |       |      |  |   |       |     |  |  |       |      |  |   |       |     |  |  |       |     

Management believes that the allowance for loan
losses at December 31, 2003 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 loan losses at December 31, 2003.



| |                      
| | ---------------------
| | 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 $184.5 million at
December 31, 2003, an increase of $52.4 million from
$132.1 million at December 31, 2002. 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, 2003, securities represented 29.0%
of total assets compared with 22.5% of total assets at
December 31, 2002. The yield on average securities for the
year ended December 31, 2003 was 3.87% compared with 5.05%
for 2002. The decrease in average yield is attributed to a lower
interest rate environment. At December 31, 2003, the fair
value for investment securities included $47.3 million in
U.S. Government securities, $122.4 million in
mortgage-backed securities and $10.4 million in municipal
securities. The average life of the securities portfolio at
December 31, 2003 was approximately four years.

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 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 5.05%
compared with 5.75% for 2001. The decrease in average yield is
attributed to a lower interest rate environment. At
December 31, 2002, the fair value of 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.

30



---



##### 



The following table summarizes the contractual
maturity of investment securities on an amortized cost basis and
their weighted average yields as of December 31, 2003:

|                               |                  |                        |        |                    |  |                  |      |                 |  |        |        |         |  |        |      |       |  |       |        |        |  |  |      |   |  |   |        |        |  |  |      |   |  |   |         |         |  |  |      |   | 
|------------------------------ | ---------------- | ---------------------- | ------ | ------------------ |  | ---------------- | ---- | --------------- |  | ------ | ------ | ------- |  | ------ | ---- | ----- |  | ----- | ------ | ------ |  |  | ---- | - |  | - | ------ | ------ |  |  | ---- | - |  | - | ------- | ------- |  |  | ---- | - | 
|                               |                  |                       
|                               |                  | December 31, 2003     
|                               |                  |                       
|                               |                  |                        |        |                    |  |                 
|                               |                  |                        |        |                    |  | After Five Years |      |                
|                               |                  |                        |        | After One Year but |  | but Within Ten   |      |                 |  |       
|                               |                  | Within One Year        |        | Within Five Years  |  | Years            |      | After Ten Years |  |       
|                               |                  |                        |        |                    |  |                  |      |                 |  |       
|                               |                  | Amount                 |        | Yield              |  | Amount           |      | Yield           |  | Amount |        | Yield   |  | Amount |      | Yield |  | Total |        | Yield 
|                               |                  |                        |        |                    |  |                  |      |                 |  |        |        |         |  |        |      |       |  |       |        |       
|                               |                  |                       
|                               |                  | (Dollars in thousands)
|U.S. Government securities     |                  | $                      |       |                    |  |                  |     | %               |  | $      | 41,614 |         |  |        | 3.03 | %     |  | $     | 5,778  |        |  |  | 3.51 | % |  | $ |       |        |  |  |     | % |  | $ | 47,392  |         |  |  | 3.08 | %
|State and municipal securities |                  |                        |       |                    |  |                  |     |                 |  |        | 7,672  |         |  |        | 6.64 |       |  |       | 1,986  |        |  |  | 6.10 |   |  |   |       |        |  |  |     |   |  |   | 9,658   |         |  |  | 6.63 |  
|                               |                  |                        |        |                    |  |                  |      |                 |  |        |        |         |  |        |      |       |  |       |        |        |  |  |      |   |  |   |        |        |  |  |      |   |  |   |         |         |  |  |      |  
|                               | Subtotal         |                        |        |                   |  |                  |      |                 |  |        |        | 49,286  |  |        |      |       |  |       |        | 7,764  |  |  |      |   |  |   |        |       |  |  |      |   |  |   |         | 57,050  |  |  |      |   | 
|Mortgage-backed securities     |                  |                        | 22,329 |                    |  |                  | 3.97 |                 |  |        | 61,157 |         |  |        | 3.95 |       |  |       | 29,295 |        |  |  | 4.06 |   |  |   | 10,555 |        |  |  | 4.58 |   |  |   | 123,336 |         |  |  | 4.04 |  
|Other                          |                  |                        |       |                    |  |                  |     |                 |  |        |       |         |  |        |     |       |  |       |       |        |  |  |     |   |  |   | 4,519  |        |  |  | 2.00 |   |  |   | 4,519   |         |  |  | 2.00 |  
|                               |                  |                        |        |                    |  |                  |      |                 |  |        |        |         |  |        |      |       |  |       |        |        |  |  |      |   |  |   |        |        |  |  |      |   |  |   |         |         |  |  |      |  
|                               | Total securities |                        | $      | 22,329             |  |                  |      |                 |  |        | $      | 110,443 |  |        |      |       |  |       | $      | 37,059 |  |  |      |   |  |   | $      | 15,074 |  |  |      |   |  |   | $       | 184,905 |  |  |      |   | 
|                               |                  |                        |        |                    |  |                  |      |                 |  |        |        |         |  |        |      |       |  |       |        |        |  |  |      |   |  |   |        |        |  |  |      |   |  |   |         |         |  |  |      |  

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

|                   |                  |                        |         |         |  |      |         |         |  |   |         |         | 
|------------------ | ---------------- | ---------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                   |                  |                       
|                   |                  | December 31,          
|                   |                  |                       
|                   |                  | 2003                   |         | 2002    |  | 2001
|                   |                  |                        |         |         |  |     
|                   |                  |                       
|                   |                  | (Dollars in thousands)
|Available-for-sale |                  | $                      | 184,547 |         |  | $    | 132,140 |         |  | $ | 109,877 |        
|Held-to-maturity   |                  |                        |        |         |  |      |        |         |  |   |        |        
|                   |                  |                        |         |         |  |      |         |         |  |   |         |        
|                   | Total securities |                        | $       | 184,547 |  |      | $       | 132,140 |  |   | $       | 109,877 | 
|                   |                  |                        |         |         |  |      |         |         |  |   |         |        

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

|                                                                         |       |                        |         |            |  |            |     |            |  |   |       |       |  |   |         |         | 
|------------------------------------------------------------------------ | ----- | ---------------------- | ------- | ---------- |  | ---------- | --- | ---------- |  | - | ----- | ----- |  | - | ------- | ------- | 
|                                                                         |       |                       
|                                                                         |       | December 31, 2003     
|                                                                         |       |                       
|                                                                         |       |                        |         | Gross      |  | Gross      |     |           
|                                                                         |       | Amortized              |         | Unrealized |  | Unrealized |     |           
|                                                                         |       | Costs                  |         | Gains      |  | Losses     |     | Fair Value
|                                                                         |       |                        |         |            |  |            |     |           
|                                                                         |       |                       
|                                                                         |       | (Dollars in thousands)
|U.S. Treasury securities and obligations of
    U.S. government agencies |       | $                      | 47,392  |            |  | $          | 386 |            |  | $ | 472   |       |  | $ | 47,306  |        
|Mortgage-backed securities                                               |       |                        | 123,336 |            |  |            | 378 |            |  |   | 1,350 |       |  |   | 122,364 |        
|State and municipal securities                                           |       |                        | 9,658   |            |  |            | 700 |            |  |   |      |       |  |   | 10,358  |        
|Other                                                                    |       |                        | 4,519   |            |  |            |    |            |  |   |      |       |  |   | 4,519   |        
|                                                                         |       |                        |         |            |  |            |     |            |  |   |       |       |  |   |         |        
|                                                                         | Total |                        | $       | 184,905    |  |            | $   | 1,464      |  |   | $     | 1,822 |  |   | $       | 184,547 | 
|                                                                         |       |                        |         |            |  |            |     |            |  |   |       |       |  |   |         |        

|                                                                         |       |                        |        |                   |  |            |       |       |  |           |     |            |  |            |        |         |  |   |        |         |  |   |     |     |  |   |     |       |  |   |        |         | 
|------------------------------------------------------------------------ | ----- | ---------------------- | ------ | ----------------- |  | ---------- | ----- | ----- |  | --------- | --- | ---------- |  | ---------- | ------ | ------- |  | - | ------ | ------- |  | - | --- | --- |  | - | --- | ----- |  | - | ------ | ------- | 
|                                                                         |       |                        |        |                  
|                                                                         |       | December 31, 2002      |        | December 31, 2001
|                                                                         |       |                        |        |                  
|                                                                         |       |                        |        | Gross             |  | Gross      |       |       |  |           |     | Gross      |  | Gross      |        |        
|                                                                         |       | Amortized              |        | Unrealized        |  | Unrealized |       | Fair  |  | Amortized |     | Unrealized |  | Unrealized |        | Fair   
|                                                                         |       | Costs                  |        | Gains             |  | Losses     |       | Value |  | Costs     |     | Gains      |  | Losses     |        | Value  
|                                                                         |       |                        |        |                   |  |            |       |       |  |           |     |            |  |            |        |        
|                                                                         |       |                       
|                                                                         |       | (Dollars in thousands)
|U.S. Treasury securities and obligations of
    U.S. government agencies |       | $                      | 33,027 |                   |  | $          | 726   |       |  | $         |    |            |  | $          | 33,753 |         |  | $ | 20,777 |         |  | $ | 9   |     |  | $ | 264 |       |  | $ | 20,522 |        
|Mortgage-backed securities                                               |       |                        | 79,886 |                   |  |            | 1,113 |       |  |           | 154 |            |  |            | 80,845 |         |  |   | 60,344 |         |  |   | 365 |     |  |   | 546 |       |  |   | 60,163 |        
|State and municipal securities                                           |       |                        | 13,555 |                   |  |            | 758   |       |  |           |    |            |  |            | 14,313 |         |  |   | 26,637 |         |  |   | 254 |     |  |   | 235 |       |  |   | 26,656 |        
|Other                                                                    |       |                        | 3,229  |                   |  |            |      |       |  |           |    |            |  |            | 3,229  |         |  |   | 2,536  |         |  |   |    |     |  |   |    |       |  |   | 2,536  |        
|                                                                         |       |                        |        |                   |  |            |       |       |  |           |     |            |  |            |        |         |  |   |        |         |  |   |     |     |  |   |     |       |  |   |        |        
|                                                                         | Total |                        | $      | 129,697           |  |            | $     | 2,597 |  |           | $   | 154        |  |            | $      | 132,140 |  |   | $      | 110,294 |  |   | $   | 628 |  |   | $   | 1,045 |  |   | $      | 109,877 | 
|                                                                         |       |                        |        |                   |  |            |       |       |  |           |     |            |  |            |        |         |  |   |        |         |  |   |     |     |  |   |     |       |  |   |        |        

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

31



---



##### 



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.




| |         
| | --------
| | Deposits

Texas Uniteds lending and investing
activities are funded primarily by deposits. Total deposits at
December 31, 2003 were $501.6 million compared to
$452.9 million at December 31, 2002, an increase of
$48.7 million or 10.8%. The increase is attributed to new
municipality customers and internal marketing efforts.

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, 2003, demand, money market
and savings deposits accounted for approximately 65.3% of total
deposits, while certificates of deposit made up 34.7% of total
deposits. Noninterest-bearing demand deposits totaled
$100.6 million or 20.1% of total deposits at
December 31, 2003, compared with $82.3 million or
18.2% of total deposits at December 31, 2002. The average
cost of deposits, including noninterest-bearing demand deposits,
was 1.54% for the year ended December 31, 2003 compared
with 1.97% for 2002 primarily due to the lower interest rate
environment during 2003 compared with 2002.

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 primarily due to the lower interest rate
environment during 2002 compared with 2001.

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

|                           |                |                          |         |         |  |        |      |      |   |        |         |         |  |  |      |      |   |   |         |         |  |  |      |      |  
|-------------------------- | -------------- | ------------------------ | ------- | ------- |  | ------ | ---- | ---- | - | ------ | ------- | ------- |  |  | ---- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | -
|                           |                |                         
|                           |                | Years Ended December 31,
|                           |                |                         
|                           |                |                          |         |         |  |       
|                           |                | 2003                     |         | 2002    |  | 2001  
|                           |                |                          |         |         |  |       
|                           |                | Amount                   |         | Rate    |  | Amount |      | Rate |   | Amount |         | Rate   
|                           |                |                          |         |         |  |        |      |      |   |        |         |        
|                           |                |                         
|                           |                | (Dollars in thousands)  
|Noninterest-bearing demand |                | $                        | 89,695  |         |  |        |     | %    |   | $      | 75,322  |         |  |  |     | %    |   | $ | 67,611  |         |  |  |     | %   
|Interest-bearing demand    |                |                          | 125,622 |         |  |        | 1.05 |      |   |        | 105,237 |         |  |  | 1.49 |      |   |   | 82,422  |         |  |  | 2.36 |     
|Savings and money market   |                |                          | 79,216  |         |  |        | 1.08 |      |   |        | 61,788  |         |  |  | 1.47 |      |   |   | 51,753  |         |  |  | 2.60 |     
|Time                       |                |                          | 190,175 |         |  |        | 2.80 |      |   |        | 167,293 |         |  |  | 3.34 |      |   |   | 155,418 |         |  |  | 5.27 |     
|                           |                |                          |         |         |  |        |      |      |   |        |         |         |  |  |      |      |   |   |         |         |  |  |      |     
|                           | Total deposits |                          | $       | 484,708 |  |        |      | 1.54 | % |        | $       | 409,640 |  |  |      | 1.97 | % |   | $       | 357,204 |  |  |      | 3.21 | %
|                           |                |                          |         |         |  |        |      |      |   |        |         |         |  |  |      |      |   |   |         |         |  |  |      |     

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, 2003     
|                                      |       |                       
|                                      |       | (Dollars in thousands)
|Three months or less                  |       | $                      | 12,631 |       
|Over three months through six months  |       |                        | 7,740  |       
|Over six months through twelve months |       |                        | 10,067 |       
|Over one year                         |       |                        | 21,581 |       
|                                      |       |                        |        |       
|                                      | Total |                        | $      | 52,019 | 
|                                      |       |                        |        |       

32



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##### 



While a majority of the certificates of deposit
in amounts of $100,000 or more will mature during 2004, Texas
United expects that a significant portion of these deposits will
be renewed. Historically, Texas Uniteds large 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

Texas United utilizes borrowings to supplement
deposits to fund its lending and investing activities.
Borrowings consist of short-term and long-term advances from the
Federal Home Loan Bank and a line of credit with a
correspondent bank. Federal Funds purchased decreased
$12.8 million to $6.9 million at December 31,
2003 compared with $19.7 million at December 31, 2002.
Borrowings increased $9.0 million to $71.9 million at
December 31, 2003 compared with $62.9 million at
December 31, 2002. Long-term borrowings totaled
$41.9 million at December 31, 2003 with an average
interest rate of 3.70%. Long-term borrowings totaled
$62.9 million at December 31, 2002 with an average
interest rate of 3.63%. The highest amount outstanding at any
time during the year was $62.9 million during 2003 and 2002.

Texas United had $30.0 million in short-term
borrowings from the FHLB at December 31, 2003. The average
balance of short-term borrowings for the year was
$29.0 million and the highest amount outstanding at any
time during the year was $30.0 million. The average
interest rate was 1.07%.

Texas United had no short-term borrowings from
the FHLB at December 31, 2002. The average balance for
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%.

Texas United had $30.0 million in short-term
borrowings from the FHLB 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 expired and was renewed for one year in February 2004. At
December 31, 2003, Texas United had $2.8 million
advanced under this line of credit. The highest amount
outstanding during the year was $9.3 million. The average
balance under the line of credit during 2003 was
$5.3 million at an average interest rate 3.25%. At
December 31, 2002, Texas United had $5.3 million
advanced under the 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 rate
of 4.94%.

In connection with the acquisition of
Bryan-College Station, Texas United assumed $3.6 million in
subordinated notes and debentures. The debentures required
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
matured March 31, 2003.

In September 2000, Texas United formed a
wholly-owned statutory business trust, TXUI Statutory
Trust I (Trust I), which issued
$7.0 million in trust preferred securities and $210,000 in
common stock. Trust I invested the proceeds in an
equivalent amount of Texas Uniteds Junior Subordinated
Deferrable Interest Debentures (Junior Subordinated
Debentures I) bearing an interest rate of
10.60% per annum. The Junior Subordinated Debentures I
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 I, 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 semi-annual distributions on the trust
preferred securities are paid at the same rate that interest is
paid on the Junior Subordinated Debenture I. Distributions
to the holders of the trust preferred securities are included in
interest expense, within the category entitled borrowings. Under
the provisions of the Junior Subordinated Debentures I,
Texas United has the right to defer payment of interest on the
Junior

33



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##### 



Subordinated Debentures I at any time, or
from time to time, for periods not exceeding five years. If
interest payments on the Junior Subordinated Debentures I
are deferred, the distributions on the trust preferred
securities will also be deferred.


In December 2003, Texas United formed a
wholly-owned statutory business trust, TXUI Statutory
Trust II (Trust II), which issued
$5.0 million in trust preferred securities and $155,000 in
common stock. Trust II invested the proceeds in an
equivalent amount of Texas Uniteds Junior Subordinated
Deferrable Interest Debentures (Junior Subordinated
Debentures II) bearing an interest rate of 6.45%
fixed per annum for five years. Afterward, the Junior
Subordinated Debentures II will bear a floating rate based
on the three month LIBOR rate plus 2.85%. The Junior
Subordinated Debentures II will mature in 2033, which date
may be shortened to a date not earlier than 2008 if certain
conditions are met, including prior approval of the Federal
Reserve. The Junior Subordinated Debentures II, which are
the only assets of Trust II, 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 IIs obligations
under the trust preferred securities.

The quarterly distributions on the trust
preferred securities are paid at the same rate that interest is
paid on the Junior Subordinated Debentures II.
Distributions to the holders of the trust preferred securities
are included in interest expense, within the category entitled
borrowings. Under the provisions of the Junior Subordinated
Debentures II, Texas United has the right to defer payment
of interest on the Junior Subordinated Debentures II at any
time, or from time to time, for periods not exceeding five
years. If interest payments on the Junior Subordinated
Debentures II are deferred, the distributions on the trust
preferred securities will also be deferred.

In accordance with Financial Accounting Standards
Board (FASB) Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51
(Revised December 2003), Trust I was
deconsolidated in Texas Uniteds financial statements. The
trust preferred securities issued by Trust I and
Trust II are currently included in the Tier 1 capital
of Texas United for regulatory purposes. However, because
Trust I and Trust II are not a part of Texas
Uniteds financial statements, the Federal Reserve Board
may in the future disallow inclusion of the trust preferred
securities in Tier 1 capital for regulatory purposes. In
July 2003, the Federal Reserve Board issued a supervisory letter
instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the
contrary. According to the supervisory letter, the Federal
Reserve Board intends to review the regulatory implications of
the change in accounting treatment of subsidiary trusts that
issue trust preferred securities and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance
that the Federal Reserve Board will continue to permit
institutions to include trust preferred securities in
Tier 1 capital for regulatory capital purposes.



| |                                              
| | ---------------------------------------------
| | 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

34



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##### 



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 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, or financial futures
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.

35



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##### 



The following table sets forth an interest rate
sensitivity analysis for Texas United at December 31, 2003:

|                                   |                                                    |                                     |          |         |  |         |          |        |  |       |          |        |  |   |         |         |  |   |         |         | 
|---------------------------------- | -------------------------------------------------- | ----------------------------------- | -------- | ------- |  | ------- | -------- | ------ |  | ----- | -------- | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                   |                                                    |                                    
|                                   |                                                    | Volumes Subject to Repricing Within
|                                   |                                                    |                                    
|                                   |                                                    |                                     |          | Greater |  |        
|                                   |                                                    |                                     |          | 31180  |  | 181365 |          | than   |  |      
|                                   |                                                    | 030 Days                           |          | Days    |  | Days    |          | 1 Year |  | Total
|                                   |                                                    |                                     |          |         |  |         |          |        |  |      
|                                   |                                                    |                                    
|                                   |                                                    | (Dollars in thousands)             
|Interest-earning assets:           |                                                    |                                     |          |         |  |         |          |        |  |       |          |        |  |   |         |         |  |   |         |        
|                                   | Securities                                         |                                     | $        | 6,487   |  |         | $        | 9,544  |  |       | $        | 10,818 |  |   | $       | 158,056 |  |   | $       | 184,905 | 
|                                   | Loans                                              |                                     |          | 101,263 |  |         |          | 47,320 |  |       |          | 57,657 |  |   |         | 178,091 |  |   |         | 384,331 | 
|                                   | Time deposits                                      |                                     |          |        |  |         |          |       |  |       |          |       |  |   |         |        |  |   |         |        | 
|                                   | Federal funds sold and other temporary investments |                                     |          |        |  |         |          |       |  |       |          |       |  |   |         |        |  |   |         |        | 
|                                   |                                                    |                                     |          |         |  |         |          |        |  |       |          |        |  |   |         |         |  |   |         |        
|Total interest-earning assets      |                                                    | $                                   | 107,750  |         |  | $       | 56,864   |        |  | $     | 68,475   |        |  | $ | 336,147 |         |  | $ | 569,236 |        
|Interest-bearing liabilities:      |                                                    |                                     |          |         |  |         |          |        |  |       |          |        |  |   |         |         |  |   |         |        
|                                   | Demand, money market and savings deposits          |                                     | $        | 226,937 |  |         | $        |       |  |       | $        |       |  |   | $       |        |  |   | $       | 226,937 | 
|                                   | Certificates of deposit and other time deposits    |                                     |          | 13,907  |  |         |          | 63,022 |  |       |          | 41,677 |  |   |         | 55,525  |  |   |         | 174,131 | 
|                                   | Federal fund purchased and FHLB borrowings         |                                     |          | 38,093  |  |         |          | 6,065  |  |       |          | 7,399  |  |   |         | 24,459  |  |   |         | 76,016  | 
|                                   |                                                    |                                     |          |         |  |         |          |        |  |       |          |        |  |   |         |         |  |   |         |        
|Total interest-bearing liabilities |                                                    | $                                   | 278,937  |         |  | $       | 69,087   |        |  | $     | 49,076   |        |  | $ | 79,984  |         |  | $ | 477,084 |        
|Period GAP                         |                                                    | $                                   | (171,187 | )       |  | $       | (12,223  | )      |  | $     | 19,399   |        |  | $ | 256,163 |         |  | $ | 92,152  |        
|Cumulative GAP                     |                                                    | $                                   | (171,187 | )       |  | $       | (183,410 | )      |  | $     | (164,011 | )      |  | $ | 92,152  |         |  | $ | 92,152  |        
|Period GAP to total assets         |                                                    |                                     | (26.9    | )%      |  |         | (1.9     | )%     |  |       | 3.0      | %      |  |   | 40.2    | %       |  |   | 14.5    | %      
|Cumulative GAP to total assets     |                                                    |                                     | (26.9    | )%      |  |         | (28.8    | )%     |  |       | (25.7    | )%     |  |   | 14.5    | %       |  |   | 14.5    | %      

Texas Uniteds one-year cumulative GAP
position at December 31, 2003, was negative
$164.0 million or 25.7% 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 and Contractual
    Obligations

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. Core deposits exclude time
deposits over $100,000. These jumbo deposits are
characteristically more sensitive to changes in interest rates
and, thus, are not considered a part of core funding. Although
access to purchased funds from correspondent banks is available
and has been utilized on occasion to take advantage of
investment opportunities, 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 investments and loans, increasing deposit marketing
activities, and borrowing from the FHLB or correspondent banks.
The cash and federal funds sold position, supplemented by
amortizing investments along with payments and maturities within
the loan portfolio, have historically created an adequate
liquidity position.

36



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##### 



Cash flows from operating activities for the year
ended December 31, 2003 were primarily provided by the sale
of loans held for sale and net earnings. 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 the year ended December 31, 2001 were
primarily 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 (other than deposit
obligations) as of December 31, 2003 are summarized below:

|                                                   |                  |                        |   |           |        |           |   |            |        |       |   |       |       |   |        |     |        |   |        |        |        | 
|-------------------------------------------------- | ---------------- | ---------------------- | - | --------- | ------ | --------- | - | ---------- | ------ | ----- | - | ----- | ----- | - | ------ | --- | ------ | - | ------ | ------ | ------ | 
|                                                   |                  |                       
|                                                   |                  | Payments due in:      
|                                                   |                  |                       
|                                                   |                  |                        |   | Fiscal    |        | Fiscal    |   |           
|                                                   |                  | Fiscal 2004            |   | 2005-2007 |        | 2008-2009 |   | Thereafter |        | Total
|                                                   |                  |                        |   |           |        |           |   |            |        |      
|                                                   |                  |                       
|                                                   |                  | (Dollars in thousands)
|Junior subordinated deferrable interest debentures |                  | $                      |  |           |        | $         |  |            |        | $     |  |       |       | $ | 12,365 |     |        | $ | 12,365 |       
|                                                   | Short-term debt  |                        |   | 32,750    |        |           |   |           |        |       |   |      |       |   |        |    |        |   |        | 32,750 |       
|                                                   | Long-term debt   |                        |   | 2,987     |        |           |   | 32,445     |        |       |   | 2,731 |       |   |        | 962 |        |   |        | 39,125 |       
|                                                   | Operating leases |                        |   | 360       |        |           |   | 239        |        |       |   | 65    |       |   |        |    |        |   |        | 664    |       
|                                                   |                  |                        |   |           |        |           |   |            |        |       |   |       |       |   |        |     |        |   |        |       
|                                                   |                  | Total                  |   | $         | 36,097 |           |   | $          | 32,684 |       |   | $     | 2,796 |   |        | $   | 13,327 |   |        | $      | 84,904 | 
|                                                   |                  |                        |   |           |        |           |   |            |        |       |   |       |       |   |        |     |        |   |        |       



| |                                   
| | ----------------------------------
| | Off Balance Sheet
    Arrangements

Texas Uniteds commitments associated with
outstanding letters of credit and commitments to extend credit
as of December 31, 2003 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:

|                             |       |                        |        |           |  |           |       |            |  |       |     |     |  |   |       |       |  |   |        |        | 
|---------------------------- | ----- | ---------------------- | ------ | --------- |  | --------- | ----- | ---------- |  | ----- | --- | --- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                             |       |                       
|                             |       | Payments due in:      
|                             |       |                       
|                             |       |                        |        | Fiscal    |  | Fiscal    |       |           
|                             |       | Fiscal 2004            |        | 2005-2006 |  | 2007-2008 |       | Thereafter |  | Total
|                             |       |                        |        |           |  |           |       |            |  |      
|                             |       |                       
|                             |       | (Dollars in thousands)
|Standby letters of credit    |       | $                      | 592    |           |  | $         | 93    |            |  | $     | 10  |     |  | $ |      |       |  | $ | 695    |       
|Commitments to extend credit |       |                        | 44,687 |           |  |           | 7,211 |            |  |       | 866 |     |  |   | 5,214 |       |  |   | 57,978 |       
|                             |       |                        |        |           |  |           |       |            |  |       |     |     |  |   |       |       |  |   |        |       
|                             | Total |                        | $      | 45,279    |  |           | $     | 7,304      |  |       | $   | 876 |  |   | $     | 5,214 |  |   | $      | 58,673 | 
|                             |       |                        |        |           |  |           |       |            |  |       |     |     |  |   |       |       |  |   |        |       

In the normal course of business, Texas United
enters into various transactions, which, in accordance with
accounting principles generally accepted in the United States,
are not included in its consolidated balance sheets. Texas
United enters into these transactions to meet the financing
needs of its customers. These transactions include commitments
to extend credit and standby letters of credit, which involve,
to varying degrees, elements of credit risk in excess of the
amounts recognized in the consolidated balance sheets.

Commitments to Extend
Credit.Texas United enters into
contractual commitments to extend credit, normally with fixed
expiration dates or termination clauses, at specified rates and
for specific purposes. Substantially all of Texas Uniteds
commitments to extend credit are contingent upon customers
maintaining specific credit standards at the time of loan
funding. Texas United minimizes its exposure to loss under these
commitments by subjecting them to credit approval and monitoring
procedures. Management assesses the credit risk associated with
certain commitments to extend credit in determining the level of
the allowance for loan losses.

Standby Letters of
Credit.Standby letters of credit are
written conditional commitments issued by Texas United to
guarantee the performance of a customer to a third party. In the
event the customer does not perform in accordance with the terms
of the agreement with the third party, Texas United would be
required to fund the commitment. The maximum potential amount of
future payments Texas United could be required to make is
represented by the contractual amount of the commitment. If the
commitment is funded, the Company would be entitled to seek
recovery from the customer. Texas Uniteds policies
generally require that

37



---



##### 



standby letter of credit arrangements contain
security and debt covenants similar to those contained in loan
agreements.




| |                  
| | -----------------
| | 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, 2003 was $38.0 million, an increase of
$2.6 million or 7.3% compared with shareholders
equity of $35.4 million at December 31, 2002. The
increase was primarily due to net earnings for 2003 of
$5.2 million, partially offset by the $1.8 million
decrease in unrealized gains on securities and payment of
dividends in the amount of $1.0 million.

38



---



##### 



The following table provides a comparison of
Texas Uniteds and State Banks leverage and
risk-weighted capital ratios as of December 31, 2003 to the
minimum and well-capitalized regulatory standards:

|                                |  |                  |      |                   |  |                   |       |   |  |  |       |  
|------------------------------- |  | ---------------- | ---- | ----------------- |  | ----------------- | ----- | - |  |  | ----- | -
|                                |  |                  |      | To be Well        |  |                  
|                                |  | Minimum          |      | Capitalized Under |  |                  
|                                |  | Required for     |      | Prompt Corrective |  | Actual Ratio at  
|                                |  | Capital Purposes |      | Action Provisions |  | December 31, 2003
|                                |  |                  |      |                   |  |                  
|Texas United                    |  |                  |      |                   |  |                   |       |   |  |  |       |  
|Leverage ratio                  |  |                  | 4.00 | %(1)              |  |                   | N/A   |   |  |  | 6.46  | %
|Tier 1 risk-based capital ratio |  |                  | 4.00 | %                 |  |                   | N/A   |   |  |  | 9.54  | %
|Risk-based capital ratio        |  |                  | 8.00 | %                 |  |                   | N/A   |   |  |  | 10.47 | %
|                               
|State Bank                      |  |                  |      |                   |  |                   |       |   |  |  |       |  
|Leverage ratio                  |  |                  | 4.00 | %(2)              |  |                   | 5.00  | % |  |  | 6.56  | %
|Tier 1 risk-based capital ratio |  |                  | 4.00 | %                 |  |                   | 6.00  | % |  |  | 9.72  | %
|Risk-based capital ratio        |  |                  | 8.00 | %                 |  |                   | 10.00 | % |  |  | 10.65 | %



---



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



|         |                                                              
|-------- | -------------------------------------------------------------
|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 44 of this Annual
Report on Form 10-K.

Consolidated Quarterly Financial Data of Texas
United

|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |       | 
|-------------------------- | -------------------------------------------------------- | --------------------------------------------- | ----- | ------------ |  | ------- | ----- | -------- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                           |                                                          |                                              
|                           |                                                          | Quarter Ended 2003                           
|                           |                                                          |                                              
|                           |                                                          | December 31                                   |       | September 30 |  | June 30 |       | March 31
|                           |                                                          |                                               |       |              |  |         |       |         
|                           |                                                          |                                              
|                           |                                                          | (Unaudited)                                  
|                           |                                                          |                                              
|                           |                                                          | (Dollars in thousands, except per share data)
|Interest income            |                                                          | $                                             | 9,252 |              |  | $       | 9,622 |          |  | $ | 9,514 |       |  | $ | 9,231 |      
|Interest expense           |                                                          |                                               | 2,437 |              |  |         | 2,587 |          |  |   | 2,721 |       |  |   | 2,733 |      
|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      
|                           | Net interest income before provision for loan
    losses |                                               |       | 6,815        |  |         |       | 7,035    |  |   |       | 6,793 |  |   |       | 6,498 | 
|Provision for loan losses  |                                                          |                                               | 800   |              |  |         | 800   |          |  |   | 500   |       |  |   | 800   |      
|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      
|                           | Net interest income after provision                      |                                               |       | 6,015        |  |         |       | 6,235    |  |   |       | 6,293 |  |   |       | 5,698 | 
|Noninterest income         |                                                          |                                               | 3,687 |              |  |         | 4,149 |          |  |   | 3,389 |       |  |   | 2,579 |      
|Noninterest expense        |                                                          |                                               | 8,347 |              |  |         | 8,188 |          |  |   | 7,659 |       |  |   | 6,716 |      
|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      
|                           | Income before income taxes                               |                                               |       | 1,355        |  |         |       | 2,196    |  |   |       | 2,023 |  |   |       | 1,561 | 
|Provision for income taxes |                                                          |                                               | 166   |              |  |         | 667   |          |  |   | 631   |       |  |   | 430   |      
|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      
|Net income                 |                                                          | $                                             | 1,189 |              |  | $       | 1,529 |          |  | $ | 1,392 |       |  | $ | 1,131 |      
|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      
|Earnings per share:        |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      
|                           | Basic                                                    |                                               | $     | 0.30         |  |         | $     | 0.38     |  |   | $     | 0.35  |  |   | $     | 0.29  | 
|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      
|                           | Diluted                                                  |                                               | $     | 0.29         |  |         | $     | 0.37     |  |   | $     | 0.34  |  |   | $     | 0.27  | 
|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      

39



---



##### 



|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |       | 
|-------------------------- | -------------------------------------------------------- | --------------------------------------------- | ----- | ------------ |  | ------- | ----- | -------- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                           |                                                          |                                              
|                           |                                                          | Quarter Ended 2002                           
|                           |                                                          |                                              
|                           |                                                          | December 31                                   |       | September 30 |  | June 30 |       | March 31
|                           |                                                          |                                               |       |              |  |         |       |         
|                           |                                                          |                                              
|                           |                                                          | (Unaudited)                                  
|                           |                                                          |                                              
|                           |                                                          | (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 before provision for loan
    losses |                                               |       | 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                                                    |                                               | $     | 0.23         |  |         | $     | 0.15     |  |   | $     | 0.34  |  |   | $     | 0.39  | 
|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      
|                           | Diluted                                                  |                                               | $     | 0.22         |  |         | $     | 0.15     |  |   | $     | 0.33  |  |   | $     | 0.37  | 
|                           |                                                          |                                               |       |              |  |         |       |          |  |   |       |       |  |   |       |      



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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, 2003.



|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

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

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

PART III.



|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Company

The information under the captions Election
of Directors, Continuing Directors and Executive
Officers, Section 16(a) Beneficial Ownership
Reporting Compliance and Corporate Governance
in Texas Uniteds definitive proxy statement for its 2004
Annual Meeting of Shareholders to be filed with the Commission
within 120 days of year end pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended
(2004 Proxy Statement), is incorporated herein by
reference in response to this item.

40



---



##### 





|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information under the caption Executive
Compensation and Other Matters in the 2004 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 2004 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
2004 Proxy Statement is incorporated herein by reference in
response to this item.



|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information under the caption Principal
Accounting Fees and Services in the 2004 Proxy Statement
is incorporated herein by reference in response to this item.

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 44 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,
    2003 and 2002                                           
| | Consolidated Statements of Earnings for the
    Years Ended December 31, 2003, 2002, and 2001           
| | Consolidated Statement of Shareholders
    Equity for the Years Ended December 31, 2003, 2002, and 2001
| | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002, and 2001         

Notes to Consolidated Financial Statements


There are no financial statement schedules filed
herewith.

(b) Reports on Form 8-K

The Company filed a Current Report on
Form 8-K under Item 7 and Item 9 on
November 3, 2003 to announce the release of its earnings
for the fourth quarter of 2003.

(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)                                                                                                                                                                                     

41



---



##### 



|        |    |                        |  |                                                                                                                                                                                                                                                                                    
|------- | -- | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                       
|Number  |    | Description of Exhibit
|        |    |                       
|        | 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                                                                                                                                                                                                                                                       
|        | 23 | .1**                   |  | Consent of Grant Thornton LLP, independent
    auditors of Texas United                                                                                                                                                                                                            
|        | 31 | .1**                   |  | Certification of the Chief Executive Officer
    pursuant to Rule 13a-14(a) of the Securities Exchange Act
    of 1934, as amended.                                                                                                                                                
|        | 31 | .2**                   |  | Certification of the Chief Financial Officer
    pursuant to Rule 13a-14(a) of the Securities Exchange Act
    of 1934, as amended.                                                                                                                                                
|        | 32 | .1**                   |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                             
|        | 32 | .2**                   |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                             



---



|  |                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.

42



---



##### 



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: L. Don Stricklin                      
| | Title: President and Chief Executive Officer

Date: March 26, 2004

Pursuant to the requirements of the Securities
Act of 1934, as amended, this report has been signed by the
following persons on behalf of the registrant in the indicated
capacities on March 26, 2004.

|                                             |  |                                                                                                                         |  | 
|-------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | 
|                                             |  |                                                                                                                        
|Signature                                    |  | Title                                                                                                                  
|                                             |  |                                                                                                                        
|                                            
|/s/ L. DON STICKLINL. Don Stricklin          |  | President and Chief Executive Officer
    (principal executive officer)                                                
|                                            
|/s/ THOMAS N. ADAMSThomas N. Adams           |  | Executive Vice President and Chief Financial
    Officer (principal financial officer/principal accounting
    officer)
|                                            
|/s/ BRUCE FRENZELBruce Frenzel               |  | Director                                                                                                               
|                                            
|/s/ MICHAEL KULHANEKMichael Kulhanek         |  | Director                                                                                                               
|                                            
|/s/ LEE D. MUELLER, JR.Lee D. Mueller, Jr.   |  | Director                                                                                                               
|                                            
|/s/ JAMES D. SELMAN, JR.James D. Selman, Jr. |  | Director                                                                                                               
|                                            
|/s/ MICHAEL STEINHAUSERMichael Steinhauser   |  | Director                                                                                                               
|                                            
|/s/ ERVAN E. ZOUZALIKErvan E. Zouzalik       |  | Director                                                                                                               

43



---



##### 



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                             |  |   
|------------------------------------------------------------------------------------------------------------ |  | --
|Report of Independent Certified Public Accountants                                                           |  | 45
|Consolidated Balance Sheets at December 31,
    2003 and 2002                                                |  | 46
|Consolidated Statements of Earnings for the Years
    Ended December 31, 2003, 2002, and 2001                |  | 47
|Consolidated Statement of Shareholders
    Equity for the Years Ended December 31, 2003, 2002,
    and 2001 |  | 48
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002, and 2001              |  | 49
|Notes to Consolidated Financial Statements                                                                   |  | 50

44



---



##### 



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, 2003 and 2002, and the
related consolidated statements of earnings, shareholders
equity and cash flows for each of the three years in the period
ended December 31, 2003. 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,
2003 and 2002, and the consolidated results of their operations
and cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note A 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

January 30, 2004


45



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,


|                                         |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |        |         |         | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ----------------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | 
|                                         |                                                                                                                                                                                                                                                                               | 2003                   |                   | 2002  
|                                         |                                                                                                                                                                                                                                                                               |                        |                   |       
|                                         |                                                                                                                                                                                                                                                                               |                       
|                                         |                                                                                                                                                                                                                                                                               | (Dollars in thousands,
|                                         |                                                                                                                                                                                                                                                                               | except share amounts) 
|ASSETS                                  
|Cash and due from banks                  |                                                                                                                                                                                                                                                                               | $                      | 17,268            |        |         | $       | 20,574  |       
|Available-for-sale securities            |                                                                                                                                                                                                                                                                               |                        | 184,547           |        |         |         | 132,140 |       
|Loans, net                               |                                                                                                                                                                                                                                                                               |                        | 376,628           |        |         |         | 349,345 |       
|Loans held for sale                      |                                                                                                                                                                                                                                                                               |                        | 3,810             |        |         |         | 33,674  |       
|Premises and equipment, net              |                                                                                                                                                                                                                                                                               |                        | 25,802            |        |         |         | 23,363  |       
|Accrued interest receivable              |                                                                                                                                                                                                                                                                               |                        | 2,984             |        |         |         | 3,006   |       
|Goodwill                                 |                                                                                                                                                                                                                                                                               |                        | 9,073             |        |         |         | 9,431   |       
|Core deposit intangibles                 |                                                                                                                                                                                                                                                                               |                        | 393               |        |         |         | 512     |       
|Mortgage servicing rights                |                                                                                                                                                                                                                                                                               |                        | 4,475             |        |         |         | 2,877   |       
|Other assets                             |                                                                                                                                                                                                                                                                               |                        | 12,704            |        |         |         | 12,350  |       
|                                         |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |       
|                                         |                                                                                                                                                                                                                                                                               | $                      | 637,684           |        |         | $       | 587,272 |       
|                                         |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |       
|                                        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Liabilities                              |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |       
|                                         | Deposits                                                                                                                                                                                                                                                                      |                        |                   |        |         |         |         |        |        
|                                         |                                                                                                                                                                                                                                                                               | Noninterest-bearing    |                   | $      | 96,337  |         |         | $      | 82,294  |        
|                                         |                                                                                                                                                                                                                                                                               | Interest-bearing       |                   |        | 404,799 |         |         |        | 370,625 |        
|                                         |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |       
|                                         |                                                                                                                                                                                                                                                                               |                        | Total deposits    |        |         | 501,136 |         |        |         | 452,919 | 
|                                         | Federal funds purchased                                                                                                                                                                                                                                                       |                        |                   | 6,891  |         |         |         | 19,732 |        
|                                         | Other liabilities                                                                                                                                                                                                                                                             |                        |                   | 6,646  |         |         |         | 5,807  |        
|                                         | Borrowings                                                                                                                                                                                                                                                                    |                        |                   | 71,875 |         |         |         | 62,945 |        
|                                         | Securities sold under repurchase agreements                                                                                                                                                                                                                                   |                        |                   | 784    |         |         |         |       |        
|                                         | Subordinated notes and debentures                                                                                                                                                                                                                                             |                        |                   |       |         |         |         | 3,241  |        
|                                         | Junior subordinated deferrable interest debentures                                                                                                                                                                                                                            |                        |                   | 12,365 |         |         |         | 7,210  |        
|                                         |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |       
|                                         |                                                                                                                                                                                                                                                                               |                        | Total liabilities |        |         | 599,697 |         |        |         | 551,854 | 
|Commitments and contingencies            |                                                                                                                                                                                                                                                                               |                        |                  |        |         |         |        |       
|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, 2003 and
    December 31, 2002; 4,008,192 shares issued and
    4,002,097 outstanding at December 31, 2003 and
    3,969,208 shares issued and 3,963,113 outstanding at
    December 31, 2002 |                        |                   | 4,008  |         |         |         | 3,969  |        
|                                         | Additional paid-in capital                                                                                                                                                                                                                                                    |                        |                   | 16,911 |         |         |         | 16,683 |        
|                                         | Retained earnings                                                                                                                                                                                                                                                             |                        |                   | 17,422 |         |         |         | 13,271 |        
|                                         | Accumulated other comprehensive (loss) gain                                                                                                                                                                                                                                   |                        |                   | (237   | )       |         |         | 1,612  |        
|                                         |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |       
|                                         |                                                                                                                                                                                                                                                                               |                        | 38,104            |        |         |         | 35,535  |       
|                                         | Less common stock held in treasury  at
    cost                                                                                                                                                                                                                              |                        |                   | 117    |         |         |         | 117    |        
|                                         |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |       
|                                         |                                                                                                                                                                                                                                                                               |                        | 37,987            |        |         |         | 35,418  |       
|                                         |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |       
|                                         |                                                                                                                                                                                                                                                                               | $                      | 637,684           |        |         | $       | 587,272 |       
|                                         |                                                                                                                                                                                                                                                                               |                        |                   |        |         |         |         |       

The accompanying notes are an integral part of
these statements.

46



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

Year ended December 31,


|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |        |        |        | 
|--------------------------------- | -------------------------------------------------- | ------------------------- | ------------------------------------------------------- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | 
|                                  |                                                    | 2003                      |                                                         | 2002   |        | 2001  
|                                  |                                                    |                           |                                                         |        |        |       
|                                  |                                                    |                          
|                                  |                                                    | (Dollars in thousands,   
|                                  |                                                    | except per share amounts)
|Interest income                   |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  | Loans                                              |                           | $                                                       | 30,295 |        |        | $     | 26,569 |        |        | $    | 24,486 |       
|                                  | Investment securities                              |                           |                                                         |        |        |        |       |        |        |        |      |        |       
|                                  |                                                    | Taxable                   |                                                         |        | 5,783  |        |       |        | 5,027  |        |      |        | 3,781  |       
|                                  |                                                    | Tax-exempt                |                                                         |        | 532    |        |       |        | 759    |        |      |        | 1,154  |       
|                                  | Federal Funds sold and other temporary investments |                           |                                                         | 91     |        |        |       | 51     |        |        |      | 473    |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  |                                                    |                           | Total interest income                                   |        |        | 36,701 |       |        |        | 32,406 |      |        |        | 29,894 | 
|Interest expense                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  | Deposits                                           |                           |                                                         | 7,487  |        |        |       | 8,057  |        |        |      | 11,490 |       
|                                  | Federal funds purchased                            |                           |                                                         | 128    |        |        |       | 330    |        |        |      | 235    |       
|                                  | Borrowings                                         |                           |                                                         | 2,117  |        |        |       | 1,244  |        |        |      | 547    |       
|                                  | Junior subordinated deferrable interest debentures |                           |                                                         | 746    |        |        |       | 742    |        |        |      | 792    |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  |                                                    | Total interest expense    |                                                         |        | 10,478 |        |       |        | 10,373 |        |      |        | 13,064 |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  |                                                    |                           | Net interest income                                     |        |        | 26,223 |       |        |        | 22,033 |      |        |        | 16,830 | 
|Provision for loan losses         |                                                    |                           | 2,900                                                   |        |        |        | 1,900 |        |        |        | 925  |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  |                                                    |                           | Net interest income after provision for loan
    losses |        |        | 23,323 |       |        |        | 20,133 |      |        |        | 15,905 | 
|Noninterest income                |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  | Service charges                                    |                           |                                                         | 6,753  |        |        |       | 5,826  |        |        |      | 4,555  |       
|                                  | Other operating income                             |                           |                                                         | 7,051  |        |        |       | 5,845  |        |        |      | 3,310  |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  |                                                    |                           | Total noninterest income                                |        |        | 13,804 |       |        |        | 11,671 |      |        |        | 7,865  | 
|Noninterest expense               |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  | Employee compensation and benefits                 |                           |                                                         | 16,689 |        |        |       | 12,602 |        |        |      | 9,877  |       
|                                  | Occupancy expense                                  |                           |                                                         | 4,621  |        |        |       | 3,365  |        |        |      | 2,393  |       
|                                  | Other operating expenses                           |                           |                                                         | 8,682  |        |        |       | 9,921  |        |        |      | 7,491  |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  |                                                    |                           | Total noninterest expenses                              |        |        | 29,992 |       |        |        | 25,888 |      |        |        | 19,761 | 
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  |                                                    |                           | Earnings before income taxes                            |        |        | 7,135  |       |        |        | 5,916  |      |        |        | 4,009  | 
|Provision for income taxes        |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  | Current expense                                    |                           |                                                         | 1,741  |        |        |       | 1,206  |        |        |      | 504    |       
|                                  | Deferred expense                                   |                           |                                                         | 153    |        |        |       | 432    |        |        |      | 281    |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  |                                                    |                           | 1,894                                                   |        |        |        | 1,638 |        |        |        | 785  |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|                                  |                                                    |                           | NET EARNINGS                                            |        | $      | 5,241  |       |        | $      | 4,278  |      |        | $      | 3,224  | 
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|Basic earnings per common share   |                                                    | $                         | 1.31                                                    |        |        | $      | 1.12  |        |        | $      | 0.86 |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|Diluted earnings per common share |                                                    | $                         | 1.26                                                    |        |        | $      | 1.07  |        |        | $      | 0.83 |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       
|Dividends per common share        |                                                    | $                         | 0.28                                                    |        |        | $      | 0.28  |        |        | $      | 0.24 |       
|                                  |                                                    |                           |                                                         |        |        |        |       |        |        |        |      |       

The accompanying notes are an integral part of
these statements.

47



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY

Years ended December 31, 2001, 2002 and
2003


|                                                                                                                   |                                                                               |                        |           |            |  |          |       |               |  |               |        |               |  |        |        |       |  |   |       |        |   |   |      |   |  |   |        |        |  
|------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------- | ---------------------- | --------- | ---------- |  | -------- | ----- | ------------- |  | ------------- | ------ | ------------- |  | ------ | ------ | ----- |  | - | ----- | ------ | - | - | ---- | - |  | - | ------ | ------ | -
|                                                                                                                   |                                                                               |                        |           |            |  |          |       | Accumulated   |  |               |        |              
|                                                                                                                   |                                                                               | Common Stock           |           | Additional |  |          |       | Other         |  | Common        |        | Total        
|                                                                                                                   |                                                                               |                        |           | Paid-in    |  | Retained |       | Comprehensive |  | Stock in      |        | Shareholders
|                                                                                                                   |                                                                               | Shares                 |           | Amount     |  | Capital  |       | Earnings      |  | Income (Loss) |        | Treasury      |  | Equity
|                                                                                                                   |                                                                               |                        |           |            |  |          |       |               |  |               |        |               |  |       
|                                                                                                                   |                                                                               |                       
|                                                                                                                   |                                                                               | (Dollars in thousands)
|Balance at January 1, 2001                                                                                         |                                                                               |                        | 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 |       
|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 |       
|Comprehensive income:                                                                                              |                                                                               |                        |           |            |  |          |       |               |  |               |        |               |  |        |        |       |  |   |       |        |   |   |      |   |  |   |        |       
|                                                                                                                   | Net earnings                                                                  |                        |           |           |  |          |       |              |  |               |        |              |  |        |        | 5,241 |  |   |       |       |   |   |      |  |  |   |        | 5,241  |  
|                                                                                                                   | Unrealized gain on securities, net of tax and
    reclassification adjustment |                        |           |           |  |          |       |              |  |               |        |              |  |        |        |      |  |   |       | (1,849 | ) |   |      |  |  |   |        | (1,849 | )
|                                                                                                                   |                                                                               |                        |           |            |  |          |       |               |  |               |        |               |  |        |        |       |  |   |       |        |   |   |      |   |  |   |        |       
|Comprehensive income                                                                                               |                                                                               |                        |           |            |  |          |       |               |  |               |        |               |  |        |        |       |  |   |       |        |   |   |      |   |  |   | 3,392  |       
|Three-for-two stock split                                                                                          |                                                                               |                        | 1,331,403 |            |  |          | 1,331 |               |  |               |       |               |  |        | (1,331 | )     |  |   |      |        |   |   |     |   |  |   |       |       
|Issuance of common stock upon exercise of
    employee stock options                                               |                                                                               |                        | 30,650    |            |  |          | 31    |               |  |               | 234    |               |  |        |       |       |  |   |      |        |   |   |     |   |  |   | 265    |       
|Cash paid in lieu of fractional shares                                                                             |                                                                               |                        |          |            |  |          |      |               |  |               | (6     | )             |  |        |       |       |  |   |      |        |   |   |     |   |  |   | (6     | )     
|Dividends                                                                                                          |                                                                               |                        |          |            |  |          |      |               |  |               |       |               |  |        | (1,082 | )     |  |   |      |        |   |   |     |   |  |   | (1,082 | )     
|                                                                                                                   |                                                                               |                        |           |            |  |          |       |               |  |               |        |               |  |        |        |       |  |   |       |        |   |   |      |   |  |   |        |       
|Balance at December 31, 2003                                                                                       |                                                                               |                        | 4,008,192 |            |  | $        | 4,008 |               |  | $             | 16,911 |               |  | $      | 17,422 |       |  | $ | (237  | )      |   | $ | (117 | ) |  | $ | 37,987 |       
|                                                                                                                   |                                                                               |                        |           |            |  |          |       |               |  |               |        |               |  |        |        |       |  |   |       |        |   |   |      |   |  |   |        |       

The accompanying notes are an integral part of
this statement.

48



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Year ended December 31,


|                                               |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |          |       |        |         |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ------ | ------ | ------- | -------- | ------ | ------- | ------- | -------- | ----- | ------ | ------- | -
|                                               |                                                                                                        | 2003                                                                               |                                                      | 2002                                      |        | 2001  
|                                               |                                                                                                        |                                                                                    |                                                      |                                           |        |       
|                                               |                                                                                                        |                                                                                   
|                                               |                                                                                                        | (Dollars in thousands)                                                            
|Cash flows from operating activities:          |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |         
|                                               | Net earnings                                                                                           |                                                                                    | $                                                    | 5,241                                     |        |        | $       | 4,278    |        |         | $       | 3,224    |      
|                                               | Adjustments to reconcile net earnings to net cash
    provided (used) by operating activities:         |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |          |      
|                                               |                                                                                                        | Provision for loan losses                                                          |                                                      |                                           | 2,900  |        |         |          | 1,900  |         |         |          | 925   |       
|                                               |                                                                                                        | Depreciation and amortization                                                      |                                                      |                                           | 2,915  |        |         |          | 2,198  |         |         |          | 1,330 |       
|                                               |                                                                                                        | Noncash compensation expense                                                       |                                                      |                                           |       |        |         |          | 50     |         |         |          | 105   |       
|                                               |                                                                                                        | (Gain) loss on sale of premises, equipment, and
    other real estate              |                                                      |                                           | (36    | )      |         |          | 1      |         |         |          | (16   | )     
|                                               |                                                                                                        | Gain on sale of loans                                                              |                                                      |                                           | (1,112 | )      |         |          |       |         |         |          |      |       
|                                               |                                                                                                        | Loss on sale of Third Coast Wealth
    Advisors, Inc.                              |                                                      |                                           | 396    |        |         |          |       |         |         |          |      |       
|                                               |                                                                                                        | Realized gain, net, on sale of available-for-sale
    securities                   |                                                      |                                           | (1,244 | )      |         |          | (1,457 | )       |         |          | (340  | )     
|                                               |                                                                                                        | Amortization of premium, net of accretion of
    discounts on securities           |                                                      |                                           | 1,473  |        |         |          | 497    |         |         |          | 139   |       
|                                               |                                                                                                        | Write-down of other real estate                                                    |                                                      |                                           |       |        |         |          | 123    |         |         |          | 1     |       
|                                               |                                                                                                        | Impairment on mortgage servicing rights                                            |                                                      |                                           | 1,235  |        |         |          | 446    |         |         |          |      |       
|                                               |                                                                                                        | Reversal of impairment on mortgage servicing
    rights                            |                                                      |                                           | (1,418 | )      |         |          |       |         |         |          |      |       
|                                               |                                                                                                        | Funding of deferred compensation plan                                              |                                                      |                                           |       |        |         |          | (3,000 | )       |         |          |      |       
|                                               |                                                                                                        | Changes in assets and liabilities, net of effects
    resulting from acquisitions: |                                                      |                                           |        |        |         |          |        |         |         |          |       |       
|                                               |                                                                                                        |                                                                                    | Decrease in accrued interest receivable              |                                           |        | 22     |         |          |        | 33      |         |          |       | 115    |        
|                                               |                                                                                                        |                                                                                    | Decrease (increase) in loans held for sale           |                                           |        | 30,466 |         |          |        | (30,502 | )       |          |       | 2,852  |        
|                                               |                                                                                                        |                                                                                    | Increase in mortgage servicing rights                |                                           |        | (2,247 | )       |          |        | (2,432  | )       |          |       | (1,002 | )      
|                                               |                                                                                                        |                                                                                    | Decrease (increase) in other assets                  |                                           |        | 1,024  |         |          |        | (1,403  | )       |          |       | (1,551 | )      
|                                               |                                                                                                        |                                                                                    | Increase (decrease) in other liabilities             |                                           |        | 1,285  |         |          |        | (339    | )       |          |       | 1,207  |        
|                                               |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |         
|                                               |                                                                                                        |                                                                                    | Net cash provided (used) by operating
    activities |                                           |        | 40,900 |         |          |        | (29,607 | )       |          |       | 6,989  |        
|Cash flows from investing activities:          |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |         
|                                               | Net increase in cash resulting from acquisitions                                                       |                                                                                    |                                                      |                                          |        |        |         | 18,194   |        |         |         |         |      
|                                               | Proceeds from sales of available-for-sale
    securities                                               |                                                                                    |                                                      | 91,604                                    |        |        |         | 109,448  |        |         |         | 22,426   |      
|                                               | Proceeds from principal repayments of
    available-for-sale securities                                |                                                                                    |                                                      | 33,805                                    |        |        |         | 18,429   |        |         |         | 11,475   |      
|                                               | Proceeds from maturities and calls of
    available-for-sale securities                                |                                                                                    |                                                      | 1,025                                     |        |        |         | 100      |        |         |         | 7,550    |      
|                                               | Purchases of available-for-sale securities, net
    of effects resulting from acquisitions             |                                                                                    |                                                      | (181,821                                  | )      |        |         | (145,640 | )      |         |         | (74,707  | )    
|                                               | Net increase in loans, net of the effects
    resulting from acquisitions                              |                                                                                    |                                                      | (38,558                                   | )      |        |         | (23,956  | )      |         |         | (38,981  | )    
|                                               | Proceeds from sales of premises, equipment,
    loans, and other real estate                           |                                                                                    |                                                      | 6,993                                     |        |        |         | 228      |        |         |         | 211      |      
|                                               | Proceeds from the sale of Third Coast Wealth
    Advisors, Inc.                                        |                                                                                    |                                                      | 75                                        |        |        |         |         |        |         |         |         |      
|                                               | Purchases of premises, equipment and other real
    estate, net of effects resulting from acquisitions |                                                                                    |                                                      | (3,861                                    | )      |        |         | (4,335   | )      |         |         | (4,998   | )    
|                                               |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |         
|                                               |                                                                                                        |                                                                                    |                                                      | Net cash used in investing activities     |        |        | (90,738 | )        |        |         | (27,532 | )        |       |        | (77,024 | )
|Cash flows from financing activities:          |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |         
|                                               | Net increase in deposits, net of the effects
    resulting from acquisitions                           |                                                                                    | $                                                    | 48,712                                    |        |        | $       | 3,396    |        |         | $       | 39,380   |      
|                                               | Change in federal funds purchased, net of the
    effects resulting from acquisitions                  |                                                                                    |                                                      | (12,841                                   | )      |        |         | 19,085   |        |         |         | 647      |      
|                                               | Net proceeds from issuance of common stock upon
    exercise of employee stock options                 |                                                                                    |                                                      | 265                                       |        |        |         | 53       |        |         |         | 138      |      
|                                               | Proceeds from borrowings                                                                               |                                                                                    |                                                      | 39,175                                    |        |        |         | 146,367  |        |         |         | 171,500  |      
|                                               | Proceeds from issuance of junior subordinated
    deferrable interest debentures                       |                                                                                    |                                                      | 5,000                                     |        |        |         |         |        |         |         |         |      
|                                               | Repayment of borrowings                                                                                |                                                                                    |                                                      | (30,245                                   | )      |        |         | (122,654 | )      |         |         | (141,395 | )    
|                                               | Repayment of subordinated notes and debentures                                                         |                                                                                    |                                                      | (3,241                                    | )      |        |         | (388     | )      |         |         |         |      
|                                               | Purchase of treasury stock                                                                             |                                                                                    |                                                      |                                          |        |        |         |         |        |         |         | (417     | )    
|                                               | Sale of treasury stock                                                                                 |                                                                                    |                                                      |                                          |        |        |         | 189      |        |         |         | 223      |      
|                                               | Securities sold under repurchase agreements                                                            |                                                                                    |                                                      | 784                                       |        |        |         |         |        |         |         |         |      
|                                               | Dividends paid                                                                                         |                                                                                    |                                                      | (1,077                                    | )      |        |         | (1,001   | )      |         |         | (838     | )    
|                                               |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |         
|                                               |                                                                                                        |                                                                                    |                                                      | Net cash provided by financing activities |        |        | 46,532  |          |        |         | 45,047  |          |       |        | 69,238  |  
|                                               |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |         
|                                               |                                                                                                        |                                                                                    |                                                      | Net decrease in cash and cash equivalents |        |        | (3,306  | )        |        |         | (12,092 | )        |       |        | (797    | )
|Cash and cash equivalents at beginning of year |                                                                                                        |                                                                                    | 20,574                                               |                                           |        |        | 32,666  |          |        |         | 33,463  |         
|                                               |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |         
|Cash and cash equivalents at end of year       |                                                                                                        | $                                                                                  | 17,268                                               |                                           |        | $      | 20,574  |          |        | $       | 32,666  |         
|                                               |                                                                                                        |                                                                                    |                                                      |                                           |        |        |         |          |        |         |         |         

The accompanying notes are an integral part of
these statements.

49



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##### 



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), and
Third Coast Wealth Advisors, Inc. (Third Coast) through the
date of sale. All significant intercompany transactions and
balances have been eliminated in consolidation. The accounting
and reporting policies followed by the corporation are in
accordance with accounting principles generally accepted in the
United States and conform to general practices within the
banking industry.

Certain items in prior financial statements have
been reclassified to conform to the current presentation.
Additionally, the prior year financial statements have been
restated to de-consolidate the Companys investment in TXUI
Statutory Trust I in connection with the implementation of
a new accounting standard related to variable interest entities
during the fourth quarter of 2003 (see Note B-New
Pronouncements). The restatement had no effect on the
Companys financial position or results of operation.

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.     Repurchase
Agreements

The Company sells certain securities under
agreements to repurchase. The agreements are treated as
collateralized financing transactions and the obligations to
repurchase securities sold are reflected as a liability in the
accompanying consolidated balance sheets. The dollar amounts of
the securities underlying the agreements remain in the asset
accounts.

5.     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

50



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##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


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.

6.     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.

Nonrefundable loan origination and commitment
fees and certain direct loan origination costs are recorded when
realized or incurred. Management has determined that such policy
is not materially different from accounting principles generally
accepted in the United States of America, which require that
such fees and costs be deferred, and the net amount recognized
over the life of the related loans as an adjustment of the yield.

7.     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 economic
conditions that may affect the borrowers ability to pay.

51



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##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


8.     Loans
Held for Sale

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

9.     Transfers
and Servicing of Financial Assets

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.

10.     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.

11.     Other
Real Estate

Real estate acquired by foreclosure is recorded
at fair value at the date of foreclosure or acquisition. 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.

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 represent 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.

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

52



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##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


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.

In October 2002, the Financial Accounting
Standards Board (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 that Statement.

In addition, SFAS 147 amends
SFAS No. 144 (SFAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets,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. The
Company will no longer record approximately $400,000 per
year of amortization expense related to unidentifiable
intangible assets acquired in connection with previous
acquisitions. The provisions of SFAS 147 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 those assets was
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 was to be reversed. During 2002, the
Company reclassified $3.5 million in unidentifiable
intangible assets to goodwill and reversed $300,000 in
amortization expense.

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.

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

53



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##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


common and potentially dilutive common shares.
The effects of stock options are considered in earnings per
share calculations if dilutive, using the treasury stock method.

15.     Stock-Based
Compensation

The Company has one stock-based employee
compensation plan and two separate agreements with executive
officers, which are described more fully in Note Q. 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 Q), to its
stock-based employee plans.

|                                                                                                                                                                             |                       |      |       |      |  |      |       |      |  |   |       |      | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- | ---- | 
|                                                                                                                                                                             |                       | 2003 |       | 2002 |  | 2001
|                                                                                                                                                                             |                       |      |       |      |  |     
|Net income as reported                                                                                                                                                       |                       | $    | 5,241 |      |  | $    | 4,278 |      |  | $ | 3,224 |     
|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 |                       |      | 28    |      |  |      | 29    |      |  |   | 57    |     
|                                                                                                                                                                             |                       |      |       |      |  |      |       |      |  |   |       |     
|Pro forma net income                                                                                                                                                         |                       | $    | 5,213 |      |  | $    | 4,249 |      |  | $ | 3,272 |     
|                                                                                                                                                                             |                       |      |       |      |  |      |       |      |  |   |       |     
|Earnings per share:                                                                                                                                                          |                       |      |       |      |  |      |       |      |  |   |       |     
|                                                                                                                                                                             | Basic  as reported   |      | $     | 1.31 |  |      | $     | 1.12 |  |   | $     | 0.86 | 
|                                                                                                                                                                             |                       |      |       |      |  |      |       |      |  |   |       |     
|                                                                                                                                                                             | Basic  pro forma     |      | $     | 1.31 |  |      | $     | 1.11 |  |   | $     | 0.87 | 
|                                                                                                                                                                             |                       |      |       |      |  |      |       |      |  |   |       |     
|                                                                                                                                                                             | Diluted  as reported |      | $     | 1.26 |  |      | $     | 1.07 |  |   | $     | 0.83 | 
|                                                                                                                                                                             |                       |      |       |      |  |      |       |      |  |   |       |     
|                                                                                                                                                                             | Diluted  pro forma   |      | $     | 1.26 |  |      | $     | 1.06 |  |   | $     | 0.84 | 
|                                                                                                                                                                             |                       |      |       |      |  |      |       |      |  |   |       |     

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.

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. Material
estimates that are particularly susceptible to significant
change in the near term relate to the determination of the
allowance for loan losses and the valuation of MSR assets.
Actual results could differ from those estimates.



|         |                   
|-------- | ------------------
|Note B  | New Pronouncements



| |                          
| | -------------------------
| | Accounting for Guarantees

FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of
Indebtedness of Others-An Interpretation of FASB Statements

54



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##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


No. 5, 57 and 107 and Rescission of FASB
Interpretation No. 34.FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of
FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002, and were
adopted in the Companys financial statements for the year
ended December 31, 2002. Implementation of the remaining
provisions of FIN 45 on January 1, 2003 did not have a
significant impact on the Companys financial statements.



| |                           
| | --------------------------
| | Variable Interest Entities

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

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

The trust preferred securities issued by
Trust I and Trust II are currently included in the
Tier 1 capital of the Company for regulatory purposes.
However, because Trust I and Trust II are not a part of the
Companys financial statements, the Federal Reserve Board
may in the future disallow inclusion of the trust preferred
securities in Tier 1 capital for regulatory purposes. In
July 2003, the Federal Reserve Board issued a supervisory letter
instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the
contrary. According to the supervisory letter, the Federal
Reserve Board intends to review the regulatory implications of
the change in accounting treatment of subsidiary trusts that
issue trust preferred securities and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance
that the Federal Reserve Board will continue to permit
institutions to include trust preferred securities in
Tier 1 capital for regulatory capital purposes.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Employers Disclosures about Pensions
    and Other Postretirement Benefits

SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits
(Revised 2003).SFAS 132
was revised by the FASB in an effort to improve financial
statement disclosures for defined benefit plans. SFAS 132
(revised 2003) requires companies to provide additional details
about plan assets, benefit obligations, cash flows, benefit
costs and other relevant information. Companies will also be
required to report the various elements of pension and other
postretirement benefit costs on a quarterly basis in interim
financial statements. The new disclosure requirements are
effective for fiscal years ending after December 15,

55



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


2003, and for quarters beginning after
December 15, 2003. Adoption of SFAS 132 (revised 2003)
had no impact on the Companys financial statements.



| |                                                  
| | -------------------------------------------------
| | Derivative Instruments and Hedging
    Activities

SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities.SFAS 149 amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under
SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. The amendments
(i) reflect decisions of the Derivatives Implementation
Group (DIG), (ii) reflect decisions made by the FASB in
conjunction with other projects dealing with financial
instruments and (iii) address implementation issues related
to the application of the definition of a derivative.
SFAS 149 also modifies various other existing
pronouncements to conform with the changes made to
SFAS 133. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003, with all
provisions applied prospectively. Adoption of SFAS 149 on
July 1, 2003 did not have a significant impact on the
Companys financial statements.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Accounting for Certain Financial
    Instruments with Characteristics of both Liabilities and
    Equity

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



| |                                                 
| | ------------------------------------------------
| | Mortgage Loan Interest Rate Lock
    Commitments

The Securities and Exchange Commission staff
recently released Staff Accounting Bulletin (SAB) 105,
Loan Commitments Accounted for as Derivative
Instruments.SAB 105 requires that a lender
should not consider the expected future cash flows related to
loan servicing or include any internally developed intangible
assets, such as customer-related intangible assets, in
determining the fair value of loan commitments accounted for as
derivatives. Companies will be required to adopt SAB 105
effective for commitments entered into after March 31,
2004. The requirements of SAB 105 will apply to the
Companys mortgage loan interest rate lock commitments
related to loans held for sale. At December 31, 2003, such
commitments with a notional amount of approximately
$6.7 million were outstanding. The Companys current
accounting policy is to not record the fair value of these
commitments because they are immaterial. The Company anticipates
that it will adopt SAB 105 at the beginning of its second
quarter, and that application of its guidance would have no
impact on the results of operations and financial position.

56



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Note C  Business Acquisitions
and Dispositions

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
$3.6 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. On July 31, 2002,
Bryan-College Station reported total consolidated assets of
$79,908, total loans of $57,335, 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.

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   | 

The Company disposed of Third Coast during
October 2003 for an after tax loss of approximately $261. The
disposal was not accounted for as discontinued operations due to
the immaterial effect on the consolidated financial statements.

Note D  Reserve
Requirements

Cash and balances maintained at the Federal
Reserve of approximately $600 and $418 satisfy regulatory
reserve requirements at December 31, 2003 and 2002.

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, 2003 and 2002:

|                               |                            |           |         |            |  |            |       |            |  |   |       |       |  |   |         |         | 
|------------------------------ | -------------------------- | --------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | ----- | ----- |  | - | ------- | ------- | 
|                               |                            |           |         | Gross      |  | Gross      |       |           
|                               |                            | Amortized |         | Unrealized |  | Unrealized |       |           
|2003                           |                            | Cost      |         | Gains      |  | Losses     |       | Fair Value
|                               |                            |           |         |            |  |            |       |           
|Available-for-sale securities: |                            |           |         |            |  |            |       |            |  |   |       |       |  |   |         |        
|                               | Municipal securities       |           | $       | 9,658      |  |            | $     | 700        |  |   | $     |      |  |   | $       | 10,358  | 
|                               | U.S. Agency securities     |           |         | 42,360     |  |            |       | 382        |  |   |       | 472   |  |   |         | 42,270  | 
|                               | U.S. Treasury securities   |           |         | 5,032      |  |            |       | 4          |  |   |       |      |  |   |         | 5,036   | 
|                               | Mortgage-backed securities |           |         | 123,336    |  |            |       | 378        |  |   |       | 1,350 |  |   |         | 122,364 | 
|                               | Other                      |           |         | 4,519      |  |            |       |           |  |   |       |      |  |   |         | 4,519   | 
|                               |                            |           |         |            |  |            |       |            |  |   |       |       |  |   |         |        
|                               |                            | $         | 184,905 |            |  | $          | 1,464 |            |  | $ | 1,822 |       |  | $ | 184,547 |        
|                               |                            |           |         |            |  |            |       |            |  |   |       |       |  |   |         |        

57



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


|                               |                            |           |         |            |  |            |       |            |  |   |     |     |  |   |         |        | 
|------------------------------ | -------------------------- | --------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | --- | --- |  | - | ------- | ------ | 
|                               |                            |           |         | Gross      |  | Gross      |       |           
|                               |                            | Amortized |         | Unrealized |  | Unrealized |       |           
|2002                           |                            | Cost      |         | Gains      |  | Losses     |       | Fair Value
|                               |                            |           |         |            |  |            |       |           
|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 |       
|                               |                            |           |         |            |  |            |       |            |  |   |     |     |  |   |         |       

Other securities include investments in Federal
Home Loan Bank (FHLB) stock of $4,241 and $3,005 at
December 31, 2003 and 2002. 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 $1,355, $1,584 and $447 for
the years ended December 31, 2003, 2002 and 2001. Gross
realized losses on sales of available-for-sale securities were
$61, $127 and $107 for the years ended December 31, 2003,
2002 and 2001.

The following table shows the contractual
maturity distribution of the investment portfolio at
December 31, 2003. 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           |  |                               | 49,286  |            |  |   | 49,860  | 
|Due from five to ten years           |  |                               | 7,764   |            |  |   | 7,804   | 
|Due after ten years                  |  |                               |        |            |  |   |        | 
|Mortgage-backed and other securities |  |                               | 127,855 |            |  |   | 126,883 | 
|                                     |  |                               |         |            |  |   |         | 
|                                     |  | $                             | 184,905 |            |  | $ | 184,547 | 
|                                     |  |                               |         |            |  |   |         | 

Securities with an aggregate book value of
approximately $90,970 and $57,623 at December 31, 2003 and
2002 were pledged as collateral to secure public deposits.

All of the Companys securities with
unrealized losses as of December 31, 2003 have been in an
unrealized loss position for less than twelve months. Management
has the intention and ability to hold securities for a period of
time sufficient for a recovery of cost. Accordingly, management
believes the unrealized losses are temporary and no impairment
loss has been realized in the Companys consolidated income
statement.

58



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Note F  Loans

Major classifications of loans are as follows at
December 31:

|                                    |                                 |      |         |         |   |   |         |         |  
|----------------------------------- | ------------------------------- | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                    |                                 | 2003 |         | 2002   
|                                    |                                 |      |         |        
|Commercial                          |                                 | $    | 63,793  |         |   | $ | 62,391  |        
|Real estate:                        |                                 |      |         |         |   |   |         |        
|                                    | 1-4 family residential          |      |         | 140,020 |   |   |         | 149,471 |  
|                                    | Commercial mortgage             |      |         | 115,033 |   |   |         | 62,014  |  
|                                    | Other                           |      |         | 8,488   |   |   |         | 18,269  |  
|Consumer  net of unearned discount |                                 |      | 53,187  |         |   |   | 60,496  |        
|                                    |                                 |      |         |         |   |   |         |        
|                                    |                                 |      | 380,521 |         |   |   | 352,641 |        
|                                    | Less: Allowance for loan losses |      |         | (3,893  | ) |   |         | (3,296  | )
|                                    |                                 |      |         |         |   |   |         |        
|                                    |                                 | $    | 376,628 |         |   | $ | 349,345 |        
|                                    |                                 |      |         |         |   |   |         |        

Impaired loans were approximately $1,255 and $709
at December 31, 2003 and 2002. 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 $590 and $804 at
December 31, 2003 and 2002.

Following is an analysis of activity with respect
to these amounts for the years ended December 31:

|                       |  |      |      |      |  |   |        |  
|---------------------- |  | ---- | ---- | ---- |  | - | ------ | -
|                       |  | 2003 |      | 2002
|                       |  |      |      |     
|Balance at January 1   |  | $    | 804  |      |  | $ | 1,138  |  
|New loans              |  |      | 55   |      |  |   | 1,654  |  
|Repayments             |  |      | (269 | )    |  |   | (1,988 | )
|                       |  |      |      |      |  |   |        |  
|Balance at December 31 |  | $    | 590  |      |  | $ | 804    |  
|                       |  |      |      |      |  |   |        |  

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:

|                                            |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                            |  | 2003 |        | 2002 |  | 2001
|                                            |  |      |        |      |  |     
|Balance at January 1                        |  | $    | 3,296  |      |  | $    | 1,754  |   |  | $ | 1,590  |  
|Provision                                   |  |      | 2,900  |      |  |      | 1,900  |   |  |   | 925    |  
|Charge-offs                                 |  |      | (3,238 | )    |  |      | (2,052 | ) |  |   | (1,383 | )
|Recoveries                                  |  |      | 935    |      |  |      | 954    |   |  |   | 622    |  
|Balance acquired from Bryan-College Station |  |      |       |      |  |      | 740    |   |  |   |       |  
|                                            |  |      |        |      |  |      |        |   |  |   |        |  
|Balance at December 31                      |  | $    | 3,893  |      |  | $    | 3,296  |   |  | $ | 1,754  |  
|                                            |  |      |        |      |  |      |        |   |  |   |        |  

59



---



##### 



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 |             | 2003 |  | 2002
|                                  |  |              |             |      |  |     
|Land                              |  |              |            |      |  | $    | 3,145  |  |  | $ | 2,648  | 
|Buildings and improvements        |  |              | 10-40 years |      |  |      | 18,196 |  |  |   | 16,669 | 
|Furniture, fixtures and equipment |  |              | 3-10 years  |      |  |      | 12,964 |  |  |   | 12,291 | 
|                                  |  |              |             |      |  |      |        |  |  |   |        | 
|                                  |  |              |             |      |  |      | 34,305 |  |  |   | 31,608 | 
|Less accumulated depreciation     |  |              |             |      |  |      | 10,044 |  |  |   | 8,641  | 
|                                  |  |              |             |      |  |      |        |  |  |   |        | 
|                                  |  |              |             |      |  |      | 24,261 |  |  |   | 22,967 | 
|Construction in progress          |  |              |             |      |  |      | 1,541  |  |  |   | 396    | 
|                                  |  |              |             |      |  |      |        |  |  |   |        | 
|                                  |  |              |             |      |  | $    | 25,802 |  |  | $ | 23,363 | 
|                                  |  |              |             |      |  |      |        |  |  |   |        | 

Included in other assets are other real estate
and repossessed assets of $431 and $421 at December 31,
2003 and 2002.

Note I  Goodwill and
Long-Lived Assets

In 2002, the Company adopted SFAS 142 and
SFAS 147 as previously discussed in Note A(12). No
impairment was noted as of the date of adoption or at any
subsequent measurement. Goodwill amortization expense of
approximately $508 was recorded in fiscal year 2001. No
amortization was recorded in fiscal years 2003 and 2002
following adoption of SFAS 142.

With the sale of Third Coast, the Company reduced
goodwill by $358.

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:

|                                |                                 |                       |       |       |      | 
|------------------------------- | ------------------------------- | --------------------- | ----- | ----- | ---- | 
|                                |                                 | 2001                 
|                                |                                 |                      
|Net earnings, as reported       |                                 | $                     | 3,224 |      
|Add back: Goodwill amortization |                                 |                       | 508   |      
|                                |                                 |                       |       |      
|                                | Adjusted net earnings           |                       | $     | 3,732 |     
|                                |                                 |                       |       |      
|Basic earnings per share:       |                                 |                       |       |      
|                                | Net earnings, as reported       |                       | $     | 0.86  |     
|                                | Add back: Goodwill amortization |                       |       | 0.14  |     
|                                |                                 |                       |       |      
|                                |                                 | Adjusted net earnings |       | $     | 1.00 | 
|                                |                                 |                       |       |      
|Diluted earnings per share:     |                                 |                       |       |      
|                                | Net earnings, as reported       |                       | $     | 0.83  |     
|                                | Add back: Goodwill amortization |                       |       | 0.13  |     
|                                |                                 |                       |       |      
|                                |                                 | Adjusted net earnings |       | $     | 0.96 | 
|                                |                                 |                       |       |      

60



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


The gross carrying amount of intangible assets
and associated accumulated amortization and impairment at
December 31, 2003 is presented in the following table:

|                             |                           |          |   |                |  |  |   |       | 
|---------------------------- | ------------------------- | -------- | - | -------------- |  |  | - | ----- | 
|                             |                           | Gross    |   | Accumulated   
|                             |                           | Carrying |   | Amortization  
|                             |                           | Amount   |   | and Impairment
|                             |                           |          |   |               
|Amortized intangible assets: |                           |          |   |                |  |  |   |      
|                             | Mortgage servicing rights |          | $ | 6,271          |  |  | $ | 1,796 | 
|                             | Core deposit intangibles  |          |   | 564            |  |  |   | 171   | 

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, 2003. Future amortization expense may be
significantly different depending upon changes in the mortgage
servicing portfolio, mortgage interest rates and market
conditions.

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

|                                         |      |           |     |              |  |       |     |     |  |   |     |     | 
|---------------------------------------- | ---- | --------- | --- | ------------ |  | ----- | --- | --- |  | - | --- | --- | 
|                                         |      | Mortgage  |     |              |  |      
|                                         |      | Servicing |     | Core Deposit |  |      
|                                         |      | Rights    |     | Intangibles  |  | Total
|                                         |      |           |     |              |  |      
|Year ended December 31, 2003 (actual)    |      | $         | 803 |              |  | $     | 119 |     |  | $ | 739 |    
|Estimate for the year ended December 31, |      |           |     |              |  |       |     |     |  |   |     |    
|                                         | 2004 |           |     | 850          |  |       |     | 103 |  |   |     | 953 | 
|                                         | 2005 |           |     | 796          |  |       |     | 88  |  |   |     | 884 | 
|                                         | 2006 |           |     | 749          |  |       |     | 72  |  |   |     | 821 | 
|                                         | 2007 |           |     | 749          |  |       |     | 56  |  |   |     | 805 | 
|                                         | 2008 |           |     | 673          |  |       |     | 40  |  |   |     | 789 | 

Note J  Mortgage
Servicing Rights

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

|                                 |  |      |        |      |  |      |       |   |  |   |       |  
|-------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                 |  | 2003 |        | 2002 |  | 2001
|                                 |  |      |        |      |  |     
|Balance at January 1             |  | $    | 2,877  |      |  | $    | 1,349 |   |  | $ | 467   |  
|Additions                        |  |      | 2,218  |      |  |      | 2,359 |   |  |   | 1,002 |  
|Amortization                     |  |      | (803   | )    |  |      | (385  | ) |  |   | (120  | )
|Reversal of impairment allowance |  |      | 1,418  |      |  |      |      |   |  |   |      |  
|Impairment allowance             |  |      | (1,235 | )    |  |      | (446  | ) |  |   |      |  
|                                 |  |      |        |      |  |      |       |   |  |   |       |  
|Balance at December 31           |  | $    | 4,475  |      |  | $    | 2,877 |   |  | $ | 1,349 |  
|                                 |  |      |        |      |  |      |       |   |  |   |       |  

At December 31, 2003, the loan servicing
portfolio with capitalized MSR totaled $246,418 compared with
$137,653 at December 31, 2002.

61



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##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Note K  Interest-Bearing
Deposits

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

|                                                        |  |      |         |      |  |   |         | 
|------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                        |  | 2003 |         | 2002
|                                                        |  |      |         |     
|NOW accounts and interest-bearing checking
    accounts |  | $    | 143,937 |      |  | $ | 117,775 | 
|Savings                                                 |  |      | 30,393  |      |  |   | 26,198  | 
|Money market                                            |  |      | 56,338  |      |  |   | 39,725  | 
|Certificates of deposit and IRAs                        |  |      | 174,131 |      |  |   | 186,927 | 
|                                                        |  |      |         |      |  |   |         | 
|                                                        |  | $    | 404,799 |      |  | $ | 370,625 | 
|                                                        |  |      |         |      |  |   |         | 

The aggregate amount of certificates of deposit,
each with a minimum denomination of $100, was approximately
$52,019 and $53,095 at December 31, 2003 and 2002. At
December 31, 2003, the scheduled maturities of certificates
of deposit and IRAs are as follows:

|                    |  |   |         | 
|------------------- |  | - | ------- | 
|2004                |  | $ | 118,713 | 
|2005                |  |   | 32,317  | 
|2006                |  |   | 6,277   | 
|2007                |  |   | 7,797   | 
|2008 and thereafter |  |   | 9,027   | 
|                    |  |   |         | 
|                    |  | $ | 174,131 | 
|                    |  |   |         | 

Deposits of executive officers, significant
shareholders and directors were $2,302 and $2,492 (including
time deposits of $308 and $951) at December 31, 2003 and
2002.

Note L  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 1.04% to 5.91% at December 31,
2003. The borrowings are collateralized by security agreements
and pledge assignments.

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 2004. There was
$2,750 and $5,250 outstanding under this line of credit at
December 31, 2003 and 2002. The line of credit agreement
contains certain covenants, including maintaining certain
financial ratios.

62



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Aggregate maturities of borrowings for the five
years following December 31, 2003 are as follows:

|                         |  |        |        | 
|------------------------ |  | ------ | ------ | 
|Year Ending December 31, |  | Amount
|                         |  |       
|2004                     |  | $      | 35,737 | 
|2005                     |  |        | 16,093 | 
|2006                     |  |        | 6,196  | 
|2007                     |  |        | 10,156 | 
|2008                     |  |        | 2,536  | 
|Thereafter               |  |        | 1,157  | 
|                         |  |        |        | 
|                         |  | $      | 71,875 | 
|                         |  |        |        | 

Note M  Subordinated Notes and
Debentures

Subordinated notes and debentures consisted of
3,241 units, which were assumed in the acquisition of
Bryan-College Station. Each unit consisted of a $1 debenture and
nine detachable warrants exercisable at an exercise price of
$42.79 per share. At December 31, 2002, the debentures
totaled $3,241, with an interest rate of 11.5%, and matured on
March 31, 2003. The warrants expired unexercised on
March 31, 2003.

Note N  Junior Subordinated
Deferrable Interest Debentures

In September 2000, the Company formed
Trust I, a trust formed under the laws of the State of
Connecticut, which issued $7.0 million of trust preferred
securities (the trust preferred securities of
Trust I) and $210 in common stock. These securities
represent preferred beneficial interests in the assets of the
Trust I. Trust I used the proceeds of the offering of
the trust preferred securities of Trust I to purchase
$7.0 million of 10.60% junior subordinated deferrable
interest debentures (the debentures of Trust I)
issued by the Company. Distributions of interest are due
semi-annually. The debentures of Trust I will mature on
September 7, 2030, and are redeemable in whole or in part
at the option of the Company at any time after September 7,
2010, with the approval of the Federal Reserve Board and in
whole at any time upon the occurrence of certain events
affecting their tax or regulatory capital treatment. The trust
preferred securities of Trust I will be subject to
mandatory redemption if the debentures of Trust I are
repaid by the Company. The debentures of Trust I may be
prepaid if certain events occur, including a change in the tax
status, a change in Trust Is status under the
Investment Company Act of 1940 or regulatory capital treatment
of the trust preferred securities of Trust I.

In December 2003, the Company formed
Trust II, a trust formed under the laws of the State of
Delaware, which issued $5.0 million of trust preferred
securities (the trust preferred securities of
Trust II) and $155 in common stock. Trust II
used the proceeds of the offering of the trust preferred
securities of Trust II to purchase $5.0 million of
6.45% fixed rate for five years junior subordinated deferrable
interest debentures (the debentures of
Trust II) issued by the Company. After five years,
the rate on the debentures of Trust II will float at the
three month LIBOR rate plus 2.85%. Distributions of interest are
due quarterly. The debentures of Trust II will mature on
December 19, 2033, and are redeemable in whole or in part
at the option of the Company at any time after December 19,
2008, with the approval of the Federal Reserve Board and in
whole at any time upon the occurrence of certain events
affecting their tax or regulatory capital treatment. The trust
preferred securities of Trust II will be subject to
mandatory redemption if the debentures of Trust II are
repaid by the Company. The debentures of Trust II may be
prepaid if certain events occur, including a change in tax
status, a change in Trust IIs status under the
Investment Company Act of 1940 or regulatory capital treatment
of the trust preferred securities of Trust II.

63



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##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Note O  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:

|                          |                                                  |                        |        |        |      |   |        |        |        |  
|------------------------- | ------------------------------------------------ | ---------------------- | ------ | ------ | ---- | - | ------ | ------ | ------ | -
|                          |                                                  | 2003                   |        | 2002  
|                          |                                                  |                        |        |       
|Deferred tax assets:      |                                                  |                        |        |        |      |   |        |       
|                          | Net operating loss carryforward                  |                        | $      | 126    |      |   | $      | 163    |       
|                          | Unrealized loss on available-for-sale securities |                        |        | 122    |      |   |        |       |       
|                          | Deferred compensation                            |                        |        | 341    |      |   |        | 241    |       
|                          | Accrued compensation settlement                  |                        |        | 164    |      |   |        | 172    |       
|                          | Provision for loan losses                        |                        |        | 1,030  |      |   |        | 744    |       
|                          | Accrued expenses not currently deductible        |                        |        | 102    |      |   |        | 102    |       
|                          |                                                  |                        |        |        |      |   |        |       
|                          |                                                  |                        | 1,885  |        |      |   | 1,422  |       
|Deferred tax liabilities: |                                                  |                        |        |        |      |   |        |       
|                          | Unrealized gain on available-for-sale securities |                        |        |       |      |   |        | (831   | )     
|                          | Depreciation and amortization differences        |                        |        | (1,058 | )    |   |        | (1,143 | )     
|                          | Accrued mortgage servicing rights income         |                        |        | (1,531 | )    |   |        | (978   | )     
|                          | Federal Home Loan Bank stock dividend            |                        |        | (225   | )    |   |        | (199   | )     
|                          |                                                  |                        |        |        |      |   |        |       
|                          |                                                  |                        | (2,814 | )      |      |   | (3,151 | )     
|                          |                                                  |                        |        |        |      |   |        |       
|                          |                                                  | Net deferred liability |        | $      | (929 | ) |        | $      | (1,729 | )
|                          |                                                  |                        |        |        |      |   |        |       

The net deferred liability at December 31,
2003 and 2002 is included in other liabilities on the
Companys consolidated balance sheet.

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

|                                      |  |      |       |      |  |      |       |   |  |  |        |  
|------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ------ | -
|                                      |  | 2003 |       | 2002 |  | 2001
|                                      |  |      |       |      |  |     
|Statutory federal income tax rate     |  |      | 34.00 | %    |  |      | 34.00 | % |  |  | 34.00  | %
|Tax-exempt interest                   |  |      | (3.73 | )    |  |      | (4.09 | ) |  |  | (13.41 | )
|Tax-exempt earnings on life insurance |  |      | (1.81 | )    |  |      | (1.77 | ) |  |  | (1.81  | )
|Other                                 |  |      | (1.91 | )    |  |      | (0.45 | ) |  |  | .80    |  
|                                      |  |      |       |      |  |      |       |   |  |  |        |  
|Effective income tax rate             |  |      | 26.55 | %    |  |      | 27.69 | % |  |  | 19.58  | %
|                                      |  |      |       |      |  |      |       |   |  |  |        |  

The Company has loss carry forwards totaling
approximately $370 that may be offset against future taxable
income. If not used, the carry forwards will expire in 2006 and
2007.

Note P  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

64



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


notional amount of those instruments. Commitments
to extend credit totaled $57,978 and $38,905 at
December 31, 2003 and 2002, which includes $695 and $787 of
outstanding standby letters of credit. At December 31,
2003, the standby letters of credit had a weighted average term
of approximately one year. 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.

The Company leases certain premises and equipment
under cancelable and noncancelable lease arrangements. Total
rentals charged to operating expenses were $426, $375 and $156
in the years ended December 31, 2003, 2002 and 2001. At
December 31, 2003, future lease commitments under
noncancelable leases are $360, $239, $65, $0 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 $1,352 as of December 31, 2003. Claims are
accrued as incurred and the total expense under the program was
$825, $1,002 and $906 in 2003, 2002 and 2001.

Note Q  Benefit
Plans



| |                                      
| | -------------------------------------
| | Stock Option Plans and
    Agreements

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 2003 or 2002.

During 1998, the Board of Directors adopted the
Texas United Bancshares, Inc. 1998 Incentive Stock Option
Plan (the 1998 Plan). Under the 1998 Plan, 337,500 shares
of common stock are reserved for qualified Incentive Stock
Options, of which 15,331 shares are available for future
grants at December 31, 2003. 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.

65



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


A summary of the Companys stock option
activity and related information follows:

|                                 |  |         |         |                |  |         |       |                |  |         |         |                |  |   |       |  |  |  |         |   |  |   |       | 
|-------------------------------- |  | ------- | ------- | -------------- |  | ------- | ----- | -------------- |  | ------- | ------- | -------------- |  | - | ----- |  |  |  | ------- | - |  | - | ----- | 
|                                 |  |         |         |                |  |        
|                                 |  | 2003    |         | 2002           |  | 2001   
|                                 |  |         |         |                |  |        
|                                 |  |         |         | Weighted       |  |         |       | Weighted       |  |         |         | Weighted      
|                                 |  |         |         | Average        |  |         |       | Average        |  |         |         | Average       
|                                 |  | Options |         | Exercise Price |  | Options |       | Exercise Price |  | Options |         | Exercise Price
|                                 |  |         |         |                |  |         |       |                |  |         |         |               
|Outstanding at beginning of year |  |         | 328,114 |                |  | $       | 6.44  |                |  |         | 323,677 |                |  | $ | 6.10  |  |  |  | 331,552 |   |  | $ | 5.78  | 
|Granted                          |  |         | 3,375   |                |  |         | 12.89 |                |  |         | 15,211  |                |  |   | 13.70 |  |  |  | 18,750  |   |  |   | 11.33 | 
|Exercised                        |  |         | (42,400 | )              |  |         | 6.26  |                |  |         | (9,436  | )              |  |   | 5.76  |  |  |  | (24,120 | ) |  |   | 5.73  | 
|Forfeited                        |  |         | (1,500  | )              |  |         | 12.66 |                |  |         | (1,338  | )              |  |   | 13.15 |  |  |  | (2,505  | ) |  |   | 5.73  | 
|                                 |  |         |         |                |  |         |       |                |  |         |         |                |  |   |       |  |  |  |         |   |  |   |       | 
|Outstanding at end of year       |  |         | 287,589 |                |  |         | 6.51  |                |  |         | 328,114 |                |  |   | 6.44  |  |  |  | 323,677 |   |  |   | 6.10  | 
|                                 |  |         |         |                |  |         |       |                |  |         |         |                |  |   |       |  |  |  |         |   |  |   |       | 
|Exercisable at end of year       |  |         | 270,713 |                |  |         | 6.15  |                |  |         | 298,102 |                |  |   | 5.84  |  |  |  | 276,102 |   |  |   | 5.63  | 
|                                 |  |         |         |                |  |         |       |                |  |         |         |                |  |   |       |  |  |  |         |   |  |   |       | 

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

|                                                         |  |            |      |                |  |            |       |                |  |            |      |                |  |   |       |  |  |   |      |  |  |   |       | 
|-------------------------------------------------------- |  | ---------- | ---- | -------------- |  | ---------- | ----- | -------------- |  | ---------- | ---- | -------------- |  | - | ----- |  |  | - | ---- |  |  | - | ----- | 
|                                                         |  |            |      |                |  |           
|                                                         |  | 2003       |      | 2002           |  | 2001      
|                                                         |  |            |      |                |  |           
|                                                         |  | 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  |  | $          |     |                |  | $          |      |                |  | $          | 5.28 |                |  | $ | 12.66 |  |  | $ | 2.01 |  |  | $ | 11.33 | 
|Exercise price exceeds market price at date of
    grant |  |            | 5.21 |                |  |            | 12.89 |                |  |            | 3.12 |                |  |   | 18.26 |  |  |   |     |  |  |   |      | 

The following table summarizes significant ranges
of outstanding and exercisable options at December 31, 2003:

|               |                |                     |  |                     |         |                  |  |         |      |                  |  |   |       |  |  |  |         |  |  |   |       | 
|-------------- | -------------- | ------------------- |  | ------------------- | ------- | ---------------- |  | ------- | ---- | ---------------- |  | - | ----- |  |  |  | ------- |  |  | - | ----- | 
|               |                |                     |  |                     |         |                 
|               |                | Options Outstanding |  |                    
|               |                |                     |  | Options Exercisable
|               |                |                     |  | Weighted Average    |         |                  |  |        
|Range of       |                |                     |  | Remaining Life      |         | Weighted Average |  |         |      | Weighted Average
|Exercise Price |                | Options             |  | (in years)          |         | Exercise Price   |  | Options |      | Exercise Price  
|               |                |                     |  |                     |         |                  |  |         |      |                 
|$              | 3.33  $ 5.00  |                     |  |                     | 50,625  |                  |  |         | 2.89 |                  |  | $ | 3.85  |  |  |  | 50,625  |  |  | $ | 3.85  | 
|$              | 5.73  $ 8.00  |                     |  |                     | 194,591 |                  |  |         | 4.66 |                  |  |   | 5.98  |  |  |  | 194,591 |  |  |   | 5.98  | 
|$              | 10.60  $12.66 |                     |  |                     | 37,725  |                  |  |         | 7.66 |                  |  |   | 11.62 |  |  |  | 23,099  |  |  |   | 11.38 | 
|$              | 13.63  $18.26 |                     |  |                     | 4,648   |                  |  |         | 5.90 |                  |  |   | 16.02 |  |  |  | 2,398   |  |  |   | 18.26 | 
|               |                |                     |  |                     |         |                  |  |         |      |                  |  |   |       |  |  |  |         |  |  |   |       | 
|               |                |                     |  |                     | 287,589 |                  |  |         |      |                  |  |   |       |  |  |  | 270,713 |  |  |   |       | 
|               |                |                     |  |                     |         |                  |  |         |      |                  |  |   |       |  |  |  |         |  |  |   |       | 

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:

|               |  |      |           |      |  |      |           |   |  |  |            |  
|-------------- |  | ---- | --------- | ---- |  | ---- | --------- | - |  |  | ---------- | -
|               |  | 2003 |           | 2002 |  | 2001
|               |  |      |           |      |  |     
|Expected life  |  |      | 10  years |      |  |      | 10  years |   |  |  | 7.0  years |  
|Interest rate  |  |      | 2.23      | %    |  |      | 2.99      | % |  |  | 4.89       | %
|Volatility     |  |      | 40        | %    |  |      | 40        | % |  |  | 0.00       | %
|Dividend yield |  |      | 2.29      | %    |  |      | 2.29      | % |  |  | 1.88       | %

66



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)




| |                                         
| | ----------------------------------------
| | 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, 2003, 2002 and 2001
were 70,012, 67,162 and 67,162. Operations are charged or
credited for the aggregate appreciation or depreciation of the
rights. During 2003, 2002 and 2001, the Company expensed $229,
$78 and $91 related to the agreements.



| |                           
| | --------------------------
| | 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, 2003, 2002 and 2001 are approximately
$453, $216 and $332.



| |                            
| | ---------------------------
| | 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 the Bank 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 $88, $82 and $53 for the years ended
December 31, 2003, 2002 and 2001.



| |                             
| | ----------------------------
| | 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

67



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


allocated to the shareholders. Total compensation
accrued was $725, $550 and $660 for the years ended
December 31, 2003, 2002 and 2001.



| |                                     
| | ------------------------------------
| | 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 $483 and $523 is accrued as of December 31,
2003 and 2002, respectively. This liability is recorded in other
liabilities on the accompanying balance sheet and has been
determined based on actuarial assumptions.



|         |                   
|-------- | ------------------
|Note R  | 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, 2003 and 2002, 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

68



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


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, 2003: |                                               |                               |  |                   |        |                   |  |                   |       |            |  |       |        |  |  |  |      |   |  |    |        |  |  | 
|                         | Total Capital (to Risk Weighted
    Assets):  |                               |  |                   |        |                   |  |                   |       |            |  |       |        |  |  |  |      |   |  |    |        |  |  |  |     
|                         |                                               | Texas United Bancshares, Inc. |  | $                 | 44,204 |                   |  |                   | 10.47 | %          |  | 3$    | 33,791 |  |  |  | 38.0 | % |  |    | N/A    |  |  |  |      |  
|                         |                                               | The Bank                      |  | $                 | 44,717 |                   |  |                   | 10.65 | %          |  | 3$    | 33,602 |  |  |  | 38.0 | % |  | 3$ | 42,003 |  |  |  | 10.0 | %
|                         | Tier 1 Capital (to Risk Weighted
    Assets): |                               |  |                   |        |                   |  |                   |       |            |  |       |        |  |  |  |      |   |  |    |        |  |  |  |     
|                         |                                               | Texas United Bancshares, Inc. |  | $                 | 40,311 |                   |  |                   | 9.54  | %          |  | 3$    | 16,895 |  |  |  | 34.0 | % |  |    | N/A    |  |  |  |      |  
|                         |                                               | The Bank                      |  | $                 | 40,824 |                   |  |                   | 9.72  | %          |  | 3$    | 16,801 |  |  |  | 34.0 | % |  | 3$ | 25,202 |  |  |  | 6.0  | %
|                         | Tier 1 Capital (to Average
    Assets):       |                               |  |                   |        |                   |  |                   |       |            |  |       |        |  |  |  |      |   |  |    |        |  |  |  |     
|                         |                                               | Texas United Bancshares, Inc. |  | $                 | 40,311 |                   |  |                   | 6.46  | %          |  | 3$    | 24,969 |  |  |  | 34.0 | % |  |    | N/A    |  |  |  |      |  
|                         |                                               | The Bank                      |  | $                 | 40,824 |                   |  |                   | 6.56  | %          |  | 3$    | 24,877 |  |  |  | 34.0 | % |  | 3$ | 31,096 |  |  |  | 5.0  | %
|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  | %

69



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Note S  Supplemental Statement of
Cash Flow Information

Cash paid during the years ended December 31
for:

|                                                           |                                                                 |      |   |        |  |      |   |        |  |  |   |        | 
|---------------------------------------------------------- | --------------------------------------------------------------- | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|                                                           |                                                                 | 2003 |   | 2002   |  | 2001
|                                                           |                                                                 |      |   |        |  |     
|                                                           | Interest                                                        |      | $ | 10,703 |  |      | $ | 10,595 |  |  | $ | 13,002 | 
|                                                           | Income taxes                                                    |      |   | 1,725  |  |      |   | 1,629  |  |  |   | 600    | 
|Noncash operating, investing and financing
    activities: |                                                                 |      |   |        |  |      |   |        |  |  |   |       
|                                                           | Dividends payable included in other liabilities                 |      |   | 302    |  |      |   | 291    |  |  |   | 266    | 
|                                                           | Common stock issued in connection with business
    acquisition |      |   |       |  |      |   | 2,615  |  |  |   |       | 
|                                                           | Real estate acquired in satisfaction of loans                   |      |   | 273    |  |      |   | 65     |  |  |   | 64     | 

Note T  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.



| |                                                                        
| | -----------------------------------------------------------------------
| | 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, 2003 and 2002 (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

70



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


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 junior subordinated
    deferrable interest debentures

The fair value of borrowings and junior
subordinated deferrable interest debentures 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.



| |                                      
| | -------------------------------------
| | Subordinated notes and
    debentures

The fair value of subordinated notes and
debentures is equal to the carrying amount due to their
short-term nature at date of acquisition.



| |                                                
| | -----------------------------------------------
| | Securities sold under repurchase
    agreements

The carrying amount of securities sold under
repurchase agreements is equal to the carrying amount due to
their short-term nature.



| |                              
| | -----------------------------
| | 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.

71



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


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

|                       |                                                    |                                                            |   |            |         |          |   |            |         |  |   |         |         |  |   |         |         | 
|---------------------- | -------------------------------------------------- | ---------------------------------------------------------- | - | ---------- | ------- | -------- | - | ---------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                       |                                                    |                                                            |   |           
|                       |                                                    | 2003                                                       |   | 2002      
|                       |                                                    |                                                            |   |           
|                       |                                                    | Carrying                                                   |   |            |         | Carrying |   |           
|                       |                                                    | Amount                                                     |   | Fair Value |         | Amount   |   | Fair Value
|                       |                                                    |                                                            |   |            |         |          |   |           
|Financial assets:      |                                                    |                                                            |   |            |         |          |   |            |         |  |   |         |         |  |   |        
|                       | Cash and due from banks                            |                                                            | $ | 17,268     |         |          | $ | 17,268     |         |  | $ | 20,574  |         |  | $ | 20,574  |        
|                       | Securities available-for-sale                      |                                                            |   | 184,547    |         |          |   | 184,547    |         |  |   | 132,140 |         |  |   | 132,140 |        
|                       | Loans held for sale                                |                                                            |   | 3,810      |         |          |   | 3,810      |         |  |   | 33,674  |         |  |   | 33,674  |        
|                       | Loans, net                                         |                                                            |   | 376,628    |         |          |   | 375,600    |         |  |   | 349,345 |         |  |   | 356,895 |        
|Financial liabilities: |                                                    |                                                            |   |            |         |          |   |            |         |  |   |         |         |  |   |        
|                       | Deposits                                           |                                                            |   |            |         |          |   |            |         |  |   |         |         |  |   |         |        
|                       |                                                    | Noninterest-bearing                                        |   | $          | 96,337  |          |   | $          | 96,337  |  |   | $       | 82,294  |  |   | $       | 82,294  | 
|                       |                                                    | Interest-bearing transaction and money market
    accounts |   |            | 230,668 |          |   |            | 230,668 |  |   |         | 183,698 |  |   |         | 183,698 | 
|                       |                                                    | Certificates of deposit                                    |   |            | 174,131 |          |   |            | 177,528 |  |   |         | 186,927 |  |   |         | 190,021 | 
|                       | Federal funds purchased                            |                                                            |   | 6,891      |         |          |   | 6,891      |         |  |   | 19,732  |         |  |   | 19,732  |        
|                       | Borrowings                                         |                                                            |   | 71,875     |         |          |   | 72,690     |         |  |   | 62,945  |         |  |   | 63,920  |        
|                       | Securities sold under repurchase agreements        |                                                            |   | 784        |         |          |   | 784        |         |  |   |        |         |  |   |        |        
|                       | Subordinated notes and debentures                  |                                                            |   |           |         |          |   |           |         |  |   | 3,241   |         |  |   | 3,241   |        
|                       | Junior subordinated deferrable interest debentures |                                                            |   | 12,365     |         |          |   | 14,557     |         |  |   | 7,000   |         |  |   | 8,492   |        

Note U  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:

|                                                                                             |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                             |  | 2003 |       | 2002 |  | 2001
|                                                                                             |  |      |       |      |  |     
|Net earnings available to common stockholders
    used in basic and diluted EPS              |  | $    | 5,241 |      |  | $    | 4,278 |  |  | $ | 3,224 | 
|                                                                                             |  |      |       |      |  |      |       |  |  |   |       | 
|Weighted average common shares used in basic EPS
    (000s)                                 |  |      | 3,984 |      |  |      | 3,827 |  |  |   | 3,742 | 
|Effect of dilutive securities:                                                               |  |      |       |      |  |      |       |  |  |   |       | 
|Stock options (000s)                                                                        |  |      | 167   |      |  |      | 172   |  |  |   | 152   | 
|                                                                                             |  |      |       |      |  |      |       |  |  |   |       | 
|Weighted average common and potential dilutive
    common shares used in diluted EPS (000s) |  |      | 4,151 |      |  |      | 3,999 |  |  |   | 3,894 | 
|                                                                                             |  |      |       |      |  |      |       |  |  |   |       | 

Options to purchase 2,398, 2,398 and
18,750 shares of common stock in 2003, 2002 and 2001 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 43,753 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 2003 and 2001.

72



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Note V  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
|2003                             |                                                                          | Amount     |        | Effect |   | Amount    
|                                 |                                                                          |            |        |        |   |           
|Unrealized losses on securities: |                                                                          |            |        |        |   |            |      |       |   |   |        |       
|                                 | Holding losses arising during period                                     |            | $      | (4,096 | ) |            | $    | 1,393 |   |   | $      | (2,703 | )
|                                 | Plus: reclassification adjustment for gains
    included in net earnings |            |        | 1,294  |   |            |      | (440  | ) |   |        | 854    |  
|                                 |                                                                          |            |        |        |   |            |      |       |   |   |        |       
|Other comprehensive loss         |                                                                          | $          | (2,802 | )      |   | $          | 953  |       |   | $ | (1,849 | )     
|                                 |                                                                          |            |        |        |   |            |      |       |   |   |        |       
|                                
|2002                             |                                                                          |            |        |        |   |            |      |       |   |   |        |       
|                                 |                                                                          |            |        |        |   |            |      |       |   |   |        |       
|Unrealized gains 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  |       
|                                 |                                                                          |            |        |        |   |            |      |       |   |   |        |       



|         |                                  
|-------- | ---------------------------------
|Note W  | Subsequent
    Events  Unaudited

On February 5, 2004, State Bank acquired
100% of Community Home Loan, Inc. (CHL) and operates
CHL as a subsidiary of State Bank. CHL is a mortgage bank
domiciled in Houston Texas. Based upon financial information as
of December 31, 2003, the Bank acquired $11,102 in assets
and assumed $10,092 in liabilities. Initial consideration paid
was $300 in cash and $200 in Company common stock. Additional
consideration will be paid annually through 2007 based upon the
achievement of performance objectives. If the objectives are
obtained, the Bank would pay an aggregate of an additional
$1,300.

73



---



##### 



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,


|                                                   |                                             |                                         |        |        |        |   |        |        |        | 
|-------------------------------------------------- | ------------------------------------------- | --------------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                   |                                             | 2003                                    |        | 2002  
|                                                   |                                             |                                         |        |       
|ASSETS                                            
|Cash and cash equivalents                          |                                             | $                                       | 694    |        |        | $ | 888    |       
|Core deposit premium                               |                                             |                                         | 393    |        |        |   | 512    |       
|Goodwill                                           |                                             |                                         | 2,531  |        |        |   | 2,531  |       
|Other assets                                       |                                             |                                         | 2,849  |        |        |   | 2,506  |       
|Investment in subsidiaries                         |                                             |                                         | 47,943 |        |        |   | 45,469 |       
|                                                   |                                             |                                         |        |        |        |   |        |       
|                                                   |                                             | $                                       | 54,410 |        |        | $ | 51,906 |       
|                                                   |                                             |                                         |        |        |        |   |        |       
|                                                  
|LIABILITIES AND SHAREHOLDERS
    EQUITY          
|Dividends payable                                  |                                             | $                                       | 302    |        |        | $ | 291    |       
|Junior subordinated deferrable interest debentures |                                             |                                         | 12,365 |        |        |   | 7,210  |       
|Subordinated notes and debentures                  |                                             |                                         |       |        |        |   | 3,241  |       
|Borrowings                                         |                                             |                                         | 2,750  |        |        |   | 5,250  |       
|Other liabilities                                  |                                             |                                         | 1,006  |        |        |   | 496    |       
|                                                   |                                             |                                         |        |        |        |   |        |       
|                                                   |                                             | Total liabilities                       |        |        | 16,423 |   |        |        | 16,488 | 
|Commitments and contingencies                      |                                             |                                         |       |        |        |   |       |       
|Shareholders equity:                              |                                             |                                         |        |        |        |   |        |       
|                                                   | Preferred stock                             |                                         |        |       |        |   |        |       |       
|                                                   | Common stock                                |                                         |        | 4,008  |        |   |        | 3,969  |       
|                                                   | Additional paid-in capital                  |                                         |        | 16,911 |        |   |        | 16,683 |       
|                                                   | Retained earnings                           |                                         |        | 17,422 |        |   |        | 13,271 |       
|                                                   | Accumulated other comprehensive (loss) gain |                                         |        | (237   | )      |   |        | 1,612  |       
|                                                   |                                             |                                         |        |        |        |   |        |       
|                                                   |                                             |                                         | 38,104 |        |        |   | 35,535 |       
|                                                   |                                             | Less common stock in treasury  at cost |        |        | 117    |   |        |        | 117    | 
|                                                   |                                             |                                         |        |        |        |   |        |       
|                                                   |                                             |                                         | 37,987 |        |        |   | 35,418 |       
|                                                   |                                             |                                         |        |        |        |   |        |       
|                                                   |                                             | $                                       | 54,410 |        |        | $ | 51,906 |       
|                                                   |                                             |                                         |        |        |        |   |        |       

74



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Texas United Bancshares, Inc.

(Parent Only)


Statements of Earnings


Year ended December 31,


|                                       |                            |                                                                       |       |       |        |      |       |     |        |   |       |     |        |  
|-------------------------------------- | -------------------------- | --------------------------------------------------------------------- | ----- | ----- | ------ | ---- | ----- | --- | ------ | - | ----- | --- | ------ | -
|                                       |                            | 2003                                                                  |       | 2002  |        | 2001
|                                       |                            |                                                                       |       |       |        |     
|Income                                 |                            | $                                                                     |      |       |        | $    |      |     |        | $ |      |    
|Costs and expenses                     |                            |                                                                       |       |       |        |      |       |     |        |   |       |    
|                                       | Salaries and benefits      |                                                                       |       | 310   |        |      |       | 88  |        |   |       | 494 |       
|                                       | Interest expense           |                                                                       |       | 1,020 |        |      |       | 985 |        |   |       | 792 |       
|                                       | General and administrative |                                                                       |       | 533   |        |      |       | 431 |        |   |       | 363 |       
|                                       |                            |                                                                       |       |       |        |      |       |     |        |   |       |    
|                                       |                            | Total expenses                                                        |       |       | (1,863 | )    |       |     | (1,504 | ) |       |     | (1,649 | )
|Other income                           |                            |                                                                       | 102   |       |        |      | 66    |     |        |   | 319   |    
|                                       |                            |                                                                       |       |       |        |      |       |     |        |   |       |    
|                                       |                            | Loss before income taxes and equity in net
    earnings of subsidiary |       |       | (1,761 | )    |       |     | (1,438 | ) |       |     | (1,330 | )
|                                       | Current income tax benefit |                                                                       |       | 721   |        |      |       | 530 |        |   |       | 423 |       
|                                       |                            |                                                                       |       |       |        |      |       |     |        |   |       |    
|                                       |                            | Loss before equity in net earnings of subsidiaries                    |       |       | (1,040 | )    |       |     | (908   | ) |       |     | (907   | )
|Equity in net earnings of subsidiaries |                            |                                                                       | 6,281 |       |        |      | 5,186 |     |        |   | 4,131 |    
|                                       |                            |                                                                       |       |       |        |      |       |     |        |   |       |    
|                                       |                            | NET EARNINGS                                                          |       | $     | 5,241  |      |       | $   | 4,278  |   |       | $   | 3,224  |  
|                                       |                            |                                                                       |       |       |        |      |       |     |        |   |       |    

75



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Texas United Bancshares, Inc.

(Parent Only)


Statements of Cash Flows


Year ended December 31,


|                                                         |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |       |        |      |       |  
|-------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------------------- | ---------------------------------------- | ---------------------------------------------------- | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ----- | ------ | ---- | ----- | -
|                                                         |                                                                                        | 2003                               |                                          | 2002                                                 |        | 2001
|                                                         |                                                                                        |                                    |                                          |                                                      |        |     
|Cash flows from operating activities:                    |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |      
|                                                         | Net earnings                                                                           |                                    | $                                        | 5,241                                                |        |      | $      | 4,278  |        |      | $      | 3,224 |       
|                                                         | Adjustments to reconcile net earnings to net cash
    used in operating activities:    |                                    |                                          |                                                      |        |      |        |        |        |      |        |       |       
|                                                         |                                                                                        | Earnings of subsidiary             |                                          |                                                      | (6,281 | )    |        |        | (5,186 | )    |        |       | (4,131 | )   
|                                                         |                                                                                        | Noncash compensation expense       |                                          |                                                      |       |      |        |        | 50     |      |        |       | 105    |     
|                                                         |                                                                                        | Amortization                       |                                          |                                                      | 126    |      |        |        | 66     |      |        |       |       |     
|                                                         |                                                                                        | Changes in assets and liabilities: |                                          |                                                      |        |      |        |        |        |      |        |       |        |     
|                                                         |                                                                                        |                                    | Increase (decrease) in other assets      |                                                      |        | 96   |        |        |        | (284 | )      |       |        | (128 | )    
|                                                         |                                                                                        |                                    | Increase (decrease) in other liabilities |                                                      |        | 184  |        |        |        | (952 | )      |       |        | 522  |      
|                                                         |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |      
|                                                         |                                                                                        |                                    |                                          | Net cash used by operating activities                |        |      | (634   | )      |        |      | (2,028 | )     |        |      | (408  | )
|Cash flows from investing activities:                    |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |      
|                                                         | Dividend from subsidiaries                                                             |                                    |                                          | 6,000                                                |        |      |        | 500    |        |      |        | 1,500 |       
|                                                         | Cash used to fund operations of subsidiary                                             |                                    |                                          |                                                     |        |      |        |       |        |      |        | (121  | )     
|                                                         | Capital contribution to subsidiaries                                                   |                                    |                                          | (3,947                                               | )      |      |        | (1,500 | )      |      |        |      |       
|                                                         | Cash paid in business combination, net of cash
    acquired                            |                                    |                                          |                                                     |        |      |        | (648   | )      |      |        |      |       
|                                                         |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |      
|                                                         |                                                                                        |                                    |                                          | Net cash provided (used) by investing
    activities |        |      | 2,053  |        |        |      | (1,648 | )     |        |      | 1,379 |  
|Cash flows from financing activities:                    |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |      
|                                                         | Net proceeds from issuance of common stock upon
    exercise of employee stock options |                                    |                                          | 265                                                  |        |      |        | 53     |        |      |        | 138   |       
|                                                         | Borrowings, net of repayments                                                          |                                    |                                          | (2,560                                               | )      |      |        | 5,250  |        |      |        |      |       
|                                                         | Payment of subordinated notes and debentures                                           |                                    |                                          | (3,241                                               | )      |      |        | (388   | )      |      |        |      |       
|                                                         | Purchase of treasury stock                                                             |                                    |                                          |                                                     |        |      |        |       |        |      |        | (417  | )     
|                                                         | Sale of treasury stock                                                                 |                                    |                                          |                                                     |        |      |        | 189    |        |      |        | 223   |       
|                                                         | Payment of dividends                                                                   |                                    |                                          | (1,077                                               | )      |      |        | (1,001 | )      |      |        | (838  | )     
|                                                         | Proceeds from issuance of junior subordinated
    debentures                           |                                    |                                          | 5,000                                                |        |      |        |       |        |      |        |      |       
|                                                         |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |      
|                                                         |                                                                                        |                                    |                                          | Net cash (used) provided by financing
    activities |        |      | (1,613 | )      |        |      | 4,103  |       |        |      | (894  | )
|                                                         |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |      
|Net decrease (increase) in cash and cash
    equivalents |                                                                                        |                                    | (194                                     | )                                                    |        |      | 427    |        |        |      | 77     |      
|Cash and cash equivalents at beginning of year           |                                                                                        |                                    | 888                                      |                                                      |        |      | 461    |        |        |      | 384    |      
|                                                         |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |      
|Cash and cash equivalents at end of year                 |                                                                                        | $                                  | 694                                      |                                                      |        | $    | 888    |        |        | $    | 461    |      
|                                                         |                                                                                        |                                    |                                          |                                                      |        |      |        |        |        |      |        |      

76



---



##### 



TEXAS UNITED BANCSHARES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Dollars in thousands, except per share
amounts)


Supplemental Statement of Cash Flow
Information:

Cash paid during the years ended December 31
for:

|                                                           |                                                                 |      |   |       |  |      |   |       |  |  |   |     | 
|---------------------------------------------------------- | --------------------------------------------------------------- | ---- | - | ----- |  | ---- | - | ----- |  |  | - | --- | 
|                                                           |                                                                 | 2003 |   | 2002  |  | 2001
|                                                           |                                                                 |      |   |       |  |     
|                                                           | Interest                                                        |      | $ | 1,101 |  |      | $ | 876   |  |  | $ | 742 | 
|                                                           | Income taxes                                                    |      |   | 1,725 |  |      |   | 1,629 |  |  |   | 600 | 
|Noncash operating, investing and financing
    activities: |                                                                 |      |   |       |  |      |   |       |  |  |   |    
|                                                           | Dividends payable included in other liabilities                 |      |   | 302   |  |      |   | 291   |  |  |   | 266 | 
|                                                           | Common stock issued in connection with business
    acquisition |      |   |      |  |      |   | 2,615 |  |  |   |    | 

77



---



##### 



INDEX TO 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)                                                                                                                                                                                                        
|        | 21 | .1**                   |  | Subsidiaries of Texas United                                                                                                                                                                                                                                                                                                                      
|        | 23 | .1**                   |  | Consent of Grant Thornton LLP, independent
    auditors of Texas United                                                                                                                                                                                                                                                                           
|        | 31 | .1**                   |  | Certification of the Chief Executive Officer
    pursuant to Rule 13a-14(a) of the Securities Exchange Act
    of 1934, as amended.                                                                                                                                                                                                               
|        | 31 | .2**                   |  | Certification of the Chief Financial Officer
    pursuant to Rule 13a-14(a) of the Securities Exchange Act
    of 1934, as amended.                                                                                                                                                                                                               
|        | 32 | .1**                   |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            
|        | 32 | .2**                   |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            



---



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | 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.