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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number 000-49928

TEXAS UNITED BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

202 W. COLORADO

LA GRANGE, TEXAS 78945

(Address of principal executive offices, including zip code)

(979) 968-8451

(Registrant’s telephone number, including area code)

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

None

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

Common Stock, par value $1.00 per share

(Title of class)

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

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

Yes ¨ No x.

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

PART I

FINANCIAL INFORMATION

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

See accompanying notes to condensed consolidated financial statements

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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

2

TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

Year Ended December 31, 2003 and

Three Months Ended March 31, 2004

(In thousands, except share amounts)

See accompanying notes to condensed consolidated financial statements

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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

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TEXAS UNITED BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements include the accounts of Texas United Bancshares, Inc. (the “Company”) and its wholly-owned subsidiaries Texas United Nevada, Inc. (“TUNI”), State Bank (the “Bank”), and Community Home Loan, Inc. (“CHL”). All material intercompany accounts and transactions have been eliminated in the consolidated report of the Company.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the Company’s consolidated financial position at March 31, 2004, the Company’s consolidated results of operations for the three months ended March 31, 2004 and 2003, consolidated cash flows for the three months ended March 31, 2004 and 2003, and consolidated changes in shareholders’ equity for the three months ended March 31, 2004 and the year ended December 31, 2003. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. The 2003 year-end consolidated balance sheet and statement of changes in shareholders’ equity data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.

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

These financial statements and the notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2003 appearing in the Company’s Annual Report on Form 10-K.

Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares are computed using the treasury stock method. Basic and diluted earnings per share have been adjusted for the three for two stock split in the form of a 50% stock dividend issued effective October 15, 2003.

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

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

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

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

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

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,

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

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

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

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

Mortgage Loan Interest Rate Lock Commitments

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

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

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

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customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Commitments to extend credit totaled $84.2 million at March 31, 2004 and $58.0 million at December 31, 2003.

Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that standby letters of credit arrangements contain collateral and debt covenants similar to those contained in loan agreements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. Standby letters of credit totaled $3.1 million at March 31, 2004 and $695,000 at December 31, 2003. As of March 31, 2004 and December 31, 2003, no liability for the fair value of the Company’s potential obligations under these guarantees has been recorded since the amount is deemed immaterial.

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

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

Mortgage servicing rights assets are established and accounted for based on discounted cash flow modeling techniques which require management to make estimates regarding the amount and timing of expected future cash flows, including assumptions about loan repayment rates, loan loss experience, and costs to service, as well as discount rates that consider the risk involved. Because the values of these assets are sensitive to changes in assumptions, the valuation of mortgage servicing rights is considered a critical accounting estimate. Please refer to Note 3 to the Condensed Consolidated Financial Statements above and discussion of “Non-Interest Income” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional insight into management’s approach in estimating transfers and servicing of financial assets.

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

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

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

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

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

Special Cautionary Notice Regarding Forward-looking Statements

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

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“continue”, “intend”, “may”, “will”, “should”, or similar expressions, identifies these forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:

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

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

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

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

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

General. The Company is a financial holding company formed in June 1998 as a result of the merger of South Central Texas Bancshares, Inc. with and into Premier Bancshares, Inc. At the effective date of the merger, the resulting company changed its name to Texas United Bancshares, Inc. The Company derives substantially all of its net income from its wholly-owned subsidiary State Bank. At March 31, 2004, the Company had eighteen full service banking centers and three loan production offices of the Bank located in the greater central and south central Texas area. In addition, the Company has seven loan production offices of CHL located in Houston and San Antonio.

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

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

Net Interest Income. For the three months ended March 31, 2004, net interest income, before the provision for loan losses, increased by 3.1% to $6.7 million from $6.5 million in the same period in 2003. The increase was primarily due to the increased volumes in loans and investment securities and the strategic lowering of the cost of funds in relation to the decrease in rates on earning assets. This has resulted in lower yields on earning assets partially offset by lower rates paid for interest-bearing liabilities. For the three months ended March 31, 2004 and 2003, the net interest margins and spreads decreased by 55 basis points to 4.63% from 5.18% and by 50 basis points to 4.38% from 4.88%, respectively.

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

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

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