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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|  |  |                                                                                                                                             
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|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
|  |  | or                                                                                                                                          
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934                                            



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Commission file number: 000-22007



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Southwest Bancorporation of Texas,
Inc.

(Exact name of registrant as specified in its
charter)


|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|Texas(State or Other Jurisdiction of
    Incorporation or Organization) |  | 76-0519693(I.R.S. Employer
    Identification No.)

4400 Post Oak Parkway

Houston, Texas 77027


(Address of Principal Executive Offices,
including zip code)


(713) 235-8800

(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, $1.00 par value


(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



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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.     o



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

The aggregate market value of the
Registrants Common Stock held by non-affiliates was
approximately $992.0 million (based upon the closing price
of $32.51 on June 30, 2003, as reported on the NASDAQ
National Market System).

There were 34,284,114 shares of the
Registrants Common Stock outstanding as of the close of
business on February 20, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement
relating to the 2004 Annual Meeting of Shareholders, which will
be filed within 120 days after December 31, 2003, are
incorporated by reference into Part III of this Report.



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PART I

Item 1.     Business

The disclosures set forth in this item are
qualified by the section captioned Special Cautionary
Notice Regarding Forward-Looking Statements 
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations of this
report and other cautionary statements set forth elsewhere in
this report.

The Company

General.Southwest
Bancorporation of Texas, Inc. (the Company) was
incorporated as a business corporation under the laws of the
State of Texas on March 28, 1996, for the purpose of
serving as a bank holding company for Southwest Bank of Texas
National Association (the Bank). The holding company
formation was consummated and the Company acquired all of the
outstanding shares of capital stock of the Bank as of the close
of business on June 30, 1996. Based upon total assets as of
December 31, 2003, the Company ranks as the largest
independent bank holding company headquartered in the Houston
metropolitan area. The Companys headquarters are located
at 4400 Post Oak Parkway, Houston, Texas 77027, and its
telephone number is (713) 235-8800. The Companys
internet address is www.swbanktx.com. The Company makes
available through its website, free of charge, its annual report
on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports as soon as
reasonably practicable after filing with the Securities and
Exchange Commission. The Company has adopted a code of conduct
and ethics that applies to all employees. This document is
available on the Companys website. The information
included on the Companys website is not a part of this
document.

Mergers and Acquisitions.On August 1, 1997, Pinemont Bank
was merged with and into the Bank in exchange for approximately
3.3 million shares of Company Common Stock in a transaction
accounted for as a pooling-of-interests. The acquisition of
Pinemont Bank added $235 million in total assets and
$219 million in total deposits to the Companys
balance sheet and nine banking locations to the Companys
operations.

On April 1, 1999, Fort Bend Holding
Corp. was merged with and into the Company and
Fort Bends subsidiary savings and loan association
was merged with and into the Bank in exchange for approximately
4.1 million shares of Company Common Stock in a transaction
accounted for as a pooling-of-interests. The acquisition of
Fort Bend Holding Corp. added $316 million in total
assets and $269 million in total deposits to the
Companys balance sheet and seven banking locations to the
Companys operations.

Through the merger with Fort Bend, the
Company acquired Fort Bends 51% ownership interest in
Mitchell Mortgage Company L.L.C. (Mitchell), a full
service mortgage banking affiliate of The Woodlands Operating
Company L.P. (Woodlands). On June 17, 1999, the
Company issued 307,323 shares of Company Common Stock to
Woodlands in exchange for Woodlands 49% ownership interest
in Mitchell and Mitchell became a wholly-owned subsidiary of the
Bank effective as of June 30, 1999. As a result, 100% of
the accounts and operations of Mitchell after that date are
included in the financial statements of the Company.

On December 29, 2000, Citizens Bankers, Inc.
(Citizens) was merged with and into the Company and
the three wholly-owned subsidiary banks of Citizens were merged
with and into the Bank (and the assets and liabilities of a
related partnership were acquired by the Bank) in exchange for
approximately 4.0 million shares of Company Common Stock in
a transaction accounted for as a pooling-of-interests. The
acquisition of Citizens added $436 million in total assets
and $381 million in total deposits to the Companys
balance sheet and six banking locations to the Companys
operations.

On July 1, 2003, Maxim Financial Holdings,
Inc. (Maxim) was merged with and into the Company in
an all cash transaction valued at $63.0 million. The
acquisition of Maxim added $348.8 million in total assets
and $241.5 million in total deposits to the Companys
balance sheet and eight banking locations to the Companys
operations.

On January 31, 2004, Reunion Bancshares,
Inc. (Reunion), parent of Lone Star Bank in Dallas
(Lone Star), was merged with and into the Company in
a cash transaction valued at $43.5 million paid at

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closing and an additional $6.5 million
deposited in an escrow account that is contingent upon the
performance of the loan portfolio and other potential
liabilities over a three-year period. The 2004 acquisition of
Reunion added $222.8 million in total assets and
$203.2 million in deposits to the Companys balance
sheet and five banking locations to the Companys
operations. The Reunion merger is not reflected in the
Companys 2003 financial statements.


Business Strategy.The Company provides an array of
sophisticated products typically found only in major regional
banks. These services are provided to middle market businesses,
private banking individuals, and retail consumers in the Houston
metropolitan area through 44 full service banking
facilities. Several banking locations have seasoned management
with significant lending experience who are responsible for
credit and pricing decisions, subject to loan committee approval
for larger credits. This decentralized relationship management
approach, coupled with the continuity of service by its banking
officers, enables the Company to develop long-term customer
relationships, maintain high quality service and provide quick
responses to customer needs. The Company believes that its
emphasis on local relationship banking, together with its
conservative approach to lending and resultant strong asset
quality, are important factors in the success and the growth of
the Company.

The Company seeks credit opportunities of good
quality within its target market that exhibit positive
historical trends, stable cash flows and secondary sources of
repayment from tangible collateral. The Company extends credit
for the purpose of obtaining and continuing long-term
relationships. Lenders are provided with detailed underwriting
policies for all types of credit risks accepted by the Company
and must obtain appropriate approvals for credit extensions in
excess of conservatively assigned individual lending limits. The
Company also maintains strict documentation requirements and
extensive credit quality assurance practices in order to
identify credit portfolio weaknesses as early as possible so any
exposures that are discovered might be reduced.

The Company has a four-part strategy for growth.
First, the Company continues to actively target the commercial
customers considered or defined as middle market,
private banking, and retail customers in Houston for loan,
deposit, and fee income opportunities as it has successfully
done for the past fourteen years. Its expansion into the Dallas
market will follow the same business model. The middle
market is generally characterized by companies having
annual revenues ranging from $1 million to
$500 million and borrowings ranging from $50,000 to
$15 million. Typical middle market customers seek a
relationship with a local independent bank that is sensitive to
their needs and understands their business philosophy. These
customers desire a long-term relationship with a decision-making
loan officer who is responsive and experienced and has ready
access to a banks senior management. In implementing this
part of its strategy, the Company continues to explore
opportunities (i) to solidify its existing customer
relationships and build new customer relationships by providing
new services required by its middle market customers and
(ii) to expand its base of services in the professional,
executive, and retail markets to meet the demands of those
sectors.

Second, the Company intends to establish branches
in areas that demographically complement its existing or
targeted customer base. As other local banks are acquired by
out-of-state organizations, the Company believes that the
establishment of branches will better meet the needs of
customers in many Houston and Dallas area neighborhoods who feel
disenfranchised by larger regional or national organizations.

Third, the Company may pursue selected
acquisitions of other financial institutions. The Company
conducts thorough studies and reviews of potential acquisition
candidates to assure that they are consistent with the
Companys existing goals, from both an economic and
strategic perspective. The Company believes market and
regulatory factors may present opportunities for the Company to
acquire other financial institutions.

Fourth, the Company has entered the Dallas
Metroplex market through its January 31, 2004 merger with
Reunion Bancshares, Inc., the parent of Lone Star Bank in
Dallas. Lone Star Bank has five banking center locations in the
prime growth areas of Dallas. Additionally, the Company plans to
open a full-scale operations center in downtown Dallas in the
second quarter of 2004. The Company will continue its geographic
diversification into other parts of Texas and contiguous states.

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Operating Segments

The Company has two operating segments: the Bank
and the mortgage company. Each segment is managed separately
because each business requires different marketing strategies
and each offers different products and services.



| |         
| | --------
| | The Bank

The Bank provides a complete range of retail and
commercial banking services that compete directly with major
regional and money center banks. Loans consist of commercial
loans to middle market and small businesses, loans to
individuals, commercial real estate loans, residential
mortgages, and construction loans. In addition, the Bank offers
a broad array of fee income products including customized cash
management services, investment and capital market products and
services, trust and private banking services, accounts
receivable financing, letters of credit, and merchant card
services. The Bank develops business through, among other
things, an active calling program by both product specialists
and lenders. Approximately 200 banking officers actively
call on customers and prospects.

The Bank maintains a staff of professional
treasury management marketing officers who consult with middle
market and large companies to design customized and
cost-effective cash management solutions. The Bank offers a full
product line of cash concentration, disbursement, and
information reporting services and a full suite of Internet
Imaging products superior to those offered by most regional
banks. Through the continued investment in new technology and
people, the Bank has attracted some of Houstons largest
middle market companies to utilize the Banks treasury
management products. The Bank also has attracted new loan
customers through use of the Banks treasury management
services as a lead-in with products such as an image-based
lockbox service and controlled disbursement and sweep products,
which allow borrowers to minimize interest expense and earn
interest income on excess operating funds. Through the use of an
internet connection, the Banks NetSt@r system provides
customers with instant access to all bank account information
with multiple intraday updates. The Bank makes business
communication more efficient through Electronic Data Interchange
(EDI), which is an inter-organizational
computer-to-computer exchange of business information in a
standard computer-processable format. Through the use of EDI and
electronic payments, the Bank can provide the customer with a
paperless funds management system. Positive Pay Advantage, a
service under which the Bank only pays checks listed on a
legitimate company issue file, is another product
which helps in the prevention of check fraud. The Banks
average commercial customer uses six treasury management
services. Because these services help customers improve their
treasury operations and achieve new efficiencies in cash
management, they are extremely useful in building and
maintaining long-term relationships.

The Bank has a retail presence in
44 locations throughout the Houston metropolitan area and,
as of January 31, 2004, five branches in Dallas. Such
locations are emerging as an important source of bank funding
and fee income. Retail products consist of both traditional
deposit accounts such as checking, savings, money market and
certificates of deposit, and a wide array of consumer loan and
electronic banking alternatives. The Bank continues to emphasize
the cultivation of retail market opportunities and investment in
retail staff to help expand and deepen customer relationships.

The Bank maintains a strong community orientation
by, among other things, supporting active participation of all
employees in local charitable, civic, school, and church
activities. The Bank has a variety of community outreach
programs and is involved in supporting non-profit organizations
in a number of ways. Several banking offices also appoint
selected customers to a business development board that assists
in introducing prospective customers to the Bank and in
developing or modifying products and services to better meet
customer needs.



| |                     
| | --------------------
| | The Mortgage Company

The Company originates residential and commercial
mortgage loans both for its own portfolio and to sell to
investors with servicing rights retained through its ownership
of Mitchell. Mitchell also purchases mortgage servicing rights,
promotes residential and commercial construction financing to
builders and developers, and

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acts as a broker in the origination of
multi-family and commercial real estate loans. Mitchell has
production offices in Fort Bend and Montgomery Counties, Texas,
with corporate offices in The Woodlands, Texas. Mitchell is an
approved seller/servicer for Federal National Mortgage
Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC) and an approved issuer of
Government National Mortgage Association (GNMA)
mortgage-backed securities. Mitchell is also a HUD-Approved
Title II nonsupervised mortgagee. During 2003, Mitchell
funded approximately $286.5 million in residential mortgage
loans, $248.8 million in commercial real estate loans, and
$199.7 million in residential and commercial construction
loans.


Competition

The banking business is highly competitive, and
the profitability of the Company depends principally upon the
Companys ability to compete in its market area. The
Company competes with other commercial and savings banks,
savings and loan associations, credit unions, finance companies,
mutual funds, insurance companies, brokerage and investment
banking firms, asset-based non-bank lenders, and certain other
non-financial institutions, including certain governmental
organizations which may offer subsidized financing at lower
rates than those offered by the Company. The Company has been
able to compete effectively with other financial institutions by
emphasizing technology and customer service, including local
office decision-making on loans, establishing long-term customer
relationships and building customer loyalty, and providing
products and services designed to address the specific needs of
its customers. Deposits in the Houston area total approximately
$88 billion.

The Gramm-Leach-Bliley Act (see discussion
below), which breaks down many barriers between the banking,
securities and insurance industries, may significantly affect
the competitive environment in which the Company operates.

Employees

As of December 31, 2003, the Company had
1,760 full-time equivalent employees, 633 of whom were
officers. Employees of the Company enjoy a variety of employee
benefit programs, including a stock option plan, a restricted
stock plan, a 401(k) plan, various comprehensive medical,
accident and group life insurance plans, and paid vacations. The
Company considers its relations with its employees to be
excellent.

Economic Conditions

The Companys success is dependent to a
significant degree on economic conditions in the eight county
region comprising the Houston metropolitan area, which the
Company defines as its primary market. The banking industry in
Texas and in Houston is affected by general economic conditions
including the effects of inflation, recession, unemployment,
real estate values, energy prices, trends in the national and
global economies, and other factors beyond the Companys
control. During the mid-1980s, severely depressed oil and
gas prices and levels of activity in the energy industries
materially and adversely affected the Texas and Houston
economies, causing recession and unemployment in the region and
resulting in excess vacancies in the Houston real estate market
and elsewhere in the State. Since 1987, however, the Houston
metropolitan economy has gained nearly 730,000 jobs, averaging
an annual growth rate of 2.6%. In the latest review by the
Office of Management and Budget the population of the Greater
Houston area increased by approximately 270,000 persons to
approximately five million residents. The job count at year end
2003 is estimated to be 2.1 million. This level of
employment is greater than 29 other states including Alabama,
Louisiana, South Carolina, and Kentucky. The Texas Workforce
Commission estimates that job growth in Houston for 2003 was a
negative 1,100 jobs, a decline of 0.1%. The Greater Houston
Partnership and the University of Houstons Institute for
Regional Forecasting are forecasting new job growth in Houston
for 2004 at 31,000 jobs, an increase of 1.5%.

Since 1987, the Houston area economy has
diversified from being primarily energy dependent to one that is
now influenced by national and global economic trends as well as
activity in the energy industries. The energy independent
sectors of the Houston area economy have grown at an annual
compounded rate of 7.4%

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since 1982. As a result, it is estimated that the
upstream sector of the energy industry now accounts for
approximately 31% of economic activity, down from 69% in 1981.
Nonetheless, an economic recession or a delayed recovery over a
prolonged period of time in the Houston area could cause an
increase in the level of the Companys non-performing
assets and loan losses, thereby causing operating losses,
impairing liquidity and eroding capital. There can be no
assurance that future adverse changes in the local economy would
not have a material adverse effect on the Companys
consolidated financial condition, results of operations, and
cash flows.


Supervision and Regulation

The federal banking laws contain numerous
provisions affecting various aspects of the business and
operations of the Company and the Bank. The following
descriptions of and references herein to applicable statutes and
regulations, which are not intended to be complete descriptions
of these provisions or their effects on the Company or the Bank,
are summaries and are qualified in their entirety by reference
to such statutes and regulations.



| |         
| | --------
| | The Bank

As a national banking association, the Bank is
principally supervised, examined and regulated by the Office of
the Comptroller of the Currency (the OCC). The OCC
regularly examines such areas as capital adequacy, reserves,
loan portfolio, investments, and management practices. The Bank
must also furnish quarterly and annual reports to the OCC, and
the OCC may exercise cease and desist and other enforcement
powers over the Bank if its actions represent unsafe or unsound
practices or violations of law. Since the deposits of the Bank
are insured by the Bank Insurance Fund (BIF) of the
Federal Deposit Insurance Corporation (the FDIC),
the Bank is also subject to regulation and supervision by the
FDIC. Because the Board of Governors of the Federal Reserve
System (the Federal Reserve Board) regulates the
Company, and because the Bank is a member of the Federal Reserve
System, the Federal Reserve Board also has supervisory authority
which affects the Bank.

Restrictions on Transactions with Affiliates
and Insiders.The Bank is subject to
certain federal statutes limiting transactions between the
Company and its nonbanking affiliates. Section 23A of the
Federal Reserve Act affects loans or other credit extensions to,
asset purchases from and investments in affiliates of the Bank.
Such transactions between the Company or any of its nonbanking
subsidiaries are limited in amount to ten percent of the
Banks capital and surplus and, with respect to the Company
and all of its nonbanking subsidiaries together, to an aggregate
of twenty percent of the Banks capital and surplus.
Furthermore, such loans and extensions of credit, as well as
certain other transactions, are required to be collateralized in
specified amounts.

In addition, Section 23B of the Federal
Reserve Act requires that certain transactions between the Bank,
including its subsidiaries, and its affiliates must be on terms
substantially the same, or at least as favorable to the Bank or
its subsidiaries, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated persons. In
the absence of such comparable transactions, any transaction
between the Bank and its affiliates must be on terms and under
circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated persons. The
Bank is also subject to certain prohibitions against any
advertising that indicates the Bank is responsible for the
obligations of its affiliates.

In May 2001, the Federal Reserve Board
adopted an interim rule addressing the applications of
Section 23A and Section 23B of the Federal Reserve Act
to credit exposure arising out of derivative transactions
between an insured institution and its affiliates and intra-day
extensions of credit by an insured depository institution to its
affiliates. The rule requires institutions to adopt policies and
procedures reasonably designed to monitor, manage, and control
credit exposures arising out of transactions and to clarify that
the transactions are subject to Section 23B of the Federal
Reserve Act. In May 2001, the Federal Reserve Board also
proposed a new rule to implement comprehensively
Section 23A and 23B of the Federal Reserve Act. On
October 31, 2002 the Federal Reserve Board approved the
final rule on Regulation W which became effective

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April 1, 2003 and supersedes and unifies the
Federal Reserve Boards interpretation of Sections 23A
and 23B. Regulation W as adopted had no material impact on
the operation of the Bank.


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 loans 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 OCC may determine that a lesser amount is appropriate.
Insiders are subject to enforcement actions for knowingly
accepting loans in violation of applicable restrictions.

Interest Rate Limits.Interest rate limitations for the Bank
are primarily governed by the National Bank Act, which generally
defers to the laws of the state where the bank is located. Under
the laws of the State of Texas, the maximum annual interest rate
that may be charged on most loans made by the Bank is based on
doubling the average auction rate, to the nearest 0.25%, for
26 week United States Treasury Bills, as computed by the
Office of the Consumer Credit Commissioner of the State of
Texas. However, the maximum rate does not decline below 18% or
rise above 24% (except for loans in excess of $250,000 that are
made for business, commercial, investment or other similar
purposes in which case the maximum annual rate may not rise
above 28%, rather than 24%). On fixed rate closed-end loans, the
maximum non-usurious rate is to be determined at the time the
rate is contracted, while on floating rate and open-end loans
(such as credit cards), the rate varies over the term of the
indebtedness. State usury laws have been preempted by federal
law for loans collateralized by a first lien on residential real
property.

Examinations.The
Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), revised the bank regulatory and funding
provisions of the Federal Deposit Insurance Corporation Act and
made revisions to several other banking statutes. Under FDICIA,
all insured institutions must undergo regular on-site
examination by their appropriate banking agency and such agency
may assess the institution for its costs of conducting the
examination. The OCC periodically examines and evaluates
national banks. Based upon such an evaluation, the OCC may
revalue the assets of a national bank and require that it
establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such
assets. The Bank is currently a participant in the OCCs
midsize bank program. This program supplies the Bank
with a full time examiner-in-charge that oversees a continuous
examination process.

Prompt Corrective Action.In addition to the capital adequacy
guidelines, FDICIA requires the OCC to take prompt
corrective action with respect to any national bank which
does not meet specified minimum capital requirements. The
applicable regulations establish five capital levels, ranging
from well capitalized to critically
undercapitalized, which authorize, and in certain cases
require, the OCC to take certain specified supervisory action.
Under regulations implemented under FDICIA, a national bank is
considered well capitalized if it has a total risk-based capital
ratio of 10.0% or greater, a Tier 1 risk-based capital
ratio of 8.0% or greater, and a leverage ratio of 5.0% or
greater, and it is not subject to an order, written agreement,
capital directive, or prompt corrective action directive to meet
and maintain a specific capital level for any capital measure. A
national bank is considered adequately capitalized if it has a
total risk-based capital ratio of 8.0% or greater, a Tier 1
risk-based capital ratio of at least 4.0% and a leverage capital
ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater
if the institution is rated composite 1 in its most recent
report of examination, subject to appropriate federal banking
agency guidelines), and the institution does not meet the
definition of an undercapitalized institution. A national bank
is considered undercapitalized if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based
capital ratio that is less than 4.0%, or a leverage ratio that
is less than 4.0% (or a leverage ratio that is less than 3.0% if
the institution is rated composite 1 in its most recent report
of examination, subject to appropriate federal banking agency
guidelines). A significantly undercapitalized institution is one
which has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than
3.0%, or a leverage ratio that is less than 3.0%. A critically
undercapitalized institution is one which has a ratio of
tangible equity to total assets that is equal to or less than
2.0%. Under certain circumstances, a well capitalized,
adequately capitalized or undercapitalized institution may be
treated as if the institution were in the next lower capital
category.

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With certain exceptions, national banks will be
prohibited from making capital distributions or paying
management fees to a holding company if the payment of such
distributions or fees will cause them to become
undercapitalized. Furthermore, undercapitalized national banks
will be required to file capital restoration plans with the OCC.
Such a plan will not be accepted unless, among other things, the
banking institutions holding company guarantees the 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. Undercapitalized national
banks also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business
unless they have an approved capital plan that permits
otherwise. The OCC also may, among other things, require an
undercapitalized national bank to issue shares or obligations,
which could be voting stock, to recapitalize the institution or,
under certain circumstances, to divest itself of any subsidiary.

The OCC is authorized by FDICIA to take various
enforcement actions against any significantly undercapitalized
national bank and any national bank that fails to submit an
acceptable capital restoration plan or fails to implement a plan
accepted by the OCC. These powers include, among other things,
requiring the institution to be recapitalized, prohibiting asset
growth, restricting interest rates paid, requiring primary
approval of capital distributions by any bank holding company
which controls the institution, requiring divestiture by the
institution of its subsidiaries or by the holding company of the
institution itself, requiring new election of directors, and
requiring the dismissal of directors and officers.

Significantly and critically undercapitalized
national banks may be subject to more extensive control and
supervision. The OCC may prohibit any such institution from,
among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or
bylaws, or engaging in certain transactions with affiliates. In
addition, critically undercapitalized institutions generally
will be prohibited from making payments of principal or interest
on outstanding subordinated debt. Within 90 days of a
national bank becoming critically undercapitalized, the OCC must
appoint a receiver or conservator unless certain findings are
made with respect to the prospect for the institutions
continued viability.

As of December 31, 2003, the Bank met the
capital requirements of a well capitalized
institution.

Dividends.There are
certain statutory limitations on the payment of dividends by
national banks. Without approval of the OCC, dividends may not
be paid by the Bank in an amount in any calendar year which
exceeds the Banks total net profits for that year, plus
its retained profits for the preceding two years, less any
required transfers to capital surplus. In addition, a national
bank may not pay dividends in excess of total retained profits,
including current years earnings after deducting bad debts
in excess of reserves for losses. In some cases, the OCC may
find a dividend payment that meets these statutory requirements
to be an unsafe or unsound practice. Under FDICIA, the Bank
cannot pay a dividend if it will cause the Bank to be
undercapitalized.



| |                           
| | --------------------------
| | FDIC Insurance Assessments

Pursuant to FDICIA, the FDIC adopted a risk-based
assessment system for insured depository institutions that takes
into account the risks attributable to different categories and
concentrations of assets and liabilities. The risk-based system
assigns an institution to one of three capital categories:
(i) well-capitalized, (ii) adequately capitalized, or
(iii) undercapitalized. These three categories are
substantially similar to the prompt corrective action
categories, with the undercapitalized category
including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt
corrective action purposes. An institution is also assigned by
the FDIC to one of three supervisory subgroups within each
capital group. The supervisory subgroup to which an institution
is assigned is based on an evaluation provided to the FDIC by
the institutions primary federal regulator and information
which the FDIC determines to be relevant to the
institutions financial condition and the risk posed to the
deposit insurance funds (which may include, if applicable,
information provided by the institutions state
supervisor). The supervisory subgroup to which an institution is
assigned by the FDIC is confidential and may not be disclosed.
An institutions insurance assessment rate is then
determined based on the capital category and supervisory
category to which it is assigned.

7



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Under the final risk-based assessment system
there are nine assessment risk classifications
(i.e., combinations of capital groups and supervisory
subgroups) to which different assessment rates are applied.
Assessment rates for deposit insurance currently range from zero
basis points to 27 basis points. A banks rate of
deposit insurance assessments will depend on the category and
subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect
on the earnings of insured institutions, including the Bank.

Under FDICIA, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has
engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by
the FDIC. Management does not know of any practice, condition or
violation that might lead to termination of deposit insurance.

Conservator and Receivership Powers.FDICIA significantly expanded the
authority of the federal banking regulators to place depository
institutions into conservatorship or receivership to include,
among other things, appointment of the FDIC as conservator or
receiver of an undercapitalized institution under certain
circumstances. In the event the Bank is placed into
conservatorship or receivership, the FDIC is required, subject
to certain exceptions, to choose the method for resolving the
institution that is least costly to the BIF, such as liquidation.

Brokered Deposit Restrictions.The Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA) and
FDICIA generally limit institutions which are not well
capitalized from accepting brokered deposits. In general,
undercapitalized institutions may not solicit, accept or renew
brokered deposits. Adequately capitalized institutions may not
solicit, accept or renew brokered deposits unless they obtain a
waiver from the FDIC. Even in that event, they may not pay an
effective yield of more than 75 basis points over the
effective yield paid on deposits of comparable size and maturity
in the institutions normal market area for deposits
accepted from within that area, or the national rate paid on
deposits of comparable size and maturity for deposits accepted
from outside the institutions normal market area.

Consumer Laws and Regulations.In addition to the laws and
regulations discussed herein, the Bank is also subject to
certain consumer laws and regulations that are designed to
protect consumers in transactions with banks. While the
following list 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 Community Reinvestment 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. The Bank must comply with the applicable provisions
of these consumer protection laws and regulations as part of its
ongoing customer relations.

Under Section 501 of the Gramm-Leach-Bliley
Act (see discussion below), the federal banking agencies are
required to establish appropriate standards for financial
institutions regarding the implementation of safeguards to
ensure the security and confidentiality of customer records and
information, protection against any anticipated threats or
hazards to the security or integrity of such records and
protection against unauthorized access to or use of such records
or information in a way that could result in substantial harm or
inconvenience to a customer. The federal banking agencies
published a joint final rule, which was effective July 1,
2001. Among other matters, the rule requires each bank to
implement a comprehensive written information security program
that includes administrative, technical and physical safeguards
relating to customer information.

Under the Gramm-Leach-Bliley Act, a financial
institution must provide its customers with a notice of privacy
policies and practices. Section 502 prohibits a financial
institution from disclosing nonpublic personal information about
a consumer to nonaffiliated third parties unless the institution
satisfies various notice and opt-out requirements and the
customer has not elected to opt out of the disclosure. Under
Section 504, the federal banking agencies are authorized to
issue regulations as necessary to implement notice requirements
and restrictions on a financial institutions ability to
disclose nonpublic personal information about consumers to
nonaffiliated third parties. In June 2000, the federal banking
agencies issued a final rule that all banks must develop initial
and annual privacy notices which describe in general terms the
banks information sharing

8



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##### 



practices. Banks that share nonpublic personal
information about customers with nonaffiliated third parties
must also provide customers with an opt-out notice and a
reasonable period of time for the customer to opt out of any
such disclosure (with certain exceptions). Limitations are
placed on the extent to which a bank can disclose an account
number or access code for credit card, deposit, or transaction
accounts to any nonaffiliated third party for use in marketing.




| |            
| | -----------
| | The Company

The Company is a bank holding company registered
under the Bank Holding Company Act of 1956 (the
BHCA), and is subject to supervision and regulation
by the Federal Reserve Board. The BHCA and other Federal laws
subject 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. As a
bank holding company, the Companys activities and those of
its banking and nonbanking subsidiaries have in the past been
limited to the business of banking and activities closely
related or incidental to banking. Under the Gramm-Leach-Bliley
Act (see discussion below), however, national banks have
broadened authority, subject to limitations on investment, to
engage in activities that are financial in nature (other than
insurance underwriting, merchant or insurance portfolio
investment, real estate development and real estate investment)
through subsidiaries, if the bank is well capitalized and well
managed and has at least a satisfactory rating under the
Community Reinvestment Act.

Because the Company 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 are subject to
the prior claims of the subsidiarys creditors. In the
event of a liquidation or other resolution of the Bank, the
claims of depositors and other general or subordinated creditors
of the Bank 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 the Company) or any shareholder or creditor
thereof.

Safe and Sound Banking Practices.Bank holding companies are not
permitted to engage in unsafe and unsound banking practices. For
example, the Federal Reserve Boards Regulation Y
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 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. A holding company may not impair its subsidiary
banks soundness by causing it to make funds available to
nonbanking subsidiaries or their customers if the Federal
Reserve Board believes it not prudent to do so.

FIRREA expanded the Federal Reserve Boards
authority to prohibit activities of bank holding companies and
their nonbanking subsidiaries that represent unsafe and unsound
banking practices or that constitute violations of laws or
regulations. Notably, FIRREA increased the amount of civil money
penalties which the Federal Reserve Board can assess 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 $1,000,000 for each
day the activity continues. FIRREA also expanded the scope of
individuals and entities against which such penalties may be
assessed.

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.

Annual Reporting; Examinations.The Company is required to file an
annual report with the Federal Reserve Board, and such
additional information as the Federal Reserve Board may require
pursuant to the BHCA. The Federal Reserve Board may examine a
bank holding company or any of its subsidiaries, and charge the
Company for the cost of such an examination.

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

9



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##### 



categories of assets and certain off-balance
sheet assets such as letters of credit 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).


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 total consolidated average assets. Bank holding
companies must maintain a minimum leverage ratio of at least
3.0%, although most are expected to maintain leverage ratios
that are 100 to 200 basis points above this minimum ratio.

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. In addition,
the regulations of the Federal Reserve Board provide that
concentration of credit risk and certain risks arising from
nontraditional activities, as well as an institutions
ability to manage these risks, are important factors to be taken
into account by regulatory agencies in assessing an
organizations overall capital adequacy.

The Federal Reserve Board adopted amendments to
its risk-based capital regulations to provide for the
consideration of interest rate risk in the agencies
determination of a banking institutions capital adequacy.



| |                       
| | ----------------------
| | Gramm-Leach-Bliley Act

Traditionally, the activities of bank holding
companies have been limited to the business of banking and
activities closely related or incidental to banking. Beginning
in 1999, however, the Gramm-Leach-Bliley Act permits bank
holding companies to engage in a broader range of financial
activities. Specifically, bank holding companies may elect to
become financial holding companies, which may
affiliate with securities firms and insurance companies and
engage in other activities that are financial in nature or
incidental to a financial activity. A bank holding company may
become a financial holding company under the statute only if
each of its subsidiary banks is well capitalized, is well
managed, and has at least a satisfactory rating under the
Community Reinvestment Act. A bank holding company that falls
out of compliance with such requirement may be required to cease
engaging in certain activities. Any bank holding company that
does not elect to become a financial holding company remains
subject to the current restrictions of the Bank Holding Company
Act. The Company has elected not to become a financial holding
company.

Under the statute, the Federal Reserve Board
serves as the primary umbrella regulator of
financial holding companies with supervisory authority over each
parent company and limited authority over its subsidiaries. The
primary regulator of each subsidiary of a financial holding
company depends on the type of activity conducted by the
subsidiary. For example, broker-dealer subsidiaries are
regulated largely by securities regulators and insurance
subsidiaries are regulated largely by insurance authorities.

Under the Gramm-Leach-Bliley Act, among the
activities that are deemed financial in nature for
financial holding companies are, in addition to
traditional lending activities, securities underwriting, dealing
in or making a market in securities, sponsoring mutual funds and
investment companies, insurance underwriting and agency
activities, activities which the Federal Reserve Board
determines to be closely related to banking, and certain
merchant banking activities.

In January 2001, the Federal Reserve Board and
the Secretary of the Treasury promulgated final regulations
governing the scope of permissible merchant banking investments,
which are those made under Section 4(k)(4)(H) of the Bank
Holding Company Act, as amended by the Gramm-Leach-Bliley Act,
which authorizes a financial holding company, directly or
indirectly as principal or on behalf of one or more

10



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##### 



persons, to acquire or control any amount of
shares, assets or ownership interests of a company or other
entity that is engaged in any activity not otherwise authorized
for the financial holding company under Section 4 of the
Bank Holding Company Act. Under the regulations, the types of
ownership that may be acquired include shares, assets or
ownership interests of a company or other entity including debt
or equity securities, warrants, options, partnership interests,
trust certificates or other instruments representing an
ownership interest in a company or entity, whether voting or
nonvoting. The merchant banking investments may be made by the
financial holding company or any of its subsidiaries, other than
a depository institution or subsidiary of a depository
institution. Before acquiring or controlling a merchant banking
investment, a financial holding company must either be or have a
securities affiliate registered under the Securities Exchange
Act of 1934 or a qualified insurance affiliate. The regulation
places restrictions on the ability of a financial holding
company to become involved in the routine management or
operation of any of its portfolio companies. The regulation also
provides that a financial holding company may own or control
shares, assets, and ownership interests pursuant to the merchant
banking provisions only for such period of time as to enable the
sale or disposition on a reasonable basis consistent with the
financial viability of the financial holding companys
merchant banking investment activities. Generally, the ownership
period is limited to ten years. Special provisions are included
in the regulation governing the investment by a financial
holding company in private equity funds. Under the merchant
banking regulation, a financial holding company may not, without
Federal Reserve Board approval, have aggregate merchant banking
investments exceeding 30 percent of the Tier 1 capital
of the financial holding company; or after excluding interests
in private equity funds, 20 percent of the Tier 1
capital of the financial holding company.


The Federal Reserve Board and Secretary of
Treasury have also requested public comment on the issue of
whether to add the activities of real estate brokerage and real
estate management to the list of permissible activities for
financial holding companies and financial subsidiaries of
national banks. The Company cannot predict whether the proposal
will be adopted or the form any final rule might take.

The Federal Reserve Board, the OCC, and the FDIC
adopted a rule, effective April 1, 2002, which establishes
special minimum regulatory capital requirements for equity
investments in non-financial companies. The capital requirements
apply symmetrically to equity investments of banks and bank
holding companies and impose a series of marginal capital
charges on covered equity investments that increase with the
level of a banking organizations overall exposure to
equity investments relative to the organizations
Tier 1 capital.



| |                                                       
| | ------------------------------------------------------
| | Enforcement Powers of the Federal Banking
    Agencies

The Federal Reserve Board and the OCC 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 the Company or the Bank, as well as
officers, directors, and other institution-affiliated parties of
these organizations, to administrative sanctions and potentially
substantial civil money penalties. In addition to the grounds
discussed above under  The Bank 
Prompt Corrective Action, 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.

Imposition of Liability for Undercapitalized
Subsidiaries.FDICIA requires bank
regulators 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.
Under FDICIA, the aggregate liability of all companies
controlling 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
guarantee and limit on liability expire

11



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after the regulators notify the institution that
it has remained adequately capitalized for each of four
consecutive calendar quarters. FDICIA grants greater powers to
the bank regulators 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. At December 31, 2003, the Bank met the
requirements of a well capitalized institution and,
therefore, these requirements presently do not apply to the
Company.


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 direct or indirect ownership or control
of more than 5% of any class of voting shares of any bank.

The Federal Reserve Board will allow the
acquisition by a bank holding company of an interest in any bank
located in another state only if the laws of the state in which
the target bank is located expressly authorize such acquisition.
Texas law permits, in certain circumstances, out-of-state bank
holding companies to acquire banks and bank holding companies in
Texas.



| |                                   
| | ----------------------------------
| | Expanded Enforcement
    Authority

One of the major effects of FDICIA was the
increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition,
the Federal Reserve Board and FDIC have 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 that 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.



| |                        
| | -----------------------
| | USA Patriot Act of 2001

On October 6, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA Patriot) Act of 2001
was enacted. The statute increased the power of the United
States Government to obtain access to information and to
investigate a full array of criminal activities. In the area of
money laundering activities, the statute added terrorism,
terrorism support, and foreign corruption to the definition of
money laundering offenses and increased the civil and criminal
penalties for money laundering; applied certain anti-money
laundering measures to United States bank accounts used by
foreign persons; prohibited financial institutions from
establishing, maintaining, administering or managing a
correspondent account with a foreign shell bank; provided for
certain forfeitures of funds deposited in United States
interbank accounts by foreign banks; provided the Secretary of
the Treasury with regulatory authority to ensure that certain
types of bank accounts are not used to hide the identity of
customers transferring funds and to impose additional reporting
requirements with respect to money laundering activities; and
included other measures. On October 28, 2002, the
Department of Treasury issued a final rule concerning compliance
by covered United States financial institutions with the new
statutory anti-money laundering requirement regarding
correspondent accounts established or maintained for foreign
banking institutions, including the requirement that financial
institutions take reasonable steps to ensure that correspondent
accounts provided to foreign banks are not being used to
indirectly provide banking services to foreign shell banks. The
Company believes that compliance with the new requirements will
not have a material adverse impact on its operations or
financial condition.



| |                           
| | --------------------------
| | 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. Commencing with its 2004 Annual
Report on Form 10-K, the Company will be required to
include a report of management on the Companys internal
control over financial reporting. 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 the Companys internal
control over financial reporting; and that the Companys

12



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independent accounting firm has issued an
attestation report on managements assessment of the
Companys internal control over financial reporting, which
report is also required to be filed as part of the Annual Report.




| |                                   
| | ----------------------------------
| | Effect of 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 United States 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 the Company and its
subsidiaries cannot be predicted.

13



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##### 



Item 2.     Properties

Facilities

The Company currently maintains 44 locations
in the greater Houston area and a loan production office in the
greater Dallas area. Sixteen of the locations are leased. The
following table sets forth specific information on each
location. Each Houston area location offers full service
banking. The Companys headquarters are located at
4400 Post Oak Parkway in a 28-story office tower in the
Galleria area in Houston, Texas.

|                                     |  |             |         |          |  |                                  |  |        |           | 
|------------------------------------ |  | ----------- | ------- | -------- |  | -------------------------------- |  | ------ | --------- | 
|                                     |  |             |         |          |  | Deposits at                     
|Location                             |  | Square Feet |         | Location |  | December 31, 2003               
|                                     |  |             |         |          |  |                                 
|                                     |  |             |         |          |  | (Dollars in                     
|                                     |  |             |         |          |  | thousands)                      
|Galleria/ Corporate(1)               |  |             | 174,378 |          |  | 4400 Post Oak Parkway            |  | $      | 1,922,424 | 
|Operations Center                    |  |             | 136,000 |          |  | 1801 Main                        |  |        | 212       | 
|Northwest Crossing(1)                |  |             | 9,488   |          |  | 13430 Northwest Freeway          |  |        | 360,433   | 
|Downtown-1100 Louisiana(1)           |  |             | 3,636   |          |  | 1100 Louisiana                   |  |        | 120,681   | 
|12 Greenway Plaza(1)                 |  |             | 4,114   |          |  | 12 Greenway Plaza                |  |        | 94,333    | 
|Medical Center  Fannin(1)           |  |             | 2,437   |          |  | 6602 Fannin                      |  |        | 43,715    | 
|Memorial City(1)                     |  |             | 3,554   |          |  | 899 Frostwood                    |  |        | 39,273    | 
|Downtown  One Houston
    Center(1) |  |             | 8,466   |          |  | 1221 McKinney                    |  |        | 72,522    | 
|Sugar Land                           |  |             | 4,000   |          |  | 14965 Southwest Freeway          |  |        | 34,674    | 
|Greenspoint                          |  |             | 3,797   |          |  | 323 N. Sam Houston Parkway, East |  | 71,067 |          
|3 Greenway Plaza(1)                  |  |             | 2,549   |          |  | 3 Greenway Plaza, Suite C118     |  |        | 6,269     | 
|Hempstead                            |  |             | 17,000  |          |  | 12130 Hempstead Highway          |  |        | 117,036   | 
|Tanglewood                           |  |             | 5,625   |          |  | 1075 Augusta                     |  |        | 109,729   | 
|Pasadena                             |  |             | 4,900   |          |  | 4500 Fairmont Parkway            |  |        | 59,433    | 
|Eldridge Parkway                     |  |             | 4,000   |          |  | 1502 Eldridge Parkway            |  |        | 19,930    | 
|Spring                               |  |             | 6,300   |          |  | 2000 Spring Cypress Road         |  |        | 55,167    | 
|Bell Tower(1)                        |  |             | 4,500   |          |  | 1330 Wirt Road                   |  |        | 70,352    | 
|Kingwood                             |  |             | 5,500   |          |  | 570 Kingwood Drive               |  |        | 63,836    | 
|Porter(1)                            |  |             | 2,450   |          |  | 23741 Highway 59, Suite 2        |  |        | 17,374    | 
|North Port                           |  |             | 5,000   |          |  | 9191 North Loop East             |  |        | 14,717    | 
|Rosenberg                            |  |             | 45,000  |          |  | 3400 Avenue H                    |  |        | 140,494   | 
|East Bernard                         |  |             | 1,500   |          |  | 9212 Highway 60                  |  |        | 20,080    | 
|Needville                            |  |             | 2,500   |          |  | 3328 School Street               |  |        | 42,937    | 
|Bissonnet                            |  |             | 2,320   |          |  | 10881 Bissonnet                  |  |        | 17,312    | 
|Katy(1)                              |  |             | 2,800   |          |  | 919 Avenue C                     |  |        | 18,567    | 
|Missouri City                        |  |             | 4,000   |          |  | 5820 Highway 6                   |  |        | 32,456    | 
|The Woodlands(2)                     |  |             | 35,137  |          |  | 4576 Research Forest Drive       |  |        | 261,451   | 
|Sterling Ridge                       |  |             | 4,000   |          |  | 10223 Kuykendahl                 |  |        | 22,028    | 
|Baytown                              |  |             | 23,876  |          |  | 1300 Rollingbrook                |  |        | 211,532   | 
|Garth Road(1)                        |  |             | 2,000   |          |  | 6900 Garth Road                  |  |        | 4,004     | 
|Lacy Drive                           |  |             | 9,200   |          |  | 1308 Lacy Drive                  |  |        | 44,824    | 
|Fairmont Parkway                     |  |             | 3,200   |          |  | 1401 Fairmont Parkway            |  |        | 34,579    | 
|Red Bluff                            |  |             | 6,400   |          |  | 3901 Red Bluff                   |  |        | 17,154    | 
|South Shaver                         |  |             | 2,750   |          |  | 2222 South Shaver                |  |        | 9,770     | 
|Las Colinas(1)                       |  |             | 3,834   |          |  | 909 E. Las Colinas Blvd., Irving |  |        |          | 
|Medical Center  Bertner(1)          |  |             | 771     |          |  | 6550 Bertner Street, Suite 600   |  |        | 623       | 
|Pennzoil Place(1)                    |  |             | 4,801   |          |  | 711 Louisiana                    |  |        | 4,916     | 
|Dickinson Termini                    |  |             | 37,975  |          |  | 2401 Termini Street              |  |        | 70,418    | 
|Dickinson FM 517 West                |  |             | 1,881   |          |  | 215 FM 517 West                  |  |        | 7,050     | 
|League City Historic District        |  |             | 27,730  |          |  | 303 East Main                    |  |        | 65,383    | 
|League City West Main                |  |             | 1,881   |          |  | 2204 West Main                   |  |        | 13,370    | 
|South Shore                          |  |             | 2,275   |          |  | 2460 Marina Bay Drive            |  |        | 16,511    | 
|Santa Fe                             |  |             | 5,065   |          |  | 13030 Highway 6                  |  |        | 22,417    | 
|Bacliff                              |  |             | 3,906   |          |  | 4021 Highway 146                 |  |        | 15,374    | 
|Texas City(1)                        |  |             | 3,422   |          |  | 2501 Palmer, Suite 100           |  |        | 16,812    | 
|                                     |  |             |         |          |  |                                  |  |        |           | 
|                                     |  |             |         |          |  |                                  |  | $      | 4,403,239 | 
|                                     |  |             |         |          |  |                                  |  |        |           | 



---



|    |                         
|--- | ------------------------
|(1) | Leased location.        
|   
|(2) | Mitchells headquarters.

14



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##### 



Item 3.     Legal
Proceedings

The Company is involved in various legal
proceedings that arise in the normal course of business. In the
opinion of management of the Company, after consultation with
its legal counsel, such legal proceedings are not expected to
have a material adverse effect on the Companys
consolidated financial position, results of operations, or cash
flows.

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

No matter was submitted during the fourth quarter
of the fiscal year covered by this Annual Report to a vote of
the Companys security holders.

PART II

Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

The Companys Common Stock began trading on
the NASDAQ Stock Market on January 28, 1997, and is quoted
in such Market under the symbol SWBT. The
Companys Common Stock was not publicly traded, nor was
there an established market therefor, prior to January 28,
1997. On February 20, 2004 there were approximately
879 holders of record of the Companys Common Stock.

The Companys principal source of funds to
pay cash dividends on its Common Stock is cash dividends from
the Bank. There are statutory limitations on the payment of
dividends by national banks. Without approval of the OCC,
dividends in any calendar year may not exceed the Banks
total net profits for that year, plus its retained profits for
the preceding two years, less any required transfers to capital
surplus or to a fund for the retirement of any preferred stock.
In addition, a dividend may not be paid in excess of a
banks cumulative net profits after deducting bad debts in
excess of the allowance for loan losses. As of December 31,
2003, approximately $172.7 million was available for
payment of dividends by the Bank to the Company under these
restrictions without regulatory approval. See
Item 1. Business  Supervision and
Regulation.

The following table presents the range of high
and low sale prices reported on the NASDAQ during the years
ended December 31, 2003 and 2002.

|                           |      |         |      |         |  |         |      |         |  |         |   |         |  |         |   |         |  |   |   |       |  |   |   |       |  |   |   |       |  |   |   |       | 
|-------------------------- | ---- | ------- | ---- | ------- |  | ------- | ---- | ------- |  | ------- | - | ------- |  | ------- | - | ------- |  | - | - | ----- |  | - | - | ----- |  | - | - | ----- |  | - | - | ----- | 
|                           |      |         |      |        
|                           |      | 2003    |      | 2002   
|                           |      |         |      |        
|                           |      | Fourth  |      | Third   |  | Second  |      | First   |  | Fourth  |   | Third   |  | Second  |   | First  
|                           |      | Quarter |      | Quarter |  | Quarter |      | Quarter |  | Quarter |   | Quarter |  | Quarter |   | Quarter
|                           |      |         |      |         |  |         |      |         |  |         |   |         |  |         |   |        
|Common stock sale price:   |      |         |      |         |  |         |      |         |  |         |   |         |  |         |   |         |  |   |   |       |  |   |   |       |  |   |   |       |  |   |   |      
|                           | High |         | $    | 39.29   |  |         | $    | 38.45   |  |         | $ | 35.95   |  |         | $ | 33.05   |  |   | $ | 37.34 |  |   | $ | 39.20 |  |   | $ | 36.73 |  |   | $ | 34.60 | 
|                           | Low  |         | $    | 35.20   |  |         | $    | 32.05   |  |         | $ | 29.65   |  |         | $ | 27.59   |  |   | $ | 24.49 |  |   | $ | 30.45 |  |   | $ | 30.68 |  |   | $ | 26.75 | 
|Dividends per common share |      | $       | 0.05 |         |  | $       | 0.05 |         |  | $       |  |         |  | $       |  |         |  | $ |  |       |  | $ |  |       |  | $ |  |       |  | $ |  |      

On February 4, 2004, the Companys
Board of Directors approved a cash dividend of $0.06 per common
share to be paid on March 15, 2004 to shareholders of
record on March 1, 2004.

Recent Sales of Unregistered
Securities

None.

15



---



##### 



Equity Compensation Plan Information

The following table sets forth information as of
December 31, 2003, with respect to the Companys
compensation plans under which equity securities are authorized
for issuance:

|                                                                  |       |                      |           |                      |  |                           |       |       |  |  |         |         | 
|----------------------------------------------------------------- | ----- | -------------------- | --------- | -------------------- |  | ------------------------- | ----- | ----- |  |  | ------- | ------- | 
|                                                                  |       |                      |           | (b)                  |  | (c)                      
|                                                                  |       | (a)                  |           |                      |  | Number of Securities     
|                                                                  |       | Number of Securities |           |                      |  | Remaining Available for  
|                                                                  |       | to be Issued         |           | Weighted-Average     |  | Future Issuance Under    
|                                                                  |       | upon Exercise of     |           | Exercise Price of    |  | Equity Compensation Plans
|                                                                  |       | Outstanding Options, |           | Outstanding Options, |  | (Excluding Securities    
|Plan Category                                                     |       | Warrants and Rights  |           | Warrants and Rights  |  | Reflected in Column(a))  
|                                                                  |       |                      |           |                      |  |                          
|Equity compensation plans approved by security
    holders        |       |                      | 2,940,958 |                      |  | $                         | 21.59 |       |  |  | 800,498 |        
|Equity compensation plans not approved by
    security holders(1) |       |                      | 25,000    |                      |  |                           |      |       |  |  |        |        
|                                                                  |       |                      |           |                      |  |                           |       |       |  |  |         |        
|                                                                  | Total |                      |           | 2,965,958            |  |                           | $     | 21.40 |  |  |         | 800,498 | 
|                                                                  |       |                      |           |                      |  |                           |       |       |  |  |         |        



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Southwest Bancorporation of Texas, Inc.
    Non-Employee Directors Deferred Fee Plan (the
    Directors Plan) allows non-employee directors to
    elect to defer all or one-half of their directors fees
    earned each year. The Company establishes an account for each
    non-employee director who elects to defer all or part of his or
    her directors fees, and such account is credited in
    phantom stock units as of the last business day of the fiscal
    quarter in which such portion of the directors fees would
    otherwise have been payable. The number of phantom stock units
    credited to a directors account is determined by dividing
    the amount of the directors fees deferred during the
    quarter by the fair market value of a share of the
    Companys stock as of the date of crediting, multiplying
    such result by 1.25, and rounding up to the nearest whole
    phantom stock unit. Payment from the directors account
    commences as soon as reasonably practicable after the earlier of
    the directors termination as a member of the
    Companys or the Banks Board of Directors or the date
    specified by the director when he or she elects to make the
    deferral. The payment from each account is in the Companys
    common stock, either in a lump sum or in up to five annual
    installments. Shareholder approval was not required under SEC
    rules and NASDAQ listing standards in effect at the time the
    Directors Plan was adopted. In November 2003, the
    Directors Plan was amended to authorize the crediting of
    an additional 100,000 phantom stock units, which may result
    in the issuance of an additional 100,000 shares of common
    stock. New rules promulgated in June 2003 require shareholder
    approval of equity compensation plans, including the
    Directors Plan. The amendments to the Directors Plan
    are expressly subject to shareholder approval at the 2004 annual
    meeting of the Companys shareholders.

Stock Repurchase Plan

During the third quarter of 2001, the Company
initiated a program to repurchase, from time to time, up to
1.0 million shares of its common stock. As of
December 31, 2003, no shares of the Companys common
stock had been repurchased under this plan.

16



---



##### 



Item 6.     Selected
Consolidated Financial Data

The following selected consolidated financial
data should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto,
appearing elsewhere in this Annual Report, and the information
contained in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
The selected historical consolidated financial data as of the
end of and for each of the five years in the period ended
December 31, 2003 are derived from the Companys
Consolidated Financial Statements which have been audited by
independent accountants.

|                         |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |           |         | 
|------------------------ | ------------------------------------------------------------------ | ------------------------------------------------------- | - | --------- | ------- | ---- | - | --------- | ------- | ---- | - | --------- | ------- |  | - | --------- | ------- |  | - | --------- | ------- | 
|                         |                                                                    |                                                        
|                         |                                                                    | Year Ended December 31,                                
|                         |                                                                    |                                                        
|                         |                                                                    | 2003                                                    |   | 2002      |         | 2001 |   | 2000      |         | 1999
|                         |                                                                    |                                                         |   |           |         |      |   |           |         |     
|                         |                                                                    |                                                        
|                         |                                                                    | (Dollars in thousands, except per share data)          
|Income Statement Data:   |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         | Interest income                                                    |                                                         | $ | 239,103   |         |      | $ | 238,415   |         |      | $ | 261,147   |         |  | $ | 272,166   |         |  | $ | 211,232   |        
|                         | Interest expense                                                   |                                                         |   | 45,725    |         |      |   | 59,779    |         |      |   | 101,158   |         |  |   | 121,662   |         |  |   | 88,219    |        
|                         |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         |                                                                    | Net interest income                                     |   |           | 193,378 |      |   |           | 178,636 |      |   |           | 159,989 |  |   |           | 150,504 |  |   |           | 123,013 | 
|                         | Provision for loan losses                                          |                                                         |   | 12,000    |         |      |   | 11,750    |         |      |   | 7,500     |         |  |   | 7,053     |         |  |   | 6,474     |        
|                         |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         |                                                                    | Net interest income after provision for loan
    losses |   |           | 181,378 |      |   |           | 166,886 |      |   |           | 152,489 |  |   |           | 143,451 |  |   |           | 116,539 | 
|                         | Noninterest income                                                 |                                                         |   | 86,920    |         |      |   | 70,391    |         |      |   | 58,158    |         |  |   | 42,893    |         |  |   | 37,464    |        
|                         | Noninterest expenses                                               |                                                         |   | 180,162   |         |      |   | 151,078   |         |      |   | 133,185   |         |  |   | 120,276   |         |  |   | 104,540   |        
|                         |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         |                                                                    | Income before income taxes                              |   |           | 88,136  |      |   |           | 86,199  |      |   |           | 77,462  |  |   |           | 66,068  |  |   |           | 49,463  | 
|                         | Provision for income taxes                                         |                                                         |   | 27,407    |         |      |   | 26,993    |         |      |   | 24,745    |         |  |   | 22,607    |         |  |   | 17,500    |        
|                         |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         | Net income                                                         |                                                         | $ | 60,729    |         |      | $ | 59,206    |         |      | $ | 52,717    |         |  | $ | 43,461    |         |  | $ | 31,963    |        
|                         |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|Per Share Data:          |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         | Basic earnings per common share(1)                                 |                                                         | $ | 1.78      |         |      | $ | 1.77      |         |      | $ | 1.60      |         |  | $ | 1.34      |         |  | $ | 1.01      |        
|                         | Diluted earnings per common share(1)                               |                                                         | $ | 1.74      |         |      | $ | 1.72      |         |      | $ | 1.55      |         |  | $ | 1.29      |         |  | $ | 0.97      |        
|                         | Cash dividends per common share                                    |                                                         | $ | 0.10      |         |      | $ |          |         |      | $ |          |         |  | $ |          |         |  | $ |          |        
|                         | Cash dividends per common share paid by Citizens
    and Fort Bend |                                                         | $ |          |         |      | $ |          |         |      | $ |          |         |  | $ | 0.07      |         |  | $ | 0.10      |        
|                         | Book value per share                                               |                                                         | $ | 14.59     |         |      | $ | 13.16     |         |      | $ | 10.99     |         |  | $ | 9.12      |         |  | $ | 7.28      |        
|                         | Average common shares outstanding (in thousands)                   |                                                         |   | 34,044    |         |      |   | 33,476    |         |      |   | 32,855    |         |  |   | 32,397    |         |  |   | 31,743    |        
|                         | Average common share equivalents (in thousands)                    |                                                         |   | 814       |         |      |   | 970       |         |      |   | 1,221     |         |  |   | 1,232     |         |  |   | 1,200     |        
|Performance Ratios:      |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         | Return on average assets                                           |                                                         |   | 1.14      | %       |      |   | 1.30      | %       |      |   | 1.32      | %       |  |   | 1.23      | %       |  |   | 1.06      | %      
|                         | Return on average common equity                                    |                                                         |   | 12.86     | %       |      |   | 14.55     | %       |      |   | 15.82     | %       |  |   | 17.00     | %       |  |   | 14.70     | %      
|                         | Net interest margin                                                |                                                         |   | 4.02      | %       |      |   | 4.35      | %       |      |   | 4.44      | %       |  |   | 4.64      | %       |  |   | 4.44      | %      
|                         | Efficiency ratio(3)                                                |                                                         |   | 64.07     | %       |      |   | 61.09     | %       |      |   | 61.06     | %       |  |   | 62.04     | %       |  |   | 65.09     | %      
|Balance Sheet Data(2):   |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         | Total assets                                                       |                                                         | $ | 5,945,736 |         |      | $ | 5,171,957 |         |      | $ | 4,401,156 |         |  | $ | 3,940,342 |         |  | $ | 3,271,188 |        
|                         | Securities                                                         |                                                         |   | 1,549,398 |         |      |   | 1,201,200 |         |      |   | 1,068,315 |         |  |   | 848,164   |         |  |   | 890,369   |        
|                         | Loans                                                              |                                                         |   | 3,588,572 |         |      |   | 3,219,340 |         |      |   | 2,759,482 |         |  |   | 2,511,437 |         |  |   | 2,035,342 |        
|                         | Allowance for loan losses                                          |                                                         |   | 43,008    |         |      |   | 36,696    |         |      |   | 31,390    |         |  |   | 28,150    |         |  |   | 22,436    |        
|                         | Total deposits                                                     |                                                         |   | 4,403,239 |         |      |   | 3,912,049 |         |      |   | 3,428,633 |         |  |   | 3,093,870 |         |  |   | 2,531,633 |        
|                         | Long-term borrowings                                               |                                                         |   | 206,658   |         |      |   | 107,049   |         |      |   | 7,410     |         |  |   | 7,743     |         |  |   | 7,192     |        
|                         | Junior subordinated deferrable interest debentures                 |                                                         |   | 51,547    |         |      |   |          |         |      |   |          |         |  |   |          |         |  |   |          |        
|                         | Total shareholders equity                                         |                                                         |   | 499,321   |         |      |   | 445,523   |         |      |   | 361,734   |         |  |   | 298,125   |         |  |   | 233,076   |        
|Capital Ratio:           |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         | Average equity to average assets                                   |                                                         |   | 8.82      | %       |      |   | 8.95      | %       |      |   | 8.34      | %       |  |   | 7.23      | %       |  |   | 7.23      | %      
|Asset Quality Ratios(2): |                                                                    |                                                         |   |           |         |      |   |           |         |      |   |           |         |  |   |           |         |  |   |          
|                         | Nonperforming assets(4)to loans
    and other real estate          |                                                         |   | 0.49      | %       |      |   | 0.50      | %       |      |   | 0.53      | %       |  |   | 0.41      | %       |  |   | 0.31      | %      
|                         | Net charge-offs to average loans                                   |                                                         |   | 0.22      | %       |      |   | 0.22      | %       |      |   | 0.17      | %       |  |   | 0.06      | %       |  |   | 0.09      | %      
|                         | Allowance for loan losses to total loans                           |                                                         |   | 1.23      | %       |      |   | 1.18      | %       |      |   | 1.17      | %       |  |   | 1.16      | %       |  |   | 1.15      | %      
|                         | Allowance for loan losses to nonperforming
    loans(5)            |                                                         |   | 337.53    | %       |      |   | 244.82    | %       |      |   | 237.82    | %       |  |   | 297.82    | %       |  |   | 519.59    | %      



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Basic earnings per common share is computed by
    dividing net income available to common shareholders by the
    weighted average number of common shares outstanding for the
    period. Diluted earnings per common share is computed by
    dividing net income available to common shareholders, adjusted
    for any changes in income that would result from the assumed
    conversion of all potential dilutive common shares, by the sum
    of the weighted average number of common shares outstanding and
    the effect of all dilutive potential common shares outstanding
    for the period.
|   
|(2) | At period end, except net charge-offs to average
    loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

17



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##### 





|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Calculated by dividing total noninterest
    expenses, excluding amortization of intangibles, by net interest
    income plus noninterest income, excluding net security gains
    (losses).
|   
|(4) | Nonperforming assets consist of nonperforming
    loans and other real estate owned.                                                                                                        
|   
|(5) | Nonperforming loans consist of nonaccrual loans,
    troubled debt restructurings and loans contractually past due
    90 days or more.                                                     

18



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##### 





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 discussed in this document
and in documents incorporated by reference herein, including
matters discussed under the caption Managements
Discussion and Analysis of Financial Condition and Results of
Operations, may constitute forward-looking statements for
purposes of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and as such may
involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements
of the Company to be materially different from future results,
performance or achievements expressed or implied by such
forward-looking statements. The words expect,
anticipate, intend, plan,
believe, seek, estimate, and
similar expressions are intended to identify such
forward-looking statements.

The Companys actual results may differ
materially from the results anticipated in these forward-looking
statements due to a variety of factors, including, without
limitation (a) the effects of future economic conditions on
the Company and its customers; (b) the costs and effects of
litigation and of unexpected or adverse outcomes in such
litigation; (c) governmental monetary and fiscal policies,
as well as legislative and regulatory changes; (d) the
effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies, as well as the Financial
Accounting Standards Board and other accounting standard
setters; (e) the risks of changes in interest rates on the
level and composition of deposits, loan demand, and the values
of loan collateral, securities and interest rate protection
agreements, as well as interest rate risks; (f) the effects
of competition from other commercial banks, thrifts, mortgage
banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market
and other mutual funds and other financial institutions
operating in the Companys market area and elsewhere,
including institutions operating locally, regionally, nationally
and internationally, together with such competitors offering
banking products and services by mail, telephone, computer and
the Internet; (g) technological changes;
(h) acquisitions and integration of acquired businesses;
(i) the failure of assumptions underlying the establishment
of reserves for loan losses and estimations of values of
collateral and various financial assets and liabilities; and
(j) acts of war or terrorism. All written or oral
forward-looking statements attributable to the Company are
expressly qualified in their entirety by these cautionary
statements.

Managements Discussion and Analysis of
Financial Condition and Results of Operations analyzes the major
elements of the Companys consolidated financial statements
and should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto and other
detailed information appearing elsewhere in this Annual Report.

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

Overview

This overview of managements discussion and
analysis highlights selected information in this document and
may not contain all of the information that is important to you.
For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources, and
critical accounting estimates, you should carefully read this
entire document. These have an impact on the Companys
financial condition and results of operations.

Net income was $60.7 million,
$59.2 million, and $52.7 million and diluted earnings
per common share was $1.74, $1.72, and $1.55 for the years ended
December 31, 2003, 2002, and 2001, respectively. This
increase in net income was primarily the result of strong loan
growth, maintaining strong asset quality, and expense control.
Returns on average assets were 1.14%, 1.30%, and 1.32% and
returns on average common shareholders equity were 12.86%,
14.55%, and 15.82% for the years ended 2003, 2002, and 2001,
respectively. Return on average assets and return on average
common shareholders equity in 2003 were negatively
impacted by the decline in the net interest margin discussed
below. Return on average assets is calculated by dividing net
income by the daily average of total assets. Return on average
common shareholders equity is calculated by dividing net
income by the daily average of common shareholders equity.

19



---



##### 



Total assets at December 31, 2003, 2002, and
2001 were $5.95 billion, $5.17 billion, and
$4.40 billion, respectively. This growth was a result of a
favorable local economy, the addition of new loan officers,
aggressive marketing, and the Companys overall growth
strategy. Loans were $3.59 billion at December 31,
2003, an increase of $369.2 million, or 11%, from
$3.22 billion at December 31, 2002. Loans were
$2.76 billion at December 31, 2001. Deposits increased
to $4.40 billion at December 31, 2003 from
$3.91 billion at December 31, 2002 and
$3.43 billion at December 31, 2001. As of
December 31, 2003, approximately $94.2 million of
loans and $227.3 million of deposits relate to the former
Maxim branches.

Two principal components of the Companys
growth strategy are expansion through de novo branching and
strategic merger transactions. During 2003, three new branches
were opened in the Houston metropolitan area. The merger with
Maxim was completed in July 2003, adding eight branches in
Galveston County. The merger with Reunion, announced in October
2003, closed on January 31, 2004. This transaction adds
five branch locations in Dallas and initiated the Companys
entry into the important Dallas/ Metroplex market. The Company
anticipates opening an operations center in Dallas during the
second quarter of 2004 to enable it to offer its treasury
management products to commercial businesses in that market.

Net interest margin, defined as net interest
income divided by average interest-earning assets, for 2003 was
4.02% down from 4.35% in 2002 and 4.44% in 2001. The decline in
the net interest margin is attributable to declines in the level
of interest rates as managed by the Federal Reserve Board and to
lower yields on the securities portfolio resulting from
increased amortization of purchased premiums as a result of the
high level of refinancings of home mortgages experienced during
2003. Declines in yields on interest-earning assets were
partially offset by reductions in the cost of interest-bearing
liabilities. Demand deposits represent an important component of
funding sources and averaged 31% of total deposits in 2003 as
compared to 30% in 2002.

Noninterest income increased $16.5 million,
or 23%, to $86.9 million in 2003 compared to
$70.4 million in 2002 and $58.2 million in 2001.
Noninterest income has become an important component of the
Companys net income and comprises 31% of total revenue,
defined as net interest income plus noninterest income, in 2003.
The primary drivers of the increase were continued growth in
service charge income arising from the sale of treasury
management products to commercial customers and the increase in
net non-sufficient funds charges on retail deposit accounts.

Noninterest expenses increased
$29.1 million, or 19%, to $180.2 million in 2003
compared to $151.1 million in 2002 and $133.2 million
in 2001. The Company continues to invest in its technology
infrastructure to accommodate both the growth in its various
business activities, including the sale of treasury management
products and services, as well as to continually upgrade its
capabilities to meet customer and data security requirements. In
addition, growth in personnel and branch facilities and the
amortization of core deposit intangibles resulting from the
merger with Maxim affected the overall level of expenses during
2003.

Credit quality is an area of importance to the
Company and 2003 reflected a continuation of favorable results.
Net charge-offs were 0.22% of average loans, unchanged from the
prior year. Nonperforming assets to total loans and other real
estate was 0.49% at December 31, 2003, a reduction from
0.50% at December 31, 2002. Although loans grew by 11% at
December 31, 2003 compared to the same period last year,
there was no material change in the composition of the loan
portfolio.

The Companys capital position remains
strong. Its Tier 1 capital ratio of 10.99% and Total
Capital ratio of 11.90% were augmented by the issuance of
$50.0 million in trust preferred securities issued by SWBT
Statutory Trust I (which is not consolidated for reporting
purposes) in October 2003. The proceeds of this issuance were
used in January 2004 to fund the merger with Reunion. See
 Financial Condition 
Liquidity.

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

20



---



##### 



borrowed funds. Net interest income, the
principal source of the Companys earnings, has declined as
a percent of total revenues due to growth in the Companys
fee income and due to a decline in the net interest margin. In
2003, net interest income provided 69% of the Companys
total revenues, compared with 72% in 2002 and 73% in 2001.
Interest rate fluctuations, as well as changes in the amount and
type of interest-earning assets and interest-bearing
liabilities, combine to affect net interest income.


2003 versus 2002.Net interest income was $193.4 million in 2003 compared to
$178.6 million in 2002, an increase of $14.7 million,
or 8%. Growth in average interest-earning assets, primarily
loans, was $701.3 million, or 17%, while yields decreased
84 basis points to 4.97%. The impact of the growth in average
interest-earning assets was partially offset by a
$443.2 million, or 14%, increase in average
interest-bearing liabilities, offset by a decrease in the rate
paid on interest-bearing liabilities of 64 basis points to 1.28%
in 2003.

Net interest margin risk is typically related to
a narrowing of the yield on interest-earning assets and cost of
funds. The Company managed this risk with asset and liability
pricing to minimize the impact of declining rates, lowering the
average costs of deposits and adding interest rate floors to
some of its loan agreements. On June 25, 2003, the Federal
Reserve decreased the federal funds rate and discount rate by
25 basis points. Due to the Banks asset sensitivity,
the net interest margin decreased after this rate cut. This
resulted in net interest margins of 4.02% and 4.35% and net
interest spreads of 3.69% and 3.89% for the years ended
December 31, 2003 and 2002, respectively.

2002 versus 2001.Net interest income was $178.6 million in 2002 compared to
$160.0 million in 2001, an increase of $18.6 million,
or 12%. Growth in average interest-earning assets, primarily
loans and securities, was $505.9 million, or 14%, while
yields decreased 144 basis points to 5.81%. The impact of the
growth in average interest-earning assets was partially offset
by a $324.0 million, or 12%, increase in average
interest-bearing liabilities, offset by a decrease in the rate
paid on interest-bearing liabilities of 170 basis points to
1.92% in 2002.

21



---



##### 



The following table presents, for the periods
indicated, the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax
equivalent adjustments were made and all average balances are
daily average balances. Nonaccruing loans have been included in
the table as loans carrying a zero yield. Interest on
nonaccruing loans is included to the extent it is received. The
yield on the securities portfolio is based on average historical
cost balances and does not give effect to changes in fair value
that are reflected as a component of consolidated
shareholders equity.

|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |      |      |  
|-------------------------------- | ---------------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | ------- | ------- | ----------- | ------- | -------- | ---- | ------- | ---- | ----------- | --------- | --------- | --------- | ------- | ------- | ------- | ------- |  | ---- | ---- | ---- | - | --------- | --------- | --------- | - | ------- | ------- | ------- |  | ---- | ---- | ---- | -
|                                 |                                                |                                           
|                                 |                                                | 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)                    
|Interest-earning assets:         |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|                                 | Loans                                          |                                            | $         | 3,362,177 |           |         | $       | 188,525     |         |          |      | 5.61    | %    |             | $         | 2,916,959 |           |         | $       | 180,658 |         |  |      | 6.19 | %    |   | $         | 2,637,695 |           |   | $       | 205,123 |         |  |      | 7.78 | %   
|                                 | Securities                                     |                                            |           | 1,355,900 |           |         |         | 49,610      |         |          |      | 3.66    |      |             |           | 1,139,017 |           |         |         | 56,959  |         |  |      | 5.00 |      |   |           | 895,947   |           |   |         | 53,297  |         |  |      | 5.95 |     
|                                 | Federal funds sold and other                   |                                            |           | 89,579    |           |         |         | 968         |         |          |      | 1.08    |      |             |           | 50,409    |           |         |         | 798     |         |  |      | 1.58 |      |   |           | 66,807    |           |   |         | 2,727   |         |  |      | 4.08 |     
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|                                 |                                                | Total interest-earning assets              |           |           | 4,807,656 |         |         |             | 239,103 |          |      |         | 4.97 | %           |           |           | 4,106,385 |         |         |         | 238,415 |  |      |      | 5.81 | % |           |           | 3,600,449 |   |         |         | 261,147 |  |      |      | 7.25 | %
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|Less allowance for loan losses   |                                                |                                            | (40,546   | )         |           |         |         |             |         |          |      |         |      |             | (34,067   | )         |           |         |         |         |         |  |      |      |      |   | (30,528   | )         |           |   |         |         |         |  |      |     
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|                                 |                                                |                                            | 4,767,110 |           |           |         |         |             |         |          |      |         |      |             | 4,072,318 |           |           |         |         |         |         |  |      |      |      |   | 3,569,921 |           |           |   |         |         |         |  |      |     
|Noninterest-earning assets       |                                                |                                            | 583,177   |           |           |         |         |             |         |          |      |         |      |             | 473,976   |           |           |         |         |         |         |  |      |      |      |   | 425,822   |           |           |   |         |         |         |  |      |     
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|                                 |                                                | Total assets                               |           | $         | 5,350,287 |         |         |             |         |          |      |         |      |             |           | $         | 4,546,294 |         |         |         |         |  |      |      |      |   |           | $         | 3,995,743 |   |         |         |         |  |      |      |      |  
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|Interest-bearing liabilities:    |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|                                 | Money market and savings deposits              |                                            | $         | 1,835,565 |           |         |         | 15,244      |         |          |      | 0.83    | %    |             | $         | 1,553,178 |           |         |         | 20,463  |         |  |      | 1.32 | %    |   | $         | 1,457,693 |           |   |         | 40,884  |         |  |      | 2.80 | %   
|                                 | Time deposits                                  |                                            |           | 1,004,928 |           |         |         | 21,727      |         |          |      | 2.16    |      |             |           | 926,001   |           |         |         | 28,499  |         |  |      | 3.08 |      |   |           | 901,822   |           |   |         | 44,950  |         |  |      | 4.98 |     
|                                 | Repurchase agreements and other borrowed funds |                                            |           | 722,038   |           |         |         | 8,754       |         |          |      | 1.21    |      |             |           | 640,141   |           |         |         | 10,817  |         |  |      | 1.69 |      |   |           | 435,851   |           |   |         | 15,324  |         |  |      | 3.52 |     
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|                                 |                                                | Total interest-bearing liabilities         |           |           | 3,562,531 |         |         |             | 45,725  |          |      |         | 1.28 | %           |           |           | 3,119,320 |         |         |         | 59,779  |  |      |      | 1.92 | % |           |           | 2,795,366 |   |         |         | 101,158 |  |      |      | 3.62 | %
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|Noninterest-bearing liabilities: |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|                                 | Noninterest-bearing demand deposits            |                                            |           | 1,281,546 |           |         |         |             |         |          |      |         |      |             |           | 994,113   |           |         |         |         |         |  |      |      |      |   |           | 836,366   |           |   |         |         |         |  |      |      |     
|                                 | Other liabilities                              |                                            |           | 34,024    |           |         |         |             |         |          |      |         |      |             |           | 25,872    |           |         |         |         |         |  |      |      |      |   |           | 30,878    |           |   |         |         |         |  |      |      |     
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|                                 |                                                | Total liabilities                          |           |           | 4,878,101 |         |         |             |         |          |      |         |      |             |           |           | 4,139,305 |         |         |         |         |  |      |      |      |   |           |           | 3,662,610 |   |         |         |         |  |      |      |      |  
|Shareholders equity             |                                                |                                            | 472,186   |           |           |         |         |             |         |          |      |         |      |             | 406,989   |           |           |         |         |         |         |  |      |      |      |   | 333,133   |           |           |   |         |         |         |  |      |     
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|                                 |                                                | Total liabilities and shareholders equity |           | $         | 5,350,287 |         |         |             |         |          |      |         |      |             |           | $         | 4,546,294 |         |         |         |         |  |      |      |      |   |           | $         | 3,995,743 |   |         |         |         |  |      |      |      |  
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|Net interest income              |                                                |                                            |           |           |           | $       | 193,378 |             |         |          |      |         |      |             |           |           |           | $       | 178,636 |         |         |  |      |      |      |   |           |           |           | $ | 159,989 |         |         |  |      |     
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|Net interest spread              |                                                |                                            |           |           |           |         |         |             |         |          | 3.69 | %       |      |             |           |           |           |         |         |         |         |  | 3.89 | %    |      |   |           |           |           |   |         |         |         |  | 3.63 | %   
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     
|Net interest margin              |                                                |                                            |           |           |           |         |         |             |         |          | 4.02 | %       |      |             |           |           |           |         |         |         |         |  | 4.35 | %    |      |   |           |           |           |   |         |         |         |  | 4.44 | %   
|                                 |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |             |           |           |           |         |         |         |         |  |      |      |      |   |           |           |           |   |         |         |         |  |      |     

22



---



##### 



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 higher outstanding balances and the volatility of
interest rates. For purposes of this table, changes attributable
to both rate and volume have been allocated proportionately to
the change due to volume and the change due to rate.

|                                               |                                               |                            |        |                            |  |       |         |         |   |      |        |         |   |   |        |        |  |   |         |         |   |   |         |         |  
|---------------------------------------------- | --------------------------------------------- | -------------------------- | ------ | -------------------------- |  | ----- | ------- | ------- | - | ---- | ------ | ------- | - | - | ------ | ------ |  | - | ------- | ------- | - | - | ------- | ------- | -
|                                               |                                               |                           
|                                               |                                               | Year Ended December 31,   
|                                               |                                               |                           
|                                               |                                               |                            |        |                           
|                                               |                                               | 2003 vs 2002               |        | 2002 vs 2001              
|                                               |                                               |                            |        |                           
|                                               |                                               |                            |        |                           
|                                               |                                               | Increase (Decrease) Due to |        | Increase (Decrease) Due to
|                                               |                                               |                            |        |                           
|                                               |                                               | Volume                     |        | Rate                       |  | Total |         | Volume  |   | Rate |        | Total  
|                                               |                                               |                            |        |                            |  |       |         |         |   |      |        |        
|                                               |                                               |                           
|                                               |                                               | (Dollars in thousands)    
|Interest-earning assets:                       |                                               |                            |        |                            |  |       |         |         |   |      |        |         |   |   |        |        |  |   |         |         |   |   |         |        
|Loans                                          |                                               | $                          | 27,574 |                            |  | $     | (19,707 | )       |   | $    | 7,867  |         |   | $ | 21,717 |        |  | $ | (46,182 | )       |   | $ | (24,465 | )      
|Securities                                     |                                               |                            | 10,846 |                            |  |       | (18,195 | )       |   |      | (7,349 | )       |   |   | 14,459 |        |  |   | (10,797 | )       |   |   | 3,662   |        
|Federal funds sold and other                   |                                               |                            | 620    |                            |  |       | (450    | )       |   |      | 170    |         |   |   | (669   | )      |  |   | (1,260  | )       |   |   | (1,929  | )      
|                                               |                                               |                            |        |                            |  |       |         |         |   |      |        |         |   |   |        |        |  |   |         |         |   |   |         |        
|                                               | Total increase (decrease) in interest income  |                            |        | 39,040                     |  |       |         | (38,352 | ) |      |        | 688     |   |   |        | 35,507 |  |   |         | (58,239 | ) |   |         | (22,732 | )
|                                               |                                               |                            |        |                            |  |       |         |         |   |      |        |         |   |   |        |        |  |   |         |         |   |   |         |        
|Interest-bearing liabilities:                  |                                               |                            |        |                            |  |       |         |         |   |      |        |         |   |   |        |        |  |   |         |         |   |   |         |        
|Money market and savings deposits              |                                               |                            | 3,720  |                            |  |       | (8,939  | )       |   |      | (5,219 | )       |   |   | 2,678  |        |  |   | (23,099 | )       |   |   | (20,421 | )      
|Time deposits                                  |                                               |                            | 2,429  |                            |  |       | (9,201  | )       |   |      | (6,772 | )       |   |   | 1,205  |        |  |   | (17,656 | )       |   |   | (16,451 | )      
|Repurchase agreements and other borrowed funds |                                               |                            | 1,384  |                            |  |       | (3,447  | )       |   |      | (2,063 | )       |   |   | 7,183  |        |  |   | (11,690 | )       |   |   | (4,507  | )      
|                                               |                                               |                            |        |                            |  |       |         |         |   |      |        |         |   |   |        |        |  |   |         |         |   |   |         |        
|                                               | Total increase (decrease) in interest expense |                            |        | 7,533                      |  |       |         | (21,587 | ) |      |        | (14,054 | ) |   |        | 11,066 |  |   |         | (52,445 | ) |   |         | (41,379 | )
|                                               |                                               |                            |        |                            |  |       |         |         |   |      |        |         |   |   |        |        |  |   |         |         |   |   |         |        
|Increase (decrease) in net interest income     |                                               | $                          | 31,507 |                            |  | $     | (16,765 | )       |   | $    | 14,742 |         |   | $ | 24,441 |        |  | $ | (5,794  | )       |   | $ | 18,647  |        
|                                               |                                               |                            |        |                            |  |       |         |         |   |      |        |         |   |   |        |        |  |   |         |         |   |   |         |        

Interest income increased by $39.0 million
in 2003 as a result of increases in the average balances of
interest-earning assets. This was offset by a reduction of
$38.4 million in interest income primarily as a result of
the declines in yields earned on the loan portfolio caused by
lower market rates as managed by The Federal Reserve Board.
Additionally, lower yields were earned on the securities
portfolio as a result of amortization of purchased premiums due
to the accelerated refinancings of home mortgages in 2003. The
cost of funds decreased by $14.1 million resulting in an
overall increase in net interest income of $14.7 million
for 2003.



| |                          
| | -------------------------
| | Provision for Loan Losses

The 2003 provision for loan losses was
$12.0 million, an increase of $250,000 from 2002. The
provision for the year ended December 31, 2002 was
$11.8 million, an increase of $4.3 million from the
year ended December 31, 2001. Factors that impact the
provision for loan losses are net charge-offs, changes in the
size of the loan portfolio, and the recognition of changes in
current risk factors. Although no assurance can be given,
management believes that the present allowance for loan losses
is adequate considering loss experience, delinquency trends, and
current economic conditions. Management regularly reviews the
Companys loan loss allowance in accordance with its
standard procedures. See  Financial
Condition  Loan Review and Allowance for Loan
Losses.



| |                   
| | ------------------
| | Noninterest Income

Noninterest income grew to $86.9 million for
the year ended December 31, 2003, an increase of
$16.5 million, or 23%, from 2002. Noninterest income was
$70.4 million in 2002, an increase of $12.2 million,
or 21%, from 2001.

23



---



##### 



The following table presents the breakout of
noninterest income between the bank and the mortgage company for
2003, 2002 and 2001:

|                                                                |                          |                         |        |          |  |          |       |       |  |          |        |          |  |      |        |          |  |          |        |       |  |   |        |        |  |   |        |        |  |   |       |       |  |   |        |        | 
|--------------------------------------------------------------- | ------------------------ | ----------------------- | ------ | -------- |  | -------- | ----- | ----- |  | -------- | ------ | -------- |  | ---- | ------ | -------- |  | -------- | ------ | ----- |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ----- | ----- |  | - | ------ | ------ | 
|                                                                |                          |                        
|                                                                |                          | Year Ended December 31,
|                                                                |                          |                        
|                                                                |                          |                         |        |          |  |         
|                                                                |                          | 2003                    |        | 2002     |  | 2001    
|                                                                |                          |                         |        |          |  |         
|                                                                |                          | Bank                    |        | Mortgage |  | Combined |       | Bank  |  | Mortgage |        | Combined |  | Bank |        | Mortgage |  | Combined
|                                                                |                          |                         |        |          |  |          |       |       |  |          |        |          |  |      |        |          |  |         
|                                                                |                          |                        
|                                                                |                          | (Dollars in thousands) 
|Service charges on deposit accounts                             |                          | $                       | 40,065 |          |  | $        |      |       |  | $        | 40,065 |          |  | $    | 33,936 |          |  | $        |       |       |  | $ | 33,936 |        |  | $ | 25,676 |        |  | $ |      |       |  | $ | 25,676 |       
|Investment services                                             |                          |                         | 9,712  |          |  |          |      |       |  |          | 9,712  |          |  |      | 9,302  |          |  |          |       |       |  |   | 9,302  |        |  |   | 7,244  |        |  |   |      |       |  |   | 7,244  |       
|Factoring fee income                                            |                          |                         | 3,806  |          |  |          |      |       |  |          | 3,806  |          |  |      | 4,692  |          |  |          |       |       |  |   | 4,692  |        |  |   | 4,742  |        |  |   |      |       |  |   | 4,742  |       
|Loan fee income                                                 |                          |                         | 2,593  |          |  |          | 4,061 |       |  |          | 6,654  |          |  |      | 1,693  |          |  |          | 2,874  |       |  |   | 4,567  |        |  |   | 1,194  |        |  |   | 2,720 |       |  |   | 3,914  |       
|Bank-owned life insurance income                                |                          |                         | 6,009  |          |  |          |      |       |  |          | 6,009  |          |  |      | 4,860  |          |  |          |       |       |  |   | 4,860  |        |  |   | 4,517  |        |  |   |      |       |  |   | 4,517  |       
|Letters of credit fee income                                    |                          |                         | 2,522  |          |  |          |      |       |  |          | 2,522  |          |  |      | 1,608  |          |  |          |       |       |  |   | 1,608  |        |  |   | 1,309  |        |  |   |      |       |  |   | 1,309  |       
|Mortgage servicing fees, net of amortization and
    impairment |                          |                         |       |          |  |          | 659   |       |  |          | 659    |          |  |      |       |          |  |          | (2,907 | )     |  |   | (2,907 | )      |  |   |       |        |  |   | 748   |       |  |   | 748    |       
|Gain on sale of loans, net                                      |                          |                         |       |          |  |          | 4,150 |       |  |          | 4,150  |          |  |      | 472    |          |  |          | 3,410  |       |  |   | 3,882  |        |  |   |       |        |  |   | 3,170 |       |  |   | 3,170  |       
|Gain on sale of securities, net                                 |                          |                         | 1,224  |          |  |          |      |       |  |          | 1,224  |          |  |      | 1,737  |          |  |          |       |       |  |   | 1,737  |        |  |   | 14     |        |  |   |      |       |  |   | 14     |       
|Other income                                                    |                          |                         | 11,024 |          |  |          | 1,095 |       |  |          | 12,119 |          |  |      | 7,909  |          |  |          | 805    |       |  |   | 8,714  |        |  |   | 6,239  |        |  |   | 585   |       |  |   | 6,824  |       
|                                                                |                          |                         |        |          |  |          |       |       |  |          |        |          |  |      |        |          |  |          |        |       |  |   |        |        |  |   |        |        |  |   |       |       |  |   |        |       
|                                                                | Total noninterest income |                         | $      | 76,955   |  |          | $     | 9,965 |  |          | $      | 86,920   |  |      | $      | 66,209   |  |          | $      | 4,182 |  |   | $      | 70,391 |  |   | $      | 50,935 |  |   | $     | 7,223 |  |   | $      | 58,158 | 
|                                                                |                          |                         |        |          |  |          |       |       |  |          |        |          |  |      |        |          |  |          |        |       |  |   |        |        |  |   |        |        |  |   |       |       |  |   |        |       

Banking Segment.The
largest component of noninterest income is service charges on
deposit accounts, which were $40.1 million for the year
ended December 31, 2003, compared to $33.9 million for
2002 and $25.7 million for 2001. These were increases of
18% and 32%, respectively, for 2003 and 2002. Several factors
contributed to this growth. First, the Banks treasury
management group continues to grow with service charges from
commercial analysis and fee income up $2.1 million, or 13%,
in 2003. This success at winning new business results from the
Companys ability to design custom cost-effective cash
management solutions for middle market and large corporate
customers. Second, net non-sufficient funds charges on deposit
accounts were $19.2 million for the year ended
December 31, 2003, an increase of $3.9 million, or
25%, from $15.3 million for the same period last year.
Additionally, the total number of deposit accounts grew from
151,376 at December 31, 2001 to 159,860 at
December 31, 2002 and to 193,701 at December 31, 2003.

Income on Bank-owned life insurance was
$6.0 million for the year ended December 31, 2003,
compared to $4.9 million for 2002 and $4.5 million for
2001. These were increases of 24% and 8%, respectively, for 2003
and 2002. The increase in 2003 was attributable to the purchase
of $30.0 million of additional Bank-owned life insurance in
the third quarter of 2003.

Other income was $11.0 million for the year
ended December 31, 2003, compared to $7.9 million in
2002 and $6.2 million in 2001. The primary reasons for the
increase in 2003 are equity earnings from unconsolidated
investees and rental income from the operations center acquired
in May 2002.

Mortgage Segment.Loan fee income was $4.1 million
for the year ended December 31, 2003 compared to
$2.9 million for 2002 and $2.7 million for 2001. Lower
interest rates in 2003 and 2002 resulted in an increase in
mortgage refinancings and originations. The increase in loan fee
income of $1.2 million, or 41%, in 2003 is the result of an
increase in the Mitchell loans funded of $212.0 million to
$735.0 million for the year ended December 31, 2003,
compared to $523.0 million in 2002.

Gain on sale of loans, net, was $4.1 million
for the year ended December 31, 2003, compared to
$3.4 million for 2002 and $3.2 million for 2001. These
were increases of 22% and 8%, respectively, for 2003 and 2002.
The increase in loan volume discussed above resulted in a larger
portfolio of loans available for sale during the year. The
principal balances of mortgage loans sold were
$270.0 million, $180.5 million, and
$141.5 million during the years ended December 31,
2003, 2002 and 2001, respectively.

24



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##### 



Mortgage servicing fees, net of amortization and
impairment, were $659,000 for the year ended December 31,
2003, compared to ($2.9) million for 2002, and $748,000 for
2001. The increase in 2003 is primarily due to a provision
established for capitalized mortgage servicing rights in excess
of fair value, net of recovery, in the amount of
$2.4 million in 2002. During 2003, the Companys
valuation allowance for mortgage servicing rights was fully
recovered. Amortization of capitalized mortgage servicing costs
for the year ended December 31, 2003 was $4.8 million,
an increase of $626,000, or 15%, from the $4.2 million for
the year ended December 31, 2002. Amortization of
capitalized mortgage servicing costs was $3.1 million for
2001. Capitalized mortgage servicing costs are expensed against
the related fee income as the underlying loans are paid off.
Additionally, mortgage servicing fees were $3.1 million for
the year ended December 31, 2003, a decrease of $551,000,
or 15%, from the $3.6 million for the year ended
December 31, 2002. This decrease is the result of a
decrease in the balances of loans serviced for others in 2003.
See Note 8  Mortgage Servicing
Rights for further discussion on accounting for these
assets.



| |                     
| | --------------------
| | Noninterest Expenses

For the year ended December 31, 2003,
noninterest expenses totaled $180.2 million, an increase of
$29.1 million, or 19%, from $151.1 million during
2002, which had increased from $133.2 million during 2001.
The increase in noninterest expenses during these periods was
due primarily to increases in salaries and employee benefits,
occupancy expenses, and merger-related expenses.

Salaries and employee benefits expense was
$103.7 million for the year ended December 31, 2003,
an increase of $16.2 million, or 18%, from
$87.6 million for the year ended December 31, 2002.
Salaries and employee benefits expense for the year ended
December 31, 2002 increased $9.5 million, or 12%, from
the same period in 2001. These increases were due primarily to
hiring additional personnel required to accommodate the
Companys growth. Total full-time equivalent employees for
the years ended December 31, 2003, 2002, and 2001 were
1,760, 1,481, and 1,376, respectively.

Occupancy expense rose $5.6 million to
$29.7 million in 2003. Major categories included within
occupancy expense are depreciation expense and maintenance
contract expense. Depreciation expense increased
$2.7 million, or 30%, to $11.9 million for the year
ended December 31, 2003. This increase was due primarily to
additional depreciation resulting from the ownership of the
downtown operations center and the addition of new branches,
including the eight Maxim branches acquired in July 2003, and
capitalized leasehold improvements associated with build-outs
and additional square footage leased at the Companys
headquarters. In addition, depreciation on computer equipment
has increased in the current year for expenditures made to
support the Companys growth. Maintenance contract expense
for the year ended December 31, 2003 was $5.6 million,
an increase of $1.6 million, or 40%, compared to
$4.0 million in 2002 and $3.2 million in 2001. The
Company has purchased maintenance contracts for major operating
systems throughout the organization.

Merger-related expenses of $3.0 million were
recognized in 2003 related to the Maxim merger. No such costs
were incurred in 2002 or 2001.

The efficiency ratio is a supplemental financial
measure utilized in managements internal evaluation of the
Company and is not defined under generally accepted accounting
principles. The efficiency ratio is calculated by dividing total
noninterest expenses, excluding intangible amortization expense,
by net interest income plus noninterest income, excluding net
security gains (losses). An increase in the efficiency ratio
indicates that more resources are being utilized to generate the
same volume of income, while a decrease would indicate a more
efficient allocation of resources. The Companys efficiency
ratios were 64.07%, 61.09%, and 61.06% for the years ended
December 31, 2003, 2002, and 2001, respectively. The
increase in the efficiency ratio in 2003 is primarily a result
of the decline in the net interest margin discussed in
 Results of Operations  Net Interest
Income above and the merger-related expenses discussed
above. This ratio may not be a comparable measurement among
different financial institutions.

25



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| |             
| | ------------
| | Income Taxes

Income tax expense includes the regular federal
income tax at the statutory rate, plus the income tax component
of the Texas franchise tax, if applicable. The amount of federal
income tax expense 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
nondeductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax
income, plus certain officers salaries, less interest income
from federal securities. In 2003 income tax expense was
$27.4 million, an increase of $414,000, or 2%, from the
$27.0 million of income tax expense in 2002 which increased
$2.2 million, or 9%, from the $24.7 million of income
tax expense in 2001. The Companys effective tax rates were
31% for the years ended December 31, 2003 and 2002, and 32%
for the year ended December 31, 2001. The reduced tax rate
is primarily due to an increase in tax exempt income earned on
the Companys bank-owned life insurance and other tax
exempt securities.



| |                    
| | -------------------
| | Impact of Inflation

The effects of inflation on the local economy and
on the Companys operating results have been relatively
modest for the past several years. Since substantially all of
the Company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. The Company attempts 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
Liquidity below.

Financial Condition



| |                          
| | -------------------------
| | Loans Held for Investment

Loans held for investment were $3.49 billion
at December 31, 2003, an increase of $373.7 million,
or 12%, from December 31, 2002. Loans held for investment
were $3.12 billion at December 31, 2002, an increase
of $445.5 million, or 17%, from $2.67 billion at
December 31, 2001.

During the past five years loans have grown
at an annualized rate of 17%. This growth is consistent with the
Companys strategy of targeting corporate, middle
market and private banking customers and providing
innovative products with superior customer service. This plan
also includes establishing new branches in areas that
demographically complement the existing or targeted customer
bases, pursuing selected mergers and acquisitions that will add
new markets, delivery systems, and management talent to the
Company, and leveraging new or existing technology to improve
the profitability of the Company and its customers.

Loans increased during 2003 as the Company
continued to expand its market presence in its defined primary
markets. Additionally, at December 31, 2003, approximately
$94.2 million of loans relate to the former Maxim branches.
The Company continues to take a conservative approach to credit
underwriting, which it believes is a prudent course of action,
especially in uncertain economic conditions. While the
short-term outlook for economic conditions is unclear, the
Company is optimistic about the future and has continued to
invest in new products, services, and personnel that it believes
will bring opportunities for growth and expansion.

The loan portfolio is concentrated in loans to
commercial, real estate construction, and land development
enterprises, with the balance in residential and consumer loans.
While no specific industry concentration is considered
significant, lending operations are focused primarily on the
eight county area in and around Houston. An economic recession
over a prolonged period of time in the Houston area could cause
increases in nonperforming assets, thereby causing operating
losses, impairing liquidity and eroding capital. There can be no
assurance that future adverse changes in the local economy would
not have a material adverse effect on the Companys
consolidated financial condition, results of operations or cash
flows.

26



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##### 



The following table summarizes the loan portfolio
of the Company by major category as of the dates indicated:

|                          |            |                                   |                                 |         |         |           |       |         |       |        |           |         |         |           |       |         |       |        |           |         |         |           |       |       |       |        |         |         |         |           |       |       |       |        |         |         |         |           |       |       |       |        |  
|------------------------- | ---------- | --------------------------------- | ------------------------------- | ------- | ------- | --------- | ----- | ------- | ----- | ------ | --------- | ------- | ------- | --------- | ----- | ------- | ----- | ------ | --------- | ------- | ------- | --------- | ----- | ----- | ----- | ------ | ------- | ------- | ------- | --------- | ----- | ----- | ----- | ------ | ------- | ------- | ------- | --------- | ----- | ----- | ----- | ------ | -
|                          |            |                                   |                                 |         |         |           |       |         |       |       
|                          |            | 2003                              |                                 | 2002    |         | 2001      |       | 2000    |       | 1999  
|                          |            |                                   |                                 |         |         |           |       |         |       |       
|                          |            | Amount                            |                                 | Percent |         | Amount    |       | Percent |       | Amount |           | Percent |         | Amount    |       | Percent |       | Amount |           | Percent
|                          |            |                                   |                                 |         |         |           |       |         |       |        |           |         |         |           |       |         |       |        |           |        
|                          |            |                                  
|                          |            | (Dollars in thousands)           
|Commercial and industrial |            | $                                 | 1,500,304                       |         |         |           | 42.96 | %       |       | $      | 1,296,849 |         |         |           | 41.59 | %       |       | $      | 1,084,114 |         |         |           | 40.56 | %     |       | $      | 954,912 |         |         |           | 39.37 | %     |       | $      | 749,816 |         |         |           | 38.29 | %    
|Real estate:              |            |                                   |                                 |         |         |           |       |         |       |        |           |         |         |           |       |         |       |        |           |         |         |           |       |       |       |        |         |         |         |           |       |       |       |        |         |         |         |           |       |      
|                          |            | Construction and land development |                                 |         | 706,546 |           |       |         | 20.24 |        |           |         | 748,272 |           |       |         | 24.00 |        |           |         | 698,423 |           |       |       | 26.13 |        |         |         | 641,128 |           |       |       | 26.43 |        |         |         | 500,547 |           |       |       | 25.57 |       
|                          |            | 1-4 family residential            |                                 |         | 567,009 |           |       |         | 16.24 |        |           |         | 447,534 |           |       |         | 14.35 |        |           |         | 344,133 |           |       |       | 12.88 |        |         |         | 335,934 |           |       |       | 13.85 |        |         |         | 290,057 |           |       |       | 14.81 |       
|                          | Commercial |                                   |                                 | 521,254 |         |           |       | 14.93   |       |        |           | 458,033 |         |           |       | 14.69   |       |        |           | 320,336 |         |           |       | 11.99 |       |        |         | 265,534 |         |           |       | 10.95 |       |        |         | 212,371 |         |           |       | 10.84 |      
|                          | Farmland   |                                   |                                 | 11,140  |         |           |       | 0.32    |       |        |           | 7,679   |         |           |       | 0.25    |       |        |           | 4,854   |         |           |       | 0.18  |       |        |         | 5,753   |         |           |       | 0.24  |       |        |         | 13,218  |         |           |       | 0.67  |      
|                          | Other      |                                   |                                 | 41,854  |         |           |       | 1.20    |       |        |           | 21,693  |         |           |       | 0.70    |       |        |           | 25,884  |         |           |       | 0.97  |       |        |         | 31,861  |         |           |       | 1.31  |       |        |         | 20,572  |         |           |       | 1.05  |      
|Consumer                  |            |                                   | 143,566                         |         |         |           | 4.11  |         |       |        | 137,891   |         |         |           | 4.42  |         |       |        | 194,714   |         |         |           | 7.29  |       |       |        | 190,376 |         |         |           | 7.85  |       |       |        | 171,714 |         |         |           | 8.77  |      
|                          |            |                                   |                                 |         |         |           |       |         |       |        |           |         |         |           |       |         |       |        |           |         |         |           |       |       |       |        |         |         |         |           |       |       |       |        |         |         |         |           |       |      
|                          |            |                                   | Total loans held for investment |         | $       | 3,491,673 |       |         |       | 100.00 | %         |         | $       | 3,117,951 |       |         |       | 100.00 | %         |         | $       | 2,672,458 |       |       |       | 100.00 | %       |         | $       | 2,425,498 |       |       |       | 100.00 | %       |         | $       | 1,958,295 |       |       |       | 100.00 | %
|                          |            |                                   |                                 |         |         |           |       |         |       |        |           |         |         |           |       |         |       |        |           |         |         |           |       |       |       |        |         |         |         |           |       |       |       |        |         |         |         |           |       |      

The primary lending focus of the Company is on
small- and medium-sized commercial, construction and land
development, residential mortgage, and consumer loans. The
Company offers a variety of commercial lending products
including term loans, lines of credit, and equipment financing.
A broad range of short- to medium-term commercial loans, both
collateralized and uncollateralized, are made available to
businesses for working capital (including inventory and
receivables), business expansion (including acquisitions of real
estate and improvements), and the purchase of equipment and
machinery. The purpose of a particular loan generally determines
its structure.

The Companys commercial loans are generally
underwritten on the basis of the borrowers ability to
service such debt from cash flow. As a general practice, the
Company takes as collateral a lien on any available real estate,
equipment, accounts receivable, inventory, or other assets and
personal guarantees of company owners or project sponsors.
Working capital loans are primarily collateralized by short-term
assets, whereas term loans are primarily collateralized by
long-term assets.

A substantial portion of the Companys real
estate loans consists of loans collateralized by real estate,
other assets, and personal guarantees of company owners or
project sponsors. Additionally, a portion of the Companys
lending activity consists of the origination of single-family
residential mortgage loans collateralized by owner-occupied
properties located in the Companys primary market area.
The Company offers a variety of mortgage loan products which
generally are amortized over 10 to 30 years.

Loans collateralized by single-family residential
real estate are typically originated in amounts of no more than
90% of appraised value. The Company typically requires mortgage
title insurance and hazard insurance in the amount of the loan.
Although the contractual loan payment periods for single-family
residential real estate loans are generally for a 10 to
30 year period, such loans often remain outstanding for
significantly shorter periods than their contractual terms. The
Company also offers home improvement loans and home equity loans
collateralized by single-family residential real estate. The
terms of these loans typically range from three to 15 years.

The Company originates residential and commercial
mortgage loans to sell to investors with servicing rights
retained. The Company also provides residential and commercial
construction financing to builders and developers and acts as a
broker in the origination of multi-family and commercial real
estate loans.

Residential construction financing to builders
generally has been originated in amounts of no more than 80% of
appraised value. The Company requires a mortgage title binder
and builders risk insurance in the amount of the loan. The
contractual loan payment periods for residential constructions
loans are generally for a six to twelve month period.

Consumer loans originated by the Company include
automobile loans, recreational vehicle loans, boat loans,
personal loans (collateralized and uncollateralized), and
deposit account collateralized loans. The terms

27



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##### 



of these loans typically range from 12 to
84 months and vary based upon the nature of collateral and
size of loan.


The contractual maturity ranges of the commercial
and industrial and funded real estate construction and land
development loan portfolio and the amount of such loans with
fixed 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                     |       | $                      | 694,926 |            |  | $          | 696,923 |           |  | $ | 108,455 |         |  | $ | 1,500,304 |          
|Real estate construction and land development |       |                        | 387,688 |            |  |            | 303,345 |           |  |   | 15,513  |         |  |   | 706,546   |          
|                                              |       |                        |         |            |  |            |         |           |  |   |         |         |  |   |           |          
|                                              | Total |                        | $       | 1,082,614  |  |            | $       | 1,000,268 |  |   | $       | 123,968 |  |   | $         | 2,206,850 | 
|                                              |       |                        |         |            |  |            |         |           |  |   |         |         |  |   |           |          
|Loans with a fixed interest rate              |       | $                      | 106,742 |            |  | $          | 175,060 |           |  | $ | 53,966  |         |  | $ | 335,768   |          
|Loans with a floating interest rate           |       |                        | 975,872 |            |  |            | 825,208 |           |  |   | 70,002  |         |  |   | 1,871,082 |          
|                                              |       |                        |         |            |  |            |         |           |  |   |         |         |  |   |           |          
|                                              | Total |                        | $       | 1,082,614  |  |            | $       | 1,000,268 |  |   | $       | 123,968 |  |   | $         | 2,206,850 | 
|                                              |       |                        |         |            |  |            |         |           |  |   |         |         |  |   |           |          



| |                    
| | -------------------
| | Loans Held for Sale

Loans held for sale of $96.9 million at
December 31, 2003 decreased from $101.4 million at
December 31, 2002. These loans are primarily single family
residential loans and are carried at the lower of cost or market
and are typically sold to investors within one year of
origination. The market value of these loans is impacted by
changes in current interest rates. An increase in interest rates
would result in a decrease in the market value of these loans
while a decrease in interest rates would result in an increase
in the market value of these loans. The business of originating
and selling loans is conducted by the Companys mortgage
segment.



| |                  
| | -----------------
| | Credit Management

The Companys loan review procedures include
a credit quality assurance process that includes approval by the
Board of Directors of lending policies and underwriting
guidelines, a loan review department staffed, in part, with
Office of the Comptroller of the Currency experienced personnel,
low individual lending limits for officers, loan committee
approval for credit relationships in excess of
$3.0 million, and a quality control process for loan
documentation. The Company also maintains a monitoring process
for credit extensions in excess of $100,000. The Company
performs quarterly concentration analyses based on various
factors such as industries, collateral types, business lines,
large credit sizes, international credit exposure and officer
portfolio loads. The Company has established underwriting
guidelines to be followed by its officers. The Company also
monitors its delinquency levels for any negative or adverse
trends. The Company continues to invest in its loan portfolio
monitoring system to enhance its risk management capabilities.

The Companys loan portfolio is well
diversified by industry type but is generally concentrated in
the eight county region defined as its primary market area.
Historically, the Houston metropolitan area has been affected
both positively and negatively by conditions in the energy
industry. It is estimated that approximately 31% of economic
activity currently is related to the upstream energy industry,
down from 69% in 1981. Since the mid-1980s, the economic
impact of changes in the energy industry has been lessened due
to the diversification of the Houston economy driven by growth
in such economic entities as the Texas Medical Center, the Port
of Houston, the Johnson Space Center, and government
infrastructure spending to support the population and job growth
in the Houston area. As a result, the economy of the
Companys primary market area has become increasingly
affected by changes in the national and international economies.

28



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##### 



The Company monitors changes in the level of
energy prices, real estate values, borrower collateral, and the
level of local, regional, national, and international economic
activity. As of December 31, 2003, these changes have had
no material effect on the Companys loan portfolio. For the
year ended December 31, 2003, net charge-offs to average
loans was 0.22%. The average for all FDIC insured commercial
banks was 0.88% for the nine months ended September 30,
2003. There can be no assurance, however, the Companys
loan portfolio will not become subject to increasing pressures
from deteriorating borrower credit due to changes in general
economic conditions.

Allowance for
Loan Losses

The allowance for loan losses represents
managements estimate of probable losses inherent in the
loan portfolio. The allowance is established through a provision
for loan losses based on managements evaluation of the
risk inherent in the loan portfolio. The allowance is increased
by provisions charged against current earnings and reduced by
net charge-offs. Loans are charged off when they are deemed to
be uncollectible; recoveries are recorded only when cash
payments are received.

At least quarterly, the Banks Allowance for
Loan Losses Committee and the Board Loan Committee review
the allowance for loan losses relative to the risk profile of
the Banks loan portfolio and current economic conditions.
The allowance is adjusted based on that review if changes are
warranted.

The allowance has several components, which
include specific reserves, migration analysis reserves,
qualitative adjustments, which includes a general reserve
component, and a separate reserve for international,
cross-border risk (allocated transfer risk reserve
ATRR).

Specific reserves cover those loans that are
nonperforming or impaired. All impaired loans greater than or
equal to $1.0 million are evaluated per
SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. Accordingly, an allowance is
established when the present value of the discounted expected
cash flows (or collateral value or observable market price) is
lower than the carrying value of that loan. For impaired loans
less than $1.0 million, a determination is made as to the
ultimate collectibility of the loan and a reserve is established
for any expected shortfall.

Migration analysis reserves cover performing
loans both classified and non-classified, excluding those loans
specifically evaluated for impairment reserve applicability. The
migration reserve is established for commercial real estate and
commercial non-real estate loans by analyzing historical loss
experience by internal risk rating. The migration analysis
reserve for consumer loans is established by analyzing
historical loss experience by collateral type.

Qualitative adjustments serve to modify the
migration analysis reserves after considering various internal
and external factors that management believes may have a
material impact on the loss probabilities within the loan
portfolio. The qualitative factors include, but are not limited
to, economic factors affecting the Banks primary market
area, changes in the nature and volume of the loan and lease
portfolio, concentrations of credit within industries and lines
of business, the experience level of the lending management, and
staff and the quality of the Banks credit risk management
systems.

The general reserve covers general economic
uncertainties as well as the imprecision inherent in any loan
and lease loss forecasting methodology. It will vary over time
depending on existing economic, industry, organization, and
portfolio conditions.

The qualitative adjustments, ATRR, and general
reserve are allocated to the loan portfolio segments on a risk
adjusted, pro-rata basis utilizing the relative reserve
contributions of each portfolio segment based on the migration
analysis.

Management believes that the allowance for loan
losses at December 31, 2003 is adequate to cover losses
inherent in the loan portfolio as of such date. There can be no
assurance, however, that the Bank will not sustain losses in
future periods which could be greater than the size of the
allowance as of December 31, 2003.

29



---



##### 



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

|                                             |                           |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |        |      |  
|-------------------------------------------- | ------------------------- | --------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ---- | ---- | ------ | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ | ---- | -
|                                             |                           |                                  
|                                             |                           | Year Ended December 31,          
|                                             |                           |                                  
|                                             |                           | 2003                              |        | 2002   |        | 2001 |        | 2000   |      | 1999
|                                             |                           |                                   |        |        |        |      |        |        |      |     
|                                             |                           |                                  
|                                             |                           | (Dollars in thousands)           
|Allowance for loan losses, beginning balance |                           | $                                 | 36,696 |        |        | $    | 31,390 |        |      | $    | 28,150 |        |      | $ | 22,436 |        |      | $ | 17,532 |       
|Provision charged against operations         |                           |                                   | 12,000 |        |        |      | 11,750 |        |      |      | 7,500  |        |      |   | 7,053  |        |      |   | 6,474  |       
|Charge-offs:                                 |                           |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |       
|                                             | Commercial and industrial |                                   |        | (2,986 | )      |      |        | (5,784 | )    |      |        | (3,663 | )    |   |        | (714   | )    |   |        | (906   | )   
|                                             | Real estate:              |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |        |     
|                                             |                           | Construction and land development |        |        | (34    | )    |        |        | (107 | )    |        |        | (65  | ) |        |        | (208 | ) |        |        | (177 | )
|                                             |                           | 1-4 family residential            |        |        | (252   | )    |        |        | (126 | )    |        |        | (171 | ) |        |        |     |   |        |        |     |  
|                                             |                           | Commercial                        |        |        | (911   | )    |        |        | (38  | )    |        |        |     |   |        |        |     |   |        |        |     |  
|                                             |                           | Farmland                          |        |        |       |      |        |        |     |      |        |        |     |   |        |        |     |   |        |        |     |  
|                                             |                           | Other                             |        |        | (2,742 | )    |        |        | (64  | )    |        |        | (94  | ) |        |        | (100 | ) |        |        |     |  
|                                             | Consumer                  |                                   |        | (1,340 | )      |      |        | (973   | )    |      |        | (1,037 | )    |   |        | (1,071 | )    |   |        | (1,128 | )   
|                                             |                           |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |       
|Total charge-offs                            |                           |                                   | (8,265 | )      |        |      | (7,092 | )      |      |      | (5,030 | )      |      |   | (2,093 | )      |      |   | (2,211 | )     
|                                             |                           |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |       
|Recoveries:                                  |                           |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |       
|                                             | Commercial and industrial |                                   |        | 203    |        |      |        | 235    |      |      |        | 265    |      |   |        | 485    |      |   |        | 265    |     
|                                             | Real estate:              |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |        |     
|                                             |                           | Construction and land development |        |        |       |      |        |        |     |      |        |        |     |   |        |        | 7    |   |        |        | 12   |  
|                                             |                           | 1-4 family residential            |        |        |       |      |        |        | 14   |      |        |        | 59   |   |        |        |     |   |        |        |     |  
|                                             |                           | Commercial                        |        |        |       |      |        |        |     |      |        |        |     |   |        |        |     |   |        |        |     |  
|                                             |                           | Farmland                          |        |        |       |      |        |        |     |      |        |        |     |   |        |        |     |   |        |        |     |  
|                                             |                           | Other                             |        |        | 378    |      |        |        | 136  |      |        |        | 51   |   |        |        |     |   |        |        |     |  
|                                             | Consumer                  |                                   |        | 570    |        |      |        | 351    |      |      |        | 395    |      |   |        | 262    |      |   |        | 364    |     
|                                             |                           |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |       
|Total recoveries                             |                           |                                   | 1,151  |        |        |      | 736    |        |      |      | 770    |        |      |   | 754    |        |      |   | 641    |       
|                                             |                           |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |       
|Net charge-offs                              |                           |                                   | (7,114 | )      |        |      | (6,356 | )      |      |      | (4,260 | )      |      |   | (1,339 | )      |      |   | (1,570 | )     
|Allowance acquired through Maxim merger      |                           |                                   | 1,426  |        |        |      |       |        |      |      |       |        |      |   |       |        |      |   |       |       
|Adjustment for sale of subsidiary            |                           |                                   |       |        |        |      | (88    | )      |      |      |       |        |      |   |       |        |      |   |       |       
|                                             |                           |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |       
|Allowance for loan losses, ending balance    |                           | $                                 | 43,008 |        |        | $    | 36,696 |        |      | $    | 31,390 |        |      | $ | 28,150 |        |      | $ | 22,436 |       
|                                             |                           |                                   |        |        |        |      |        |        |      |      |        |        |      |   |        |        |      |   |        |       
|Allowance to period-end loans                |                           |                                   | 1.23   | %      |        |      | 1.18   | %      |      |      | 1.17   | %      |      |   | 1.16   | %      |      |   | 1.15   | %     
|Net charge-offs to average loans             |                           |                                   | 0.22   | %      |        |      | 0.22   | %      |      |      | 0.17   | %      |      |   | 0.06   | %      |      |   | 0.09   | %     
|Allowance to period-end nonperforming loans  |                           |                                   | 337.53 | %      |        |      | 244.82 | %      |      |      | 237.82 | %      |      |   | 297.82 | %      |      |   | 519.59 | %     

30



---



##### 



The following table reflects the distribution of
the allowance for loan losses among various categories of loans
based on collateral types for the dates indicated. The Company
has allocated portions of its general allowance for loan losses
to cover the estimated losses inherent in particular risk
categories of loans. This allocation is made for analytical
purposes and is not necessarily indicative of the categories in
which loan losses may occur. The total allowance is available to
absorb losses from any category of loans.

|                                                        |                           |                                   |        |             |       |        |        |             |       |        |        |             |       |  |        |       |       |   |        |        |       |  |        |       |       | 
|------------------------------------------------------- | ------------------------- | --------------------------------- | ------ | ----------- | ----- | ------ | ------ | ----------- | ----- | ------ | ------ | ----------- | ----- |  | ------ | ----- | ----- | - | ------ | ------ | ----- |  | ------ | ----- | ----- | 
|                                                        |                           |                                  
|                                                        |                           | December 31,                     
|                                                        |                           |                                  
|                                                        |                           |                                   |        |             |       |       
|                                                        |                           | 2003                              |        | 2002        |       | 2001  
|                                                        |                           |                                   |        |             |       |       
|                                                        |                           |                                   |        | Percent of  |       |        |        | Percent of  |       |        |        | Percent of 
|                                                        |                           |                                   |        | Loans to    |       |        |        | Loans to    |       |        |        | Loans to   
|                                                        |                           | Amount                            |        | Total Loans |       | Amount |        | Total Loans |       | Amount |        | Total Loans
|                                                        |                           |                                   |        |             |       |        |        |             |       |        |        |            
|                                                        |                           |                                  
|                                                        |                           | (Dollars in thousands)           
|Balance of allowance for loan losses applicable
    to: |                           |                                   |        |             |       |        |        |             |       |        |        |             |       |  |        |       |       |   |        |        |       |  |        |      
|                                                        | Commercial and industrial |                                   | $      | 25,388      |       |        |        | 42.96       | %     |        | $      | 15,637      |       |  |        | 41.59 | %     |   | $      | 13,554 |       |  |        | 40.56 | %    
|                                                        | Real estate:              |                                   |        |             |       |        |        |             |       |        |        |             |       |  |        |       |       |   |        |        |       |  |        |       |      
|                                                        |                           | Construction and land development |        |             | 5,503 |        |        |             | 20.24 |        |        |             | 6,825 |  |        |       | 24.00 |   |        |        | 7,395 |  |        |       | 26.13 | 
|                                                        |                           | 1-4 family residential            |        |             | 2,478 |        |        |             | 16.24 |        |        |             | 4,014 |  |        |       | 14.35 |   |        |        | 2,695 |  |        |       | 12.88 | 
|                                                        |                           | Commercial                        |        |             | 5,179 |        |        |             | 14.93 |        |        |             | 5,868 |  |        |       | 14.69 |   |        |        | 3,397 |  |        |       | 11.99 | 
|                                                        |                           | Farmland                          |        |             | 39    |        |        |             | 0.32  |        |        |             | 53    |  |        |       | 0.25  |   |        |        | 34    |  |        |       | 0.18  | 
|                                                        |                           | Other                             |        |             | 2,465 |        |        |             | 1.20  |        |        |             | 1,037 |  |        |       | 0.70  |   |        |        | 1,110 |  |        |       | 0.97  | 
|                                                        | Consumer                  |                                   |        | 1,956       |       |        |        | 4.11        |       |        |        | 3,262       |       |  |        | 4.42  |       |   |        | 3,205  |       |  |        | 7.29  |      
|                                                        |                           |                                   |        |             |       |        |        |             |       |        |        |             |       |  |        |       |       |   |        |        |       |  |        |      
|Total allowance for loan losses                         |                           | $                                 | 43,008 |             |       |        | 100.00 | %           |       | $      | 36,696 |             |       |  | 100.00 | %     |       | $ | 31,390 |        |       |  | 100.00 | %    
|                                                        |                           |                                   |        |             |       |        |        |             |       |        |        |             |       |  |        |       |       |   |        |        |       |  |        |      

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                        |                           |                                   |        |             |       |        |        |             |       |   |        |        |       |  |        |       |       | 
|------------------------------------------------------- | ------------------------- | --------------------------------- | ------ | ----------- | ----- | ------ | ------ | ----------- | ----- | - | ------ | ------ | ----- |  | ------ | ----- | ----- | 
|                                                        |                           |                                  
|                                                        |                           | December 31,                     
|                                                        |                           |                                  
|                                                        |                           |                                   |        |            
|                                                        |                           | 2000                              |        | 1999       
|                                                        |                           |                                   |        |            
|                                                        |                           |                                   |        | Percent of  |       |        |        | Percent of 
|                                                        |                           |                                   |        | Loans to    |       |        |        | Loans to   
|                                                        |                           | Amount                            |        | Total Loans |       | Amount |        | Total Loans
|                                                        |                           |                                   |        |             |       |        |        |            
|                                                        |                           |                                  
|                                                        |                           | (Dollars in thousands)           
|Balance of allowance for loan losses applicable
    to: |                           |                                   |        |             |       |        |        |             |       |   |        |        |       |  |        |      
|                                                        | Commercial and industrial |                                   | $      | 12,219      |       |        |        | 39.37       | %     |   | $      | 10,793 |       |  |        | 38.29 | %    
|                                                        | Real estate:              |                                   |        |             |       |        |        |             |       |   |        |        |       |  |        |       |      
|                                                        |                           | Construction and land development |        |             | 5,733 |        |        |             | 26.43 |   |        |        | 4,184 |  |        |       | 25.57 | 
|                                                        |                           | 1-4 family residential            |        |             | 3,294 |        |        |             | 13.85 |   |        |        | 2,498 |  |        |       | 14.81 | 
|                                                        |                           | Commercial                        |        |             | 2,676 |        |        |             | 10.95 |   |        |        | 1,962 |  |        |       | 10.84 | 
|                                                        |                           | Farmland                          |        |             | 40    |        |        |             | 0.24  |   |        |        | 93    |  |        |       | 0.67  | 
|                                                        |                           | Other                             |        |             | 1,253 |        |        |             | 1.31  |   |        |        | 143   |  |        |       | 1.05  | 
|                                                        | Consumer                  |                                   |        | 2,935       |       |        |        | 7.85        |       |   |        | 2,763  |       |  |        | 8.77  |      
|                                                        |                           |                                   |        |             |       |        |        |             |       |   |        |        |       |  |        |      
|Total allowance for loan losses                         |                           | $                                 | 28,150 |             |       |        | 100.00 | %           |       | $ | 22,436 |        |       |  | 100.00 | %    
|                                                        |                           |                                   |        |             |       |        |        |             |       |   |        |        |       |  |        |      



| |                                            
| | -------------------------------------------
| | Nonperforming Assets and Impaired
    Loans

Nonperforming assets, which include nonaccrual
loans, accruing loans 90 or more days past due, restructured
loans, and other real estate and foreclosed property, were
$17.0 million at December 31, 2003, compared with
$15.7 million at December 31, 2002 and
$14.2 million at December 31, 2001. This resulted in a
ratio of nonperforming assets to loans and other real estate of
0.49%, 0.50%, and 0.53% at December 31, 2003, 2002, and
2001, respectively. The increase in nonperforming assets is
primarily due to an increase in other real estate and foreclosed
property of $3.5 million to $4.2 million at
December 31, 2003 when compared to $760,000 at
December 31, 2002. The increase in other real estate and
foreclosed property is primarily caused by the April 1,
2003 foreclosure on a multi-family loan. Nonaccrual loans, the
largest component of nonperforming assets, were
$11.4 million at December 31, 2003, a decrease of
$1.7 million from $13.1 million at December 31,
2002.

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                                              |                            | $                      | 11,443 |        |  | $    | 13,113 |        |  | $    | 11,020 |        |  | $ | 8,345 |       |  | $ | 2,471 |      
|Accruing loans 90 or more days past due                       |                            |                        | 1,299  |        |  |      | 1,876  |        |  |      | 2,179  |        |  |   | 1,107 |       |  |   | 1,847 |      
|Restructured loans                                            |                            |                        |       |        |  |      |       |        |  |      |       |        |  |   |      |       |  |   |      |      
|Other real estate and foreclosed property                     |                            |                        | 4,248  |        |  |      | 760    |        |  |      | 1,037  |        |  |   | 454   |       |  |   | 1,840 |      
|                                                              |                            |                        |        |        |  |      |        |        |  |      |        |        |  |   |       |       |  |   |       |      
|                                                              | Total nonperforming assets |                        | $      | 16,990 |  |      | $      | 15,749 |  |      | $      | 14,236 |  |   | $     | 9,906 |  |   | $     | 6,158 | 
|                                                              |                            |                        |        |        |  |      |        |        |  |      |        |        |  |   |       |       |  |   |       |      
|Nonperforming assets to total loans and other
    real estate |                            |                        | 0.49   | %      |  |      | 0.50   | %      |  |      | 0.53   | %      |  |   | 0.41  | %     |  |   | 0.31  | %    

Loans on which the accrual of interest has been
discontinued are designated as nonaccrual loans. Loans are
designated as nonaccrual when reasonable doubt exists as to the
full collection of interest and principal. When a loan is placed
on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income.
Income on such loans is then recognized only to the extent that
cash is

31



---



##### 



received and where the future collection of
interest and principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current
with respect to interest and principal and when, in the judgment
of management, the loans are estimated to be fully collectible
as to both principal and interest. Gross interest income on
nonaccrual loans that would have been recorded had these loans
been performing as agreed was $1.2 million, $814,000, and
$626,000 for the years ended December 31, 2003, 2002, and
2001, respectively.


The Company regularly updates appraisals on loans
collateralized 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.

A loan is considered impaired, based on current
information and events, if management believes that the Company
will be unable to collect all amounts due according to the
contractual terms of the loan agreement. All amounts due
according to the contractual terms means that both the
contractual interest payments and the contractual principal
payments of a loan will be collected as scheduled on the loan
agreement. An insignificant delay or insignificant shortfall in
the amount of payment does not require a loan to be considered
impaired. If the measure of the impaired loan is less than the
recorded investment in the loan, a specific reserve is
established for the shortfall as a component of the Banks
allowance for loan loss methodology. All nonaccrual loans are
considered impaired at December 31, 2003 and 2002.

The following is a summary of loans considered to
be impaired:

|                                                          |                                             |                        |        |        |  |   |        |        | 
|--------------------------------------------------------- | ------------------------------------------- | ---------------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                          |                                             |                       
|                                                          |                                             | December 31,          
|                                                          |                                             |                       
|                                                          |                                             | 2003                   |        | 2002  
|                                                          |                                             |                        |        |       
|                                                          |                                             |                       
|                                                          |                                             | (Dollars in thousands)
|Impaired loans with no SFAS No. 114
    valuation reserve |                                             | $                      | 12,568 |        |  | $ | 14,508 |       
|Impaired loans with a SFAS No. 114
    valuation reserve  |                                             |                        | 4,240  |        |  |   | 8,538  |       
|                                                          |                                             |                        |        |        |  |   |        |       
|                                                          | Total recorded investment in impaired loans |                        | $      | 16,808 |  |   | $      | 23,046 | 
|                                                          |                                             |                        |        |        |  |   |        |       
|Valuation allowance related to impaired loans             |                                             | $                      | 2,768  |        |  | $ | 3,646  |       
|                                                          |                                             |                        |        |        |  |   |        |       

The average recorded investment in impaired loans
during 2003, 2002, and 2001 was $19.9 million,
$22.1 million, and $15.5 million, respectively.
Interest income on impaired loans of $296,000, $456,000, and
$425,000 was recognized for cash payments received in 2003, 2002
and 2001, respectively. The decrease in the valuation allowance
related to impaired loans is the result of a change in the
composition of these loans and charge-offs recorded in 2003.



| |           
| | ----------
| | 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 classified as held to maturity
are stated at cost, increased by accretion of discounts and
reduced by amortization of premiums, both computed by the
interest method, only if management has the positive intent and
ability to hold those securities to maturity. Securities that
are bought and held principally for the purpose of selling them
in the near term are classified as trading and measured at fair
value in the financial statements with unrealized gains and
losses included in earnings. Securities 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) until realized.
Gains and losses on sales of securities are determined using the
specific-identification method. The Company has classified all
securities as available for sale at December 31, 2003.

32



---



##### 



The amortized cost of securities classified as
available for sale and held to maturity is as follows:

|                    |                                       |                                     |   |           |           |      |   |         |           |      |   |         |           |  |   |         |         |  |   |         |         | 
|------------------- | ------------------------------------- | ----------------------------------- | - | --------- | --------- | ---- | - | ------- | --------- | ---- | - | ------- | --------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                    |                                       |                                    
|                    |                                       | December 31,                       
|                    |                                       |                                    
|                    |                                       | 2003                                |   | 2002      |           | 2001 |   | 2000    |           | 1999
|                    |                                       |                                     |   |           |           |      |   |         |           |     
|                    |                                       |                                    
|                    |                                       | (Dollars in thousands)             
|Available for sale: |                                       |                                     |   |           |           |      |   |         |           |      |   |         |           |  |   |         |         |  |   |        
|                    | U.S. Government and agency securities |                                     | $ | 250,359   |           |      | $ | 142,032 |           |      | $ | 50,860  |           |  | $ | 169,069 |         |  | $ | 134,001 |        
|                    | Mortgage-backed securities            |                                     |   | 1,101,988 |           |      |   | 869,872 |           |      |   | 872,974 |           |  |   | 618,523 |         |  |   | 678,523 |        
|                    | Municipal securities                  |                                     |   | 152,927   |           |      |   | 105,143 |           |      |   | 85,047  |           |  |   | 27,920  |         |  |   | 17,021  |        
|                    | Federal Reserve Bank stock            |                                     |   | 4,459     |           |      |   | 4,431   |           |      |   | 4,230   |           |  |   | 3,949   |         |  |   | 2,981   |        
|                    | Federal Home Loan Bank stock          |                                     |   | 25,469    |           |      |   | 27,188  |           |      |   | 7,939   |           |  |   | 17,972  |         |  |   | 16,051  |        
|                    | Other securities                      |                                     |   | 9,455     |           |      |   | 30,777  |           |      |   | 41,169  |           |  |   | 15,491  |         |  |   | 7,286   |        
|                    |                                       |                                     |   |           |           |      |   |         |           |      |   |         |           |  |   |         |         |  |   |        
|                    |                                       | Total securities available for sale |   | $         | 1,544,657 |      |   | $       | 1,179,443 |      |   | $       | 1,062,219 |  |   | $       | 852,924 |  |   | $       | 855,863 | 
|                    |                                       |                                     |   |           |           |      |   |         |           |      |   |         |           |  |   |         |         |  |   |        
|Held to maturity:   |                                       |                                     |   |           |           |      |   |         |           |      |   |         |           |  |   |         |         |  |   |        
|                    | U.S. Government and agency securities |                                     | $ |          |           |      | $ |        |           |      | $ |        |           |  | $ |        |         |  | $ | 12,761  |        
|                    | Mortgage-backed securities            |                                     |   |          |           |      |   |        |           |      |   |        |           |  |   |        |         |  |   | 29,164  |        
|                    | Municipal securities                  |                                     |   |          |           |      |   |        |           |      |   |        |           |  |   |        |         |  |   | 13,486  |        
|                    | Other securities                      |                                     |   |          |           |      |   |        |           |      |   |        |           |  |   |        |         |  |   | 3,533   |        
|                    |                                       |                                     |   |           |           |      |   |         |           |      |   |         |           |  |   |         |         |  |   |        
|                    |                                       | Total securities held to maturity   |   | $         |          |      |   | $       |          |      |   | $       |          |  |   | $       |        |  |   | $       | 58,944  | 
|                    |                                       |                                     |   |           |           |      |   |         |           |      |   |         |           |  |   |         |         |  |   |        

The amortized cost and approximate fair value of
securities classified as available for sale is as follows:

|                                      |                                     |                        |           |                   |  |                   |       |           |  |            |        |        |   |           |           |            |  |      |         |           |  |      |        |        |  |   |        |        |   |   |         |           |  |   |         |           |  |   |       |        |  |   |        |        |   |   |         |           | 
|------------------------------------- | ----------------------------------- | ---------------------- | --------- | ----------------- |  | ----------------- | ----- | --------- |  | ---------- | ------ | ------ | - | --------- | --------- | ---------- |  | ---- | ------- | --------- |  | ---- | ------ | ------ |  | - | ------ | ------ | - | - | ------- | --------- |  | - | ------- | --------- |  | - | ----- | ------ |  | - | ------ | ------ | - | - | ------- | --------- | 
|                                      |                                     |                        |           |                   |  |                  
|                                      |                                     | December 31, 2003      |           | December 31, 2002 |  | December 31, 2001
|                                      |                                     |                        |           |                   |  |                  
|                                      |                                     |                        |           |                   |  |                   |       |           |  |            |        |        |   |           |           |            |  |     
|                                      |                                     |                        |           | Gross             |  |                   |       |           |  | Gross      |        |        |   |           |           | Gross      |  |     
|                                      |                                     |                        |           | Unrealized        |  |                   |       |           |  | Unrealized |        |        |   |           |           | Unrealized |  |     
|                                      |                                     | Amortized              |           |                   |  | Fair              |       | Amortized |  |            |        | Fair   |   | Amortized |           |            |  | Fair
|                                      |                                     | Cost                   |           | Gain              |  | Loss              |       | Value     |  | Cost       |        | Gain   |   | Loss      |           | Value      |  | Cost |         | Gain      |  | Loss |        | Value 
|                                      |                                     |                        |           |                   |  |                   |       |           |  |            |        |        |   |           |           |            |  |      |         |           |  |      |        |       
|                                      |                                     |                       
|                                      |                                     | (Dollars in thousands)
|Available for sale:                   |                                     |                        |           |                   |  |                   |       |           |  |            |        |        |   |           |           |            |  |      |         |           |  |      |        |        |  |   |        |        |   |   |         |           |  |   |         |           |  |   |       |        |  |   |        |        |   |   |         |          
|U.S. Government and agency securities |                                     | $                      | 250,359   |                   |  | $                 | 841   |           |  | $          | (102   | )      |   | $         | 251,098   |            |  | $    | 142,032 |           |  | $    | 1,323  |        |  | $ |       |        |   | $ | 143,355 |           |  | $ | 50,860  |           |  | $ | 1,294 |        |  | $ | (17    | )      |   | $ | 52,137  |          
|Mortgage-backed securities            |                                     |                        | 1,101,988 |                   |  |                   | 7,078 |           |  |            | (8,320 | )      |   |           | 1,100,746 |            |  |      | 869,872 |           |  |      | 18,077 |        |  |   | (1,194 | )      |   |   | 886,755 |           |  |   | 872,974 |           |  |   | 8,571 |        |  |   | (2,825 | )      |   |   | 878,720 |          
|Municipal securities                  |                                     |                        | 152,927   |                   |  |                   | 5,905 |           |  |            | (754   | )      |   |           | 158,078   |            |  |      | 105,143 |           |  |      | 3,634  |        |  |   | (190   | )      |   |   | 108,587 |           |  |   | 85,047  |           |  |   | 252   |        |  |   | (1,524 | )      |   |   | 83,775  |          
|Federal Reserve Bank stock            |                                     |                        | 4,459     |                   |  |                   |      |           |  |            |       |        |   |           | 4,459     |            |  |      | 4,431   |           |  |      |       |        |  |   |       |        |   |   | 4,431   |           |  |   | 4,230   |           |  |   |      |        |  |   |       |        |   |   | 4,230   |          
|Federal Home Loan Bank stock          |                                     |                        | 25,469    |                   |  |                   |      |           |  |            |       |        |   |           | 25,469    |            |  |      | 27,188  |           |  |      |       |        |  |   |       |        |   |   | 27,188  |           |  |   | 7,939   |           |  |   |      |        |  |   |       |        |   |   | 7,939   |          
|Other securities                      |                                     |                        | 9,455     |                   |  |                   | 93    |           |  |            |       |        |   |           | 9,548     |            |  |      | 30,777  |           |  |      | 107    |        |  |   |       |        |   |   | 30,884  |           |  |   | 41,169  |           |  |   | 356   |        |  |   | (11    | )      |   |   | 41,514  |          
|                                      |                                     |                        |           |                   |  |                   |       |           |  |            |        |        |   |           |           |            |  |      |         |           |  |      |        |        |  |   |        |        |   |   |         |           |  |   |         |           |  |   |       |        |  |   |        |        |   |   |         |          
|                                      | Total securities available for sale |                        | $         | 1,544,657         |  |                   | $     | 13,917    |  |            | $      | (9,176 | ) |           | $         | 1,549,398  |  |      | $       | 1,179,443 |  |      | $      | 23,141 |  |   | $      | (1,384 | ) |   | $       | 1,201,200 |  |   | $       | 1,062,219 |  |   | $     | 10,473 |  |   | $      | (4,377 | ) |   | $       | 1,068,315 | 
|                                      |                                     |                        |           |                   |  |                   |       |           |  |            |        |        |   |           |           |            |  |      |         |           |  |      |        |        |  |   |        |        |   |   |         |           |  |   |         |           |  |   |       |        |  |   |        |        |   |   |         |          

Declines in the fair value of individual
securities below their cost that are other than temporary would
result in write-downs, as a realized loss, of the individual
securities to their fair value. The Company believes that none
of the unrealized losses should be considered other than
temporary.

In connection with the Citizens merger, the
Company transferred all of Citizens held to maturity debt
securities to the available for sale category in 2000. The
amortized cost of these securities at the time of transfer was
$55.8 million and the unrealized gain was $267,000
($174,000 net of income taxes).

Securities were $1.55 billion at
December 31, 2003, an increase of $348.2 million from
$1.20 billion at December 31, 2002. During 2002,
securities increased $132.9 million from $1.07 billion
at December 31, 2001. The average yield on the securities
portfolio for 2003 was 3.66%, while the average yield was 5.00%
in 2002.

33



---



##### 



Included in the Companys mortgage-backed
securities at December 31, 2003 were agency issued
collateral mortgage obligations with a book value of
$225.1 million and a fair market value of
$226.1 million and non-agency issued collateral mortgage
obligations with a book value of $79.1 million and fair
market value of $79.0 million.

At December 31, 2003, $864.9 million of
the mortgage-backed securities held by the Company had final
maturities of more than 10 years. At December 31,
2003, approximately $11.5 million of the Companys
mortgage-backed securities earned interest at floating rates and
will reprice within one year and, accordingly, were less
susceptible to declines in value should interest rates increase.

The following table summarizes the contractual
maturity of investments and their weighted average yields at
December 31, 2003. The yield on the securities portfolio is
based on average historical cost balances and does not give
effect to changes in fair value that are reflected as a separate
component of other comprehensive income. The yield on municipal
securities has not been computed on a fully tax equivalent basis.

|                                             |                   |                        |        |                    |  |                  |      |                 |   |           |         |         |  |           |      |       |   |       |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |           |           |  |  |      |      |  
|-------------------------------------------- | ----------------- | ---------------------- | ------ | ------------------ |  | ---------------- | ---- | --------------- | - | --------- | ------- | ------- |  | --------- | ---- | ----- | - | ----- | ------- | ------- |  |  | ---- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | - | - | --------- | --------- |  |  | ---- | ---- | -
|                                             |                   |                       
|                                             |                   | December 31, 2003     
|                                             |                   |                       
|                                             |                   |                        |        |                    |  |                 
|                                             |                   |                        |        |                    |  | After Five Years |      |                
|                                             |                   |                        |        | After One Year but |  | but within       |      |                 |   |          
|                                             |                   | Within One Year        |        | within Five Years  |  | Ten Years        |      | After Ten Years |   |          
|                                             |                   |                        |        |                    |  |                  |      |                 |   |          
|                                             |                   | Amortized              |        |                    |  | Amortized        |      |                 |   | Amortized |         |         |  | Amortized |      |       |   |      
|                                             |                   | Cost                   |        | Yield              |  | Cost             |      | Yield           |   | Cost      |         | Yield   |  | Cost      |      | Yield |   | Total |         | Yield  
|                                             |                   |                        |        |                    |  |                  |      |                 |   |           |         |         |  |           |      |       |   |       |         |        
|                                             |                   |                       
|                                             |                   | (Dollars in thousands)
|U.S. Government and agency securities        |                   | $                      | 23,682 |                    |  |                  | 3.08 | %               |   | $         | 226,677 |         |  |           | 2.94 | %     |   | $     |        |         |  |  |     | %    |   | $ |        |         |  |  |     | %    |   | $ | 250,359   |           |  |  | 2.96 | %   
|Mortgage-backed securities                   |                   |                        | 491    |                    |  |                  | 5.93 |                 |   |           | 45,061  |         |  |           | 3.51 |       |   |       | 191,522 |         |  |  | 4.06 |      |   |   | 864,914 |         |  |  | 3.91 |      |   |   | 1,101,988 |           |  |  | 3.92 |     
|Municipal securities                         |                   |                        | 1,151  |                    |  |                  | 4.87 |                 |   |           | 4,602   |         |  |           | 4.53 |       |   |       | 19,248  |         |  |  | 3.99 |      |   |   | 127,926 |         |  |  | 4.47 |      |   |   | 152,927   |           |  |  | 4.41 |     
|Federal Reserve Bank stock                   |                   |                        | 4,459  |                    |  |                  | 6.00 |                 |   |           |        |         |  |           |     |       |   |       |        |         |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 4,459     |           |  |  | 6.00 |     
|Federal Home Loan Bank stock                 |                   |                        | 25,469 |                    |  |                  | 2.00 |                 |   |           |        |         |  |           |     |       |   |       |        |         |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 25,469    |           |  |  | 2.00 |     
|Other securities                             |                   |                        | 7,054  |                    |  |                  | 0.90 |                 |   |           | 678     |         |  |           | 6.01 |       |   |       | 1,672   |         |  |  | 2.96 |      |   |   | 51      |         |  |  | 3.19 |      |   |   | 9,455     |           |  |  | 1.64 |     
|Federal funds sold                           |                   |                        | 56,161 |                    |  |                  | 1.02 |                 |   |           |        |         |  |           |     |       |   |       |        |         |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 56,161    |           |  |  | 1.02 |     
|Securities purchased under resale agreements |                   |                        | 30,000 |                    |  |                  | 0.91 |                 |   |           |        |         |  |           |     |       |   |       |        |         |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 30,000    |           |  |  | 0.91 |     
|Interest-bearing deposits                    |                   |                        | 8,747  |                    |  |                  | 1.22 |                 |   |           |        |         |  |           |     |       |   |       |        |         |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 8,747     |           |  |  | 1.22 |     
|                                             |                   |                        |        |                    |  |                  |      |                 |   |           |         |         |  |           |      |       |   |       |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |           |           |  |  |      |     
|                                             | Total investments |                        | $      | 157,214            |  |                  |      | 1.66            | % |           | $       | 277,018 |  |           |      | 3.07  | % |       | $       | 212,442 |  |  |      | 4.05 | % |   | $       | 992,891 |  |  |      | 3.98 | % |   | $         | 1,639,565 |  |  |      | 3.61 | %
|                                             |                   |                        |        |                    |  |                  |      |                 |   |           |         |         |  |           |      |       |   |       |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |           |           |  |  |      |     



| |             
| | ------------
| | Other Assets

Other assets were $193.6 million at
December 31, 2003, an increase of $55.8 million from
$137.8 million at December 31, 2002. This increase is
primarily attributable to increases in the cash value of
Bank-owned life insurance policies, factored receivables, other
real estate and foreclosed property, and investments in
unconsolidated equity investees. The cash value of Bank-owned
life insurance policies was $121.7 million at
December 31, 2003, an increase of $34.2 million, or
39%, from $87.5 million at December 31, 2002. The
Company purchased an additional $30.0 million of Bank-owned
life insurance during the third quarter of 2003. Factored
receivables result from providing operating funds to businesses
by converting their accounts receivable to cash. Factored
receivables were $32.0 million at December 31, 2003,
an increase of $8.9 million, or 39%, from
$23.0 million at December 31, 2002. Other real estate
and foreclosed property was $4.2 million at
December 31, 2003, an increase of $3.5 million, or
459%, from $760,000 at December 31, 2002. This increase
primarily resulted from the April 1, 2003 foreclosure of a
multi-family loan. Investments in unconsolidated investees was
$11.9 million at December 31, 2003, an increase of
$4.6 million, or 62%, from $7.3 million at
December 31, 2002. The increase is primarily due to
additional capital contributions and equity earnings.



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

The Company offers a variety of deposit accounts
having a wide range of interest rates and terms. The
Companys deposits consist of demand, savings,
interest-bearing demand, money market, and time accounts.

34



---



##### 



The Company relies primarily on its product and
service offerings, high quality customer service, advertising,
and competitive pricing policies to attract and retain these
deposits. Deposits provide the primary source of funding for the
Companys lending and investment activities, and the
interest paid for deposits must be managed carefully to control
the level of interest expense.


The Company had $156.4 million and
$149.4 million of its deposits classified as brokered funds
at December 31, 2003 and 2002, respectively. The
Banks brokered deposits are attributable to a major
treasury management relationship whereby the Bank provides
banking and treasury management services to mortgage companies
throughout the United States. Under this relationship, a
referring source, whose business is to lend money to mortgage
companies, introduces its customers to the Bank. Deposits
garnered as a result of those introductions are classified as
brokered deposits for financial and regulatory reporting
purposes. In spite of this classification, management believes
that the deposits in question are stable and relationship-based
and that they do not have the characteristics or risks normally
associated with brokered deposits.

The Companys ratio of average demand
deposits to average total deposits for the years ended
December 31, 2003, 2002, and 2001 was 31%, 30%, and 28%,
respectively.

Average total deposits during 2003 increased to
$4.12 billion from $3.47 billion in 2002, an increase
of $648.7 million or 19%. Average total deposits related to
the former Maxim branches were approximately $119.0 million
for 2003. Average noninterest-bearing deposits increased to
$1.28 billion in 2003 from $994.1 million in 2002.
Average total deposits in 2002 rose to $3.47 billion from
$3.20 billion in 2001, an increase of $277.4 million,
or 9%.

The average daily balances and weighted average
rates paid on deposits for each of the years ended
December 31, 2003, 2002, and 2001 are presented below:

|                                 |                |                         |           |           |  |        |      |      |  |        |           |           |  |  |      |   |  |   |           |           |  |  |      |   | 
|-------------------------------- | -------------- | ----------------------- | --------- | --------- |  | ------ | ---- | ---- |  | ------ | --------- | --------- |  |  | ---- | - |  | - | --------- | --------- |  |  | ---- | - | 
|                                 |                |                        
|                                 |                | Year Ended December 31,
|                                 |                |                        
|                                 |                |                         |           |           |  |       
|                                 |                | 2003                    |           | 2002      |  | 2001  
|                                 |                |                         |           |           |  |       
|                                 |                | Amount                  |           | Rate      |  | Amount |      | Rate |  | Amount |           | Rate     
|                                 |                |                         |           |           |  |        |      |      |  |        |           |          
|                                 |                |                        
|                                 |                | (Dollars in thousands) 
|Interest-bearing demand          |                | $                       | 45,493    |           |  |        | 0.22 | %    |  | $      | 34,409    |           |  |  | 0.23 | % |  | $ | 62,510    |           |  |  | 0.50 | %
|Regular savings                  |                |                         | 115,211   |           |  |        | 0.33 |      |  |        | 94,388    |           |  |  | 0.88 |   |  |   | 81,799    |           |  |  | 1.58 |  
|Premium yield                    |                |                         | 847,045   |           |  |        | 0.96 |      |  |        | 830,690   |           |  |  | 1.61 |   |  |   | 851,951   |           |  |  | 3.41 |  
|Money market savings             |                |                         | 827,816   |           |  |        | 0.80 |      |  |        | 593,691   |           |  |  | 1.04 |   |  |   | 461,433   |           |  |  | 2.21 |  
|Time deposits less than $100,000 |                |                         | 283,670   |           |  |        | 2.67 |      |  |        | 293,752   |           |  |  | 3.63 |   |  |   | 302,885   |           |  |  | 5.25 |  
|Time deposits $100,000 and over  |                |                         | 629,749   |           |  |        | 1.85 |      |  |        | 553,666   |           |  |  | 2.69 |   |  |   | 522,601   |           |  |  | 4.82 |  
|IRAs, QRPs and other           |                |                         | 91,509    |           |  |        | 2.74 |      |  |        | 78,583    |           |  |  | 3.73 |   |  |   | 76,336    |           |  |  | 5.07 |  
|                                 |                |                         |           |           |  |        |      |      |  |        |           |           |  |  |      |   |  |   |           |           |  |  |      |  
|Total interest-bearing deposits  |                |                         | 2,840,493 |           |  |        | 1.30 | %    |  |        | 2,479,179 |           |  |  | 1.97 | % |  |   | 2,359,515 |           |  |  | 3.64 | %
|                                 |                |                         |           |           |  |        |      |      |  |        |           |           |  |  |      |   |  |   |           |           |  |  |      |  
|Noninterest-bearing deposits     |                |                         | 1,281,546 |           |  |        |      |      |  |        | 994,113   |           |  |  |      |   |  |   | 836,366   |           |  |  |      |  
|                                 |                |                         |           |           |  |        |      |      |  |        |           |           |  |  |      |   |  |   |           |           |  |  |      |  
|                                 | Total deposits |                         | $         | 4,122,039 |  |        |      |      |  |        | $         | 3,473,292 |  |  |      |   |  |   | $         | 3,195,881 |  |  |      |   | 
|                                 |                |                         |           |           |  |        |      |      |  |        |           |           |  |  |      |   |  |   |           |           |  |  |      |  

The following table sets forth the maturity of
the Companys time deposits that are $100,000 or greater as
of the dates indicated:

|                              |                                       |                        |         |         |  |      |         |         |  |   |         |         | 
|----------------------------- | ------------------------------------- | ---------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                              |                                       |                       
|                              |                                       | December 31,          
|                              |                                       |                       
|                              |                                       | 2003                   |         | 2002    |  | 2001
|                              |                                       |                        |         |         |  |     
|                              |                                       |                       
|                              |                                       | (Dollars in thousands)
|3 months or less              |                                       | $                      | 417,384 |         |  | $    | 285,071 |         |  | $ | 348,782 |        
|Between 3 months and 6 months |                                       |                        | 60,101  |         |  |      | 56,087  |         |  |   | 81,457  |        
|Between 6 months and 1 year   |                                       |                        | 78,948  |         |  |      | 68,934  |         |  |   | 75,461  |        
|Over 1 year                   |                                       |                        | 86,157  |         |  |      | 108,016 |         |  |   | 48,420  |        
|                              |                                       |                        |         |         |  |      |         |         |  |   |         |        
|                              | Total time deposits $100,000 and over |                        | $       | 642,590 |  |      | $       | 518,108 |  |   | $       | 554,120 | 
|                              |                                       |                        |         |         |  |      |         |         |  |   |         |        

35



---



##### 





| |                      
| | ---------------------
| | Short-term Borrowings

Securities sold under repurchase agreements and
short-term borrowings generally represent borrowings with
maturities ranging from one to thirty days. Short-term
borrowings consist of federal funds purchased and overnight
borrowings with the Federal Home Loan Bank (the
FHLB). Information relating to these borrowings for the
years ended December 31, 2003 and 2002 is summarized as
follows:

|                                             |                                         |                        |   |         |   |  |   |         |  
|-------------------------------------------- | --------------------------------------- | ---------------------- | - | ------- | - |  | - | ------- | -
|                                             |                                         |                       
|                                             |                                         | December 31,          
|                                             |                                         |                       
|                                             |                                         | 2003                   |   | 2002   
|                                             |                                         |                        |   |        
|                                             |                                         |                       
|                                             |                                         | (Dollars in thousands)
|Securities sold under repurchase agreements: |                                         |                        |   |         |   |  |   |        
|                                             | Average                                 |                        | $ | 261,320 |   |  | $ | 271,304 |  
|                                             | Period-end                              |                        |   | 285,571 |   |  |   | 275,443 |  
|                                             | Maximum month-end balance during period |                        |   | 303,764 |   |  |   | 323,815 |  
|Interest rate:                               |                                         |                        |   |         |   |  |   |        
|                                             | Weighted average for the period         |                        |   | 0.88    | % |  |   | 1.45    | %
|                                             | Weighted average at period-end          |                        |   | 0.72    | % |  |   | 1.15    | %
|Short-term borrowings:                       |                                         |                        |   |         |   |  |   |        
|                                             | Average                                 |                        | $ | 276,193 |   |  | $ | 326,675 |  
|                                             | Period-end                              |                        |   | 473,154 |   |  |   | 408,381 |  
|                                             | Maximum month-end balance during period |                        |   | 473,154 |   |  |   | 501,736 |  
|Interest rate:                               |                                         |                        |   |         |   |  |   |        
|                                             | Weighted average for the period         |                        |   | 1.11    | % |  |   | 1.74    | %
|                                             | Weighted average at period-end          |                        |   | 0.98    | % |  |   | 1.26    | %



| |                          
| | -------------------------
| | Interest Rate Sensitivity

Asset and liability management is concerned with
the timing and magnitude of the repricing of assets as compared
to liabilities. It is the objective of the Company to generate
stable growth in net interest income and to attempt to control
risks associated with interest rate movements. In general,
managements strategy is to reduce the impact of changes in
interest rates on its net interest income by maintaining a
favorable match between the maturities or repricing dates of its
interest-earning assets and interest-bearing liabilities. The
Company adjusts its interest sensitivity during the year through
changes in the mix of assets and liabilities and may use
interest rate products such as interest rate swap and cap
agreements. The Companys asset and liability management
strategy is formulated and monitored by the Asset Liability
Management Committee (the ALCO), which is composed
of senior officers of the Bank and two independent directors, in
accordance with the Committees charter and policies
approved by the Banks Board of Directors. This Committee
meets monthly to review, among other things, the sensitivity of
the Banks assets and liabilities to interest rate changes,
the book and market values of assets and liabilities, unrealized
gains and losses, purchase and sale activity, and maturities of
investments and borrowings. The Asset Liability Committee also
establishes pricing and funding decisions with respect to the
Banks overall asset and liability composition. The
Committee reviews the Banks liquidity, cash flow
flexibility, maturities of investments, deposits and borrowings,
retail and institutional deposit activity, current market
conditions, and interest rates on both a local and national
level.

To effectively measure and manage interest rate
risk, the Company uses simulation analysis to determine the
impact on net interest income of changes in interest rates 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.

The following table presents an analysis of the
sensitivity inherent in the Companys net interest income
and market value of portfolio equity. The data used to prepare
the table is as of December 31, 2003, which may not be
representative of average balances at any other time period.
This analysis is reviewed by

36



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##### 



management on a monthly basis. The results are
impacted by changes in the composition of the balance sheet.
Management believes that, based on available information, the
Bank has been and will continue to be slightly asset sensitive.
The interest rate scenarios presented in the table include
interest rates at December 31, 2003, 2002, and 2001 and as
adjusted by instantaneous rate changes upward of up to
200 basis points and downward of up to -100 basis points.
Each rate scenario reflects unique prepayment and repricing
assumptions. Since there are limitations inherent in any
methodology used to estimate the exposure to changes in market
interest rates, this analysis is not intended to be a forecast
of the actual effect of a change in market interest rates on the
Company. The market value sensitivity analysis presented
includes assumptions that (i) the composition of the
Companys interest sensitive assets and liabilities
existing at year end will remain constant over the twelve month
measurement period; and (ii) that changes in market rates
are parallel and instantaneous across the yield curve regardless
of duration or repricing characteristics of specific assets or
liabilities. Further, the analysis does not contemplate any
actions that the Company might undertake in response to changes
in market interest rates. Accordingly, this analysis is not
intended and does not provide a precise forecast of the effect
actual changes in market rates will have on the Company.


|                                            |                  |                          |  |     |       |    |  |      |       |      |  |  |      |   |  |  |       |    |  |  |       |   
|------------------------------------------- | ---------------- | ------------------------ |  | --- | ----- | -- |  | ---- | ----- | ---- |  |  | ---- | - |  |  | ----- | -- |  |  | ----- | --
|                                            |                  |                         
|                                            |                  | Change in Interest Rates
|                                            |                  |                         
|                                            |                  | -100                     |  | -50 |       | 0  |  | +100 |       | +200
|                                            |                  |                          |  |     |       |    |  |      |       |     
|Impact on net interest income:              |                  |                          |  |     |       |    |  |      |       |      |  |  |      |   |  |  |       |    |  | 
|                                            | Next 12 months:  |                          |  |     |       |    |  |      |       |      |  |  |      |   |  |  |       |    |  |  |      
|                                            |                  | December 31, 2003        |  |     | (1.20 | )% |  |      | 0.25  | %    |  |  | 0.00 | % |  |  | 1.23  | %  |  |  | 3.33  | % 
|                                            |                  | December 31, 2002        |  |     | (6.17 | )% |  |      | (3.71 | )%   |  |  | 0.00 | % |  |  | 4.39  | %  |  |  | 6.83  | % 
|                                            |                  | December 31, 2001        |  |     | (5.44 | )% |  |      | (2.21 | )%   |  |  | 0.00 | % |  |  | 1.92  | %  |  |  | 3.59  | % 
|                                            | Months 13 to 24: |                          |  |     |       |    |  |      |       |      |  |  |      |   |  |  |       |    |  |  |      
|                                            |                  | December 31, 2003        |  |     | (4.37 | )% |  |      | (1.43 | )%   |  |  | 0.00 | % |  |  | 3.37  | %  |  |  | 6.65  | % 
|                                            |                  | December 31, 2002        |  |     | (7.13 | )% |  |      | (4.15 | )%   |  |  | 0.00 | % |  |  | 5.36  | %  |  |  | 8.42  | % 
|                                            |                  | December 31, 2001        |  |     | (7.66 | )% |  |      | (3.47 | )%   |  |  | 0.00 | % |  |  | 3.38  | %  |  |  | 6.11  | % 
|Impact on market value of portfolio equity: |                  |                          |  |     |       |    |  |      |       |      |  |  |      |   |  |  |       |    |  | 
|                                            |                  | December 31, 2003        |  |     | (2.49 | )% |  |      | (0.49 | )%   |  |  | 0.00 | % |  |  | (0.32 | )% |  |  | (0.39 | )%
|                                            |                  | December 31, 2002        |  |     | (5.34 | )% |  |      | (2.96 | )%   |  |  | 0.00 | % |  |  | 2.44  | %  |  |  | 0.64  | % 
|                                            |                  | December 31, 2001        |  |     | (0.89 | )% |  |      | 0.41  | %    |  |  | 0.00 | % |  |  | (4.14 | )% |  |  | (8.16 | )%

Interest rate sensitivity (GAP) is
defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a
given time period. A GAP is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A GAP is considered negative when
the amount of interest rate sensitive liabilities exceeds
interest rate sensitive assets. During a period of rising
interest rates, a negative GAP would tend to adversely affect
net interest income, 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. While GAP is a
useful measurement and contributes toward effective asset and
liability management, it is difficult to predict the effect of
changing interest rates solely on that measure. For this reason,
the Company relies on simulation analysis to manage interest
rate risk. Because different types of assets and liabilities
with the same or similar maturities may react differently to
changes in overall market rates or conditions, changes in
interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each
maturity category.

The Companys one-year cumulative GAP
position at December 31, 2003 was a positive
$362.4 million or 6.09% of assets. This is a one-day
position that is continually changing and is not indicative of
the Company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,
shortcomings are inherent in GAP analysis since certain assets
and liabilities may not move proportionally as interest rates
change.

37



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##### 



The following table sets forth an interest rate
sensitivity analysis for the Company as of December 31,
2003 and 2002.

|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |          |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |           | 
|-------------------------------------------------------------------- | ------------------------------------------ | ---------------------- | --------- | ----------- |  | ----------- | -------- | ----------- |  | ---------- | -------- | -------------- |  | ----- | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                                                     |                                            |                        |           |             |  | One Year to |          | More than   |  | Total Rate |          | Total Non-     |  |      
|                                                                     |                                            | 0-90 Days              |           | 91-364 Days |  | Three Years |          | Three Years |  | Sensitive  |          | Rate Sensitive |  | Total
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |          |                |  |      
|                                                                     |                                            |                       
|                                                                     |                                            | (Dollars in thousands)
|Cash and due from banks                                              |                                            | $                      |          |             |  | $           |         |             |  | $          |         |                |  | $     |          |           |  | $ |          |           |  | $ | 390,890   |           |  | $ | 390,890   |          
|Federal funds sold and other cash equivalents                        |                                            |                        | 94,908    |             |  |             |         |             |  |            |         |                |  |       |          |           |  |   | 94,908    |           |  |   |          |           |  |   | 94,908    |          
|Securities                                                           |                                            |                        | 136,293   |             |  |             | 129,459  |             |  |            | 410,207  |                |  |       | 873,439   |           |  |   | 1,549,398 |           |  |   |          |           |  |   | 1,549,398 |          
|Loans                                                                |                                            |                        | 1,925,652 |             |  |             | 594,740  |             |  |            | 665,177  |                |  |       | 391,560   |           |  |   | 3,577,129 |           |  |   | 11,443    |           |  |   | 3,588,572 |          
|Allowance for loan losses                                            |                                            |                        |          |             |  |             |         |             |  |            |         |                |  |       |          |           |  |   |          |           |  |   | (43,008   | )         |  |   | (43,008   | )        
|Other assets                                                         |                                            |                        |          |             |  |             |         |             |  |            |         |                |  |       |          |           |  |   |          |           |  |   | 364,976   |           |  |   | 364,976   |          
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |          |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                                                     | Total assets                               |                        | $         | 2,156,853   |  |             | $        | 724,199     |  |            | $        | 1,075,384      |  |       | $         | 1,264,999 |  |   | $         | 5,221,435 |  |   | $         | 724,301   |  |   | $         | 5,945,736 | 
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |          |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Deposits                                                             |                                            | $                      | 875,520   |             |  | $           | 632,419  |             |  | $          | 584,996  |                |  | $     | 797,266   |           |  | $ | 2,890,201 |           |  | $ | 1,513,038 |           |  | $ | 4,403,239 |          
|Securities sold under repurchase agreements and
    other borrowings |                                            |                        | 758,828   |             |  |             | 200,320  |             |  |            | 952      |                |  |       | 5,283     |           |  |   | 965,383   |           |  |   |          |           |  |   | 965,383   |          
|Junior subordinated deferrable interest debentures                   |                                            |                        | 51,547    |             |  |             |         |             |  |            |         |                |  |       |          |           |  |   | 51,547    |           |  |   |          |           |  |   | 51,547    |          
|Other liabilities                                                    |                                            |                        |          |             |  |             |         |             |  |            |         |                |  |       |          |           |  |   |          |           |  |   | 26,246    |           |  |   | 26,246    |          
|Shareholders equity                                                 |                                            |                        |          |             |  |             |         |             |  |            |         |                |  |       |          |           |  |   |          |           |  |   | 499,321   |           |  |   | 499,321   |          
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |          |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                                                     | Total liabilities and shareholders equity |                        | $         | 1,685,895   |  |             | $        | 832,739     |  |            | $        | 585,948        |  |       | $         | 802,549   |  |   | $         | 3,907,131 |  |   | $         | 2,038,605 |  |   | $         | 5,945,736 | 
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |          |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Period GAP                                                           |                                            | $                      | 470,958   |             |  | $           | (108,540 | )           |  | $          | 489,436  |                |  | $     | 462,450   |           |  | $ | 1,314,304 |           |  |   |           |           |  |   |           |          
|Cumulative GAP                                                       |                                            | $                      | 470,958   |             |  | $           | 362,418  |             |  | $          | 851,854  |                |  | $     | 1,314,304 |           |  | $ | 1,314,304 |           |  |   |           |           |  |   |           |          
|Period GAP to total assets                                           |                                            |                        | 7.92      | %           |  |             | (1.83    | )%          |  |            | 8.23     | %              |  |       | 7.78      | %         |  |   | 22.10     | %         |  |   |           |           |  |   |           |          
|Cumulative GAP to total assets                                       |                                            |                        | 7.92      | %           |  |             | 6.09     | %           |  |            | 14.32    | %              |  |       | 22.10     | %         |  |   | 22.10     | %         |  |   |           |           |  |   |           |          
|As of December 31, 2002                                              |                                            |                        |           |             |  |             |          |             |  |            |          |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Period GAP                                                           |                                            | $                      | 1,041,511 |             |  | $           | (385,043 | )           |  | $          | (191,332 | )              |  | $     | 558,748   |           |  | $ | 1,023,884 |           |  |   |           |           |  |   |           |          
|Cumulative GAP                                                       |                                            | $                      | 1,041,511 |             |  | $           | 656,468  |             |  | $          | 465,136  |                |  | $     | 1,023,884 |           |  | $ | 1,023,884 |           |  |   |           |           |  |   |           |          
|Period GAP to total assets                                           |                                            |                        | 20.15     | %           |  |             | (7.45    | )%          |  |            | (3.70    | )%             |  |       | 10.81     | %         |  |   | 19.81     | %         |  |   |           |           |  |   |           |          
|Cumulative GAP to total assets                                       |                                            |                        | 20.15     | %           |  |             | 12.70    | %           |  |            | 9.00     | %              |  |       | 19.81     | %         |  |   | 19.81     | %         |  |   |           |           |  |   |           |          



| |          
| | ---------
| | Liquidity

Liquidity management involves maintaining
sufficient cash levels to fund operations and to meet the
requirements of borrowers, depositors, and creditors. Higher
levels of liquidity bear higher corresponding costs, measured in
terms of lower yields on short-term, more liquid earning assets,
and higher interest expense involved in extending liability
maturities. Liquid assets include cash and cash equivalents,
loans and securities maturing within one year, and money market
instruments. In addition, the Company holds securities maturing
after one year, which can be sold to meet liquidity needs.

The Company relies primarily on customer
deposits, securities sold under repurchase agreements, and
operating cash flow to fund interest-earning assets. Another
source of liquidity is overnight federal funds purchased from
the Companys correspondent banks. The FHLB is also a
potential source of liquidity for the Bank. The FHLB allows
member banks to borrow against their eligible collateral to
satisfy liquidity requirements.

Maintaining a relatively stable funding base,
which is achieved by diversifying funding sources, competitively
pricing deposit products, and extending the contractual maturity
of liabilities, reduces the Companys exposure to roll over
risk on deposits and limits reliance on volatile short-term
purchased funds.

38



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##### 



Short-term funding needs arise from declines in
deposits or other funding sources, funding of loan commitments
and requests for new loans. The Companys strategy is to
fund assets to the maximum extent possible with core deposits
that provide a sizable source of relatively stable and low-cost
funds. Core deposits include all deposits, except certificates
of deposit and other time deposits of $100,000 and over. Average
core deposits funded approximately 72% of total interest-earning
assets for the year ended December 31, 2003 and 71% for the
same period in 2002.


Management believes the Company has sufficient
liquidity to meet all reasonable borrower, depositor, and
creditor needs in the present economic environment. In addition,
the Bank has access to the FHLB for borrowing purposes. The
Company has not received any recommendations from regulatory
authorities that would materially affect liquidity, capital
resources, or operations.

Subject to certain limitations, the Bank may
borrow funds from the FHLB in the form of advances. Credit
availability from the FHLB to the Bank is based on the
Banks financial and operating condition. Borrowings from
the FHLB by the Bank were approximately $203.3 million at
December 31, 2003. In addition to creditworthiness, the
Bank must own a minimum amount of FHLB capital stock. This
minimum is 5.00% of outstanding FHLB advances. Unused borrowing
capacity at December 31, 2003 was approximately
$496.0 million. The Bank uses FHLB advances for both
long-term and short-term liquidity needs. Other than normal
banking operations, the Bank has no long-term liquidity needs.
The Bank has not been involved with highly leveraged
transactions that may create unusual long-term liquidity needs.

In October 2003, the Company formed SWBT
Statutory Trust I (the Trust) to issue trust
preferred securities. On October 7, 2003, the Trust issued
in a private placement $50.0 million in trust preferred
securities in the form of its floating rate Capital Securities
and issued to the Company $1.5 million of trust common
securities. The Trust used the proceeds to purchase
$51.5 million of the Companys floating rate junior
subordinated deferrable interest debentures due
December 17, 2033 (the Debentures). The
interest rate on the Debentures was 4% at December 31,
2003. The Debentures are the sole assets of the Trust and are
subordinate to all of the Companys existing and future
obligations for borrowed or purchased money, obligations under
letters of credit and certain derivative contracts, and any
guarantees by the Company of any of such obligations. The $51.0
million in proceeds, net of issuance costs, from this offering
were used to fund the cash purchase price for Reunion.

Payments due by period for the Companys
contractual obligations (other than deposit liabilities with no
stated maturity) at December 31, 2003 are presented below:

|                                                   |  |                        |           |             |  |             |         |            |  |       |        |  |  |   |        |  |  |   |           | 
|-------------------------------------------------- |  | ---------------------- | --------- | ----------- |  | ----------- | ------- | ---------- |  | ----- | ------ |  |  | - | ------ |  |  | - | --------- | 
|                                                   |  |                        |           | After One   |  | After Three |         |            |  |      
|                                                   |  | Within One             |           | but Within  |  | but Within  |         | After Five |  |      
|                                                   |  | Year                   |           | Three Years |  | Five Years  |         | Years      |  | Total
|                                                   |  |                        |           |             |  |             |         |            |  |      
|                                                   |  |                       
|                                                   |  | (Dollars in thousands)
|Time deposits                                      |  | $                      | 781,515   |             |  | $           | 175,000 |            |  | $     | 49,374 |  |  | $ | 46     |  |  | $ | 1,005,935 | 
|Securities sold under repurchase agreements        |  |                        | 285,571   |             |  |             |        |            |  |       |       |  |  |   |       |  |  |   | 285,571   | 
|Short-term borrowings                              |  |                        | 473,154   |             |  |             |        |            |  |       |       |  |  |   |       |  |  |   | 473,154   | 
|Long-term borrowings                               |  |                        | 200,422   |             |  |             | 951     |            |  |       | 1,522  |  |  |   | 3,763  |  |  |   | 206,658   | 
|Junior subordinated deferrable interest debentures |  |                        |          |             |  |             |        |            |  |       |       |  |  |   | 51,547 |  |  |   | 51,547    | 
|Operating lease obligations                        |  |                        | 5,166     |             |  |             | 9,416   |            |  |       | 789    |  |  |   | 5,416  |  |  |   | 20,787    | 
|                                                   |  |                        |           |             |  |             |         |            |  |       |        |  |  |   |        |  |  |   |           | 
|Total contractual obligations                      |  | $                      | 1,745,828 |             |  | $           | 185,367 |            |  | $     | 51,685 |  |  | $ | 60,772 |  |  | $ | 2,043,652 | 
|                                                   |  |                        |           |             |  |             |         |            |  |       |        |  |  |   |        |  |  |   |           | 

39



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##### 





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

The contractual amount of the Companys
financial instruments with off-balance sheet risk expiring by
period at December 31, 2003 is presented below:

|                                                                 |  |                        |           |             |  |             |         |            |  |       |         |  |  |   |         |  |  |   |           | 
|---------------------------------------------------------------- |  | ---------------------- | --------- | ----------- |  | ----------- | ------- | ---------- |  | ----- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                                                                 |  |                        |           | After One   |  | After Three |         |            |  |      
|                                                                 |  | Within One             |           | but Within  |  | but Within  |         | After Five |  |      
|                                                                 |  | Year                   |           | Three Years |  | Five Years  |         | Years      |  | Total
|                                                                 |  |                        |           |             |  |             |         |            |  |      
|                                                                 |  |                       
|                                                                 |  | (Dollars in thousands)
|Unfunded loan commitments including unfunded
    lines of credit |  | $                      | 1,001,415 |             |  | $           | 809,211 |            |  | $     | 264,973 |  |  | $ | 60,374  |  |  | $ | 2,135,973 | 
|Standby letters of credit                                        |  |                        | 134,449   |             |  |             | 87,275  |            |  |       | 5,317   |  |  |   |        |  |  |   | 227,041   | 
|Commercial letters of credit                                     |  |                        | 8,958     |             |  |             | 570     |            |  |       |        |  |  |   |        |  |  |   | 9,528     | 
|Unfunded commitments to unconsolidated investees                 |  |                        | 3,753     |             |  |             |        |            |  |       |        |  |  |   |        |  |  |   | 3,753     | 
|Commitments to sell mortgage loans                               |  |                        | 10,577    |             |  |             |        |            |  |       |        |  |  |   |        |  |  |   | 10,577    | 
|Guarantees on GNMA securities administered                       |  |                        |          |             |  |             |        |            |  |       |        |  |  |   | 86,045  |  |  |   | 86,045    | 
|                                                                 |  |                        |           |             |  |             |         |            |  |       |         |  |  |   |         |  |  |   |           | 
|Total financial instruments with off-balance
    sheet risk      |  | $                      | 1,159,152 |             |  | $           | 897,056 |            |  | $     | 270,290 |  |  | $ | 146,419 |  |  | $ | 2,472,917 | 
|                                                                 |  |                        |           |             |  |             |         |            |  |       |         |  |  |   |         |  |  |   |           | 

Due to the nature of the Companys unfunded
loan commitments, including unfunded lines of credit, the
amounts presented above do not necessarily represent amounts the
Company anticipates funding in the periods presented above.
During the last three years, the Company has experienced stable
usage between 64% and 66% of unfunded loan commitments,
including unfunded lines of credit.



| |                             
| | ----------------------------
| | Critical Accounting Policies

The Company has established various accounting
policies that govern the application of accounting principles
generally accepted in the United States in the preparation of
the Companys financial statements. The significant
accounting policies of the Company are described in the
footnotes to the consolidated financial statements. Certain
accounting policies involve significant judgments and
assumptions by management that have a material impact on the
carrying value of certain assets and liabilities; management
considers such accounting policies to be critical accounting
policies. The judgments and assumptions used by management are
based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions made by management,
actual results could differ from these judgments and
assumptions, which could have a material impact on the carrying
values of assets and liabilities and the results of operations
of the Company.

The Company believes the allowance for loan
losses is the critical accounting policy that requires the most
significant judgments and assumptions used in the preparation of
its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical
experience as well as other factors including the effect of
changes in the local real estate market on collateral values,
the effect on the loan portfolio of current economic indicators
and their probable impact on borrowers, and increases or
decreases in nonperforming and impaired loans. Changes in these
factors may cause managements estimate of the allowance to
increase or decrease and result in adjustments to the
Companys provision for loan losses. See
 Financial Condition  Loan Review
and Allowance for Loan Losses and
Note 1  Nature of Operations and Summary
of Significant Accounting Policies for a detailed
description of the Companys estimation process and
methodology related to 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, credit 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

40



---



##### 



accounting estimate. See
Note 1  Nature of Operations and Summary
of Significant Accounting Policies and
Note 8  Mortgage Servicing Rights
for further discussion on the accounting for these assets.




| |                  
| | -----------------
| | Capital Resources

Shareholders equity increased to
$499.3 million at December 31, 2003 from
$445.5 million at December 31, 2002, an increase of
$53.8 million, or 12%, primarily from comprehensive
income of $49.5 million and the exercise of stock options.

Capital management consists of providing equity
to support both current and future operations. The Company is
subject to capital adequacy requirements imposed by the Federal
Reserve Board and the Bank is subject to capital adequacy
requirements imposed by the OCC. Both the Federal Reserve Board
and the OCC 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.

Bank regulatory authorities in the United States
have issued risk-based capital standards by which all bank
holding companies and banks are evaluated in terms of capital
adequacy. The risk-based capital standards issued by the Federal
Reserve Board apply to the Company, and the OCC guidelines apply
to the Bank. These guidelines relate a financial
institutions capital to the risk profile of its assets.
The risk-based capital standards require all financial
organizations to have Tier 1 capital of at
least 4.0% of risk-adjusted assets and total
risk-based capital (Tier 1 and Tier 2) of
at least 8.0% of risk-adjusted assets. Tier 1
capital includes, generally, common shareholders
equity and qualifying perpetual preferred stock together with
related surpluses and retained earnings, qualifying perpetual
preferred stock, trust preferred securities, and minority
interest in equity accounts of consolidated subsidiaries less
deductions for goodwill and various other intangibles.
Tier 2 capital may consist of a limited amount
of subordinated debt, certain hybrid capital instruments and
other debt securities, 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 agencies have also adopted guidelines that
supplement the risk-based capital guidelines with a minimum
leverage ratio of Tier 1 capital to average total
consolidated assets (Tier 1 leverage ratio) of
3.0% for institutions with well diversified risk, including no
undue interest rate exposure, excellent asset quality, high
liquidity, and good earnings, 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 Tier 1 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.

41



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##### 



The following table compares the Companys
and the Banks leverage and risk-weighted capital ratios as
of December 31, 2003 and 2002 to the minimum regulatory
standards:

|                        |                                           |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |       |  
|----------------------- | ----------------------------------------- | ---------------------- |  | --------------- | ------- | ----------------- |  | ------------ | ----- | ---------------- |  | ----- | ------- |  |  |  | ---- | - |  | - | ------- |  |  |  | ----- | -
|                        |                                           |                        |  |                 |         |                   |  |              |       |                 
|                        |                                           |                        |  |                 |         |                   |  |              |       | Minimum To Be   
|                        |                                           |                        |  |                 |         |                   |  |              |       | Well Capitalized
|                        |                                           |                        |  |                 |         |                   |  | Under Prompt
|                        |                                           |                        |  | Minimum Capital |         | Corrective Action
|                        |                                           | Actual                 |  | Requirement     |         | Provisions       
|                        |                                           |                        |  |                 |         |                  
|                        |                                           | Amount                 |  | Ratio           |         | Amount            |  | Ratio        |       | Amount           |  | Ratio
|                        |                                           |                        |  |                 |         |                   |  |              |       |                  |  |      
|                        |                                           |                       
|                        |                                           | (Dollars in thousands)
|As of December 31, 2003 |                                           |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  | 
|                        | Total Capital (to Risk Weighted Assets):  |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  | $               | 558,858 |                   |  |              | 11.90 | %                |  | $     | 375,630 |  |  |  | 8.00 | % |  | $ | N/A     |  |  |  | N/A   | %
|                        |                                           | The Bank               |  |                 | 504,960 |                   |  |              | 10.77 |                  |  |       | 375,132 |  |  |  | 8.00 |   |  |   | 468,915 |  |  |  | 10.00 |  
|                        | Tier I Capital (to Risk Weighted Assets): |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 515,850 |                   |  |              | 10.99 |                  |  |       | 187,815 |  |  |  | 4.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 461,438 |                   |  |              | 9.84  |                  |  |       | 187,566 |  |  |  | 4.00 |   |  |   | 375,312 |  |  |  | 8.00  |  
|                        | Tier I Capital (to Average Assets):       |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 515,850 |                   |  |              | 9.15  |                  |  |       | 169,086 |  |  |  | 3.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 461,438 |                   |  |              | 8.20  |                  |  |       | 168,917 |  |  |  | 3.00 |   |  |   | 281,529 |  |  |  | 5.00  |  
|As of December 31, 2002 |                                           |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  | 
|                        | Total Capital (to Risk Weighted Assets):  |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 465,545 |                   |  |              | 11.68 |                  |  |       | 318,794 |  |  |  | 8.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 450,853 |                   |  |              | 11.33 |                  |  |       | 318,418 |  |  |  | 8.00 |   |  |   | 398,023 |  |  |  | 10.00 |  
|                        | Tier I Capital (to Risk Weighted Assets): |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 428,849 |                   |  |              | 10.76 |                  |  |       | 159,397 |  |  |  | 4.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 413,643 |                   |  |              | 10.39 |                  |  |       | 159,209 |  |  |  | 4.00 |   |  |   | 318,418 |  |  |  | 8.00  |  
|                        | Tier I Capital (to Average Assets):       |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 428,849 |                   |  |              | 9.43  |                  |  |       | 136,389 |  |  |  | 3.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 413,643 |                   |  |              | 8.59  |                  |  |       | 144,524 |  |  |  | 3.00 |   |  |   | 240,873 |  |  |  | 5.00  |  

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. Also pursuant to
FDICIA, each federal banking agency has promulgated regulations
setting the levels at which an insured institution would be
considered well capitalized, adequately
capitalized, undercapitalized,
significantly undercapitalized, and critically
undercapitalized. Under the Federal Reserve Boards
regulations, the Bank is classified as well
capitalized for purposes of prompt corrective action. See
Item 1. Business  Supervision and
Regulation.

The trust preferred securities issued by the
Trust are included in the Tier 1 capital of the Company for
regulatory capital purposes. The Federal Reserve may in the
future disallow inclusion of trust preferred securities as
Tier 1 capital due to the requirements of
FIN No. 46. On July 2, 2003, the Federal Reserve
Board issued a supervisory letter instructing bank holding
companies to continue to include the trust preferred securities
in the calculation of Tier 1 capital for regulatory capital
purposes until further notice. The Federal Reserve Board has
indicated that it intends to review the regulatory implications
of the changes in accounting treatment of subsidiary trusts that
issue trust preferred securities. There can be no assurance that
the Federal

42



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##### 



Reserve Board will continue to permit
institutions to include trust preferred securities in
Tier 1 capital for regulatory purposes. As of
December 31, 2003, if the Company were not permitted to
include the $50.0 million in trust preferred securities in
its Tier 1 capital, the Company would still meet the
regulatory minimums required to be adequately capitalized.




| |              
| | -------------
| | Other Matters

On January 17, 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation
No. 46, (FIN No. 46) Consolidation of
Variable Interest Entities, which addresses consolidation by
business enterprises of variable interest entities. FIN
No. 46 clarifies the application of Accounting Research
Bulletin No. 51 (ARB No. 51),
Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN No. 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period
ending after December 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. As a result of FIN
No. 46, the accounts and transactions of the Trust have not
been consolidated, even though the Company owns all of the
Trusts outstanding common stock.

On May 15, 2003, the FASB approved Statement
of Financial Accounting Standards (SFAS)
No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many
of those instruments, including mandatorily redeemable preferred
securities, were previously classified as equity or as mezzanine
debt. On October 29, 2003, the FASB deferred the effective
date for certain provisions of SFAS No. 150. The
Company adopted this statement with no impact on its financial
condition or results of operations.

On December 16, 2003, the American Institute
of Certified Public Accountants (AICPA) issued
Statement of Position 03-3 (SOP 03-3),
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. SOP 03-3 provides guidance on the accounting
for differences between contractual and expected cash flows from
the purchasers initial investment in loans or debt
securities acquired in a transfer, if those differences are
attributable, at least in part, to credit quality. Among other
things, SOP 03-3: (1) prohibits the recognition of the
excess of contractual cash flows over expected cash flows as an
adjustment of yield, loss accrual, or valuation allowance at the
time of purchase; (2) requires that subsequent increases in
expected cash flows be recognized prospectively through an
adjustment of yield; and (3) requires the subsequent
decreases in expected cash flows be recognized as an impairment.
In addition, SOP 03-3 prohibits the creation or carrying
over of a valuation allowance in the initial accounting of all
loans within its scope that are acquired in a transfer.
SOP 03-3 becomes effective for loans or debt securities
acquired in fiscal years beginning after December 15, 2004.
The Company does not expect the requirements of SOP 03-3 to
have a material impact on its financial condition or results of
operations.



|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    about Market Risk

The Companys financial performance is
impacted by, among other factors, interest rate risk and credit
risk. The Company relies on an extensive loan review process to
mitigate its credit risk. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Financial
Condition  Loan Review and Allowance for Loan
Losses herein.

Management may use derivative contracts to manage
its exposure to commitments to originate mortgage loans. All of
the derivatives utilized by the Company are for purposes other
than trading. The derivatives utilized consist of purchased
options on FNMA or FHLMC guaranteed mortgage-backed securities
and forward delivery commitments with FNMA and other secondary
market investors. These financial instruments are used to reduce
the Companys exposure to the effects of fluctuations in
interest rates on the

43



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##### 



Companys lending and secondary marketing
activities. The notional amount and fair value of such
derivatives was immaterial at December 31, 2003 and 2002.


Interest rate risk is the change in value due to
changes in interest rates. This risk is addressed by the
Companys ALCO, which includes senior management and two
independent directors. The ALCO monitors interest rate risk by
analyzing the potential impact to the net portfolio of equity
value and net interest income from potential changes to interest
rates and considers the impact of alternative strategies or
changes in balance sheet structure. The ALCO manages the
Companys balance sheet in part to minimize the potential
impact on net portfolio value and net interest income despite
changes in interest rates. The Companys exposure to
interest rate risk is reviewed on a monthly basis by the ALCO.
Interest rate risk exposure is measured using interest rate
sensitivity analysis to determine the change in net portfolio
value in the event of hypothetical changes in interest rates. If
potential changes to net portfolio value and net interest income
resulting from hypothetical interest rate changes are not within
the limits established by the Board, the Board may direct
management to adjust its asset and liability mix to bring
interest rate risk within Board-approved limits. In order to
reduce the exposure to interest rate fluctuations, the Company
has implemented strategies to more closely match its balance
sheet composition. Interest rate sensitivity is computed by
estimating the changes in net portfolio of equity value, or
market value over a range of potential changes in interest
rates. The market value of equity is the market value of the
Companys assets minus the market value of its liabilities
plus the market value of any off-balance sheet items, if any.
The market value of each asset, liability, and off-balance sheet
item is its net present value of expected cash flows discounted
at market rates after adjustment for rate changes. The Company
measures the impact on market value for an immediate and
sustained 200 basis point increase and decrease
(shock) in interest rates.

In addition, reference is made to
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Financial Condition  Interest Rate Sensitivity and
Liquidity, which is incorporated herein by reference.

Item 8.     Financial
Statements and Supplementary Data

Reference is made to the financial statements,
the reports thereon and the notes thereto commencing at
page 51 of this Form 10-K, which financial statements,
reports, notes and data are incorporated herein by reference.

44



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##### 



Quarterly Financial Data (Unaudited)

The following table represents summarized data
for each of the quarters in fiscal 2003 and 2002.

|                                                                                  |                                                         |                                       |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |        | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                                  |                                                         |                                       |        |        
|                                                                                  |                                                         | 2003                                  |        | 2002   
|                                                                                  |                                                         |                                       |        |        
|                                                                                  |                                                         | Fourth                                |        | Third   |  | Second  |        | First   |  | Fourth  |        | Third   |  | Second  |        | First  
|                                                                                  |                                                         | Quarter                               |        | Quarter |  | Quarter |        | Quarter |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                                                                                  |                                                         |                                       |        |         |  |         |        |         |  |         |        |         |  |         |        |        
|                                                                                  |                                                         |                                      
|                                                                                  |                                                         | (In thousands, except per share data)
|Interest income                                                                   |                                                         | $                                     | 62,053 |         |  | $       | 60,976 |         |  | $       | 58,761 |         |  | $       | 57,313 |         |  | $ | 59,650 |        |  | $ | 61,231 |        |  | $ | 59,582 |        |  | $ | 57,952 |       
|Interest expense                                                                  |                                                         |                                       | 10,697 |         |  |         | 11,211 |         |  |         | 11,585 |         |  |         | 12,232 |         |  |   | 14,122 |        |  |   | 15,490 |        |  |   | 14,677 |        |  |   | 15,490 |       
|                                                                                  |                                                         |                                       |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                                                                  | Net interest income                                     |                                       |        | 51,356  |  |         |        | 49,765  |  |         |        | 47,176  |  |         |        | 45,081  |  |   |        | 45,528 |  |   |        | 45,741 |  |   |        | 44,905 |  |   |        | 42,462 | 
|Provision for loan losses                                                         |                                                         |                                       | 3,000  |         |  |         | 3,000  |         |  |         | 3,000  |         |  |         | 3,000  |         |  |   | 3,000  |        |  |   | 3,000  |        |  |   | 3,250  |        |  |   | 2,500  |       
|                                                                                  |                                                         |                                       |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                                                                  | Net interest income after provision for loan
    losses |                                       |        | 48,356  |  |         |        | 46,765  |  |         |        | 44,176  |  |         |        | 42,081  |  |   |        | 42,528 |  |   |        | 42,741 |  |   |        | 41,655 |  |   |        | 39,962 | 
|Noninterest income                                                                |                                                         |                                       | 23,156 |         |  |         | 24,432 |         |  |         | 20,079 |         |  |         | 19,253 |         |  |   | 20,001 |        |  |   | 16,520 |        |  |   | 17,675 |        |  |   | 16,195 |       
|Noninterest expense                                                               |                                                         |                                       | 48,130 |         |  |         | 51,358 |         |  |         | 41,163 |         |  |         | 39,511 |         |  |   | 39,459 |        |  |   | 38,144 |        |  |   | 37,251 |        |  |   | 36,224 |       
|                                                                                  |                                                         |                                       |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                                                                  | Income before income taxes                              |                                       |        | 23,382  |  |         |        | 19,839  |  |         |        | 23,092  |  |         |        | 21,823  |  |   |        | 23,070 |  |   |        | 21,117 |  |   |        | 22,079 |  |   |        | 19,933 | 
|Provision for income taxes                                                        |                                                         |                                       | 7,071  |         |  |         | 6,459  |         |  |         | 7,129  |         |  |         | 6,748  |         |  |   | 7,153  |        |  |   | 6,555  |        |  |   | 6,897  |        |  |   | 6,388  |       
|                                                                                  |                                                         |                                       |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|Net income                                                                        |                                                         | $                                     | 16,311 |         |  | $       | 13,380 |         |  | $       | 15,963 |         |  | $       | 15,075 |         |  | $ | 15,917 |        |  | $ | 14,562 |        |  | $ | 15,182 |        |  | $ | 13,545 |       
|                                                                                  |                                                         |                                       |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|Basic earnings per common share                                                   |                                                         | $                                     | 0.48   |         |  | $       | 0.39   |         |  | $       | 0.47   |         |  | $       | 0.45   |         |  | $ | 0.47   |        |  | $ | 0.43   |        |  | $ | 0.46   |        |  | $ | 0.41   |       
|Diluted earnings per common share                                                 |                                                         | $                                     | 0.46   |         |  | $       | 0.38   |         |  | $       | 0.46   |         |  | $       | 0.44   |         |  | $ | 0.46   |        |  | $ | 0.42   |        |  | $ | 0.44   |        |  | $ | 0.40   |       
|Dividends per common share                                                        |                                                         | $                                     | 0.05   |         |  | $       | 0.05   |         |  | $       |       |         |  | $       |       |         |  | $ |       |        |  | $ |       |        |  | $ |       |        |  | $ |       |       
|Weighted average common shares outstanding
    including common share equivalents |                                                         |                                       | 35,095 |         |  |         | 35,001 |         |  |         | 34,728 |         |  |         | 34,640 |         |  |   | 34,566 |        |  |   | 34,726 |        |  |   | 34,412 |        |  |   | 34,081 |       

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

During 2002, management dedicated extensive time,
resources, and capital to the development and implementation of
a comprehensive enterprise-wide risk management system
(ERM). The process placed all activities of the
Company into 14 processes with 12 process owners. In
the initial assessment, a catalogue of the key risks in the
Company were identified for ongoing monitoring. Detailed risk
assessments were then conducted to determine the risk profile.
Infrastructure supporting the ERM includes a Board Executive and
Risk Committee, an internal Risk Management Committee, and
centralized Risk Management supervision. An automated
application, Enterprise Risk Management System
(ERMS), has also been developed to facilitate
execution of this methodology. The basic ERMS system is updated
on a regular basis. Management is in the process of developing
measurement criteria and risk performance indicators for the
various risk processes.

The Companys chief executive officer and
chief financial officer have evaluated the Companys
disclosure controls and procedures (as defined in
Rule 13a-15(e) and Rule 15d-15(e) under the Exchange
Act) as of December 31, 2003 and concluded that those
disclosure controls and procedures are effective.

There have been no changes in the Companys
internal controls or in other factors known to the Company that
could significantly affect these controls subsequent to their
evaluation, nor any corrective actions with regard to
significant deficiencies and material weaknesses.

45



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##### 



While the Company believes that its existing
disclosure controls and procedures have been effective to
accomplish these objectives, the Company continues to examine,
refine and formalize its disclosure controls and procedures and
to monitor ongoing developments in this area.

PART III

Item 10.     Directors
and Executive Officers of the Registrant

For information regarding the directors and
persons nominated to become directors of the Company, reference
is made to the information presented in the Companys
definitive Proxy Statement for its 2004 Annual Meeting of
Shareholders to be filed with the Commission pursuant to
Regulation 14A under the Securities and Exchange Act of
1934 (the 2004 Proxy Statement). All of such
information is incorporated herein by reference.

Item 11.     Executive
Compensation

For information concerning the compensation paid
by the Company during the year ended December 31, 2003 to
its executive officers, reference is made to the information
presented in the 2004 Proxy Statement. Such information is
incorporated herein by reference.

Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

For information concerning the beneficial
ownership of the common stock of the Company by its directors
and officers and by certain other beneficial owners, reference
is made to the information presented in the 2004 Proxy
Statement. Such information is incorporated herein by reference.

Item 13.     Certain
Relationships and Related Transactions

For information regarding certain business
relationships and related transactions involving the
Companys officers and directors, reference is made to the
information presented in the 2004 Proxy Statement. Such
information is incorporated herein by reference.

PART IV

Item 14.     Principal
Accountant Fees and Services

For information concerning principal accountant
fees and services and audit committee pre-approval policies,
reference is made to the information presented in the 2004 Proxy
Statement. Such information is incorporated herein by reference.

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

(a) and (d) Financial Statements and
Financial Statement Schedules

The financial statements and financial statement
schedule listed on the accompanying Index to Financial
Statements and Schedule (see page 49) are filed as part of
this Form 10-K.

(b) Reports On Form 8-K

Three reports on Form 8-K were filed by the
Company during the three months ended December 31, 2003:



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) A Current Report on Form 8-K dated
    October 20, 2003 was filed on October 21, 2003;
    Item 7(c) and Item 12, reporting earnings results for
    the third quarter of 2003.
|
| | (ii) A Current Report on Form 8-K dated
    October 28, 2003 was filed on October 28, 2003;
    Item 7(c) and Item 9, regarding presentation of
    certain data to investors.     

46



---



##### 



EXHIBIT INDEX

(c) *Exhibits(1)

| |         |  |  |   |  |                                                                                                                                                                                                                                                                                          
| | ------- |  |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1     |  |  |  |  | Articles of Incorporation of the Company,
    restated as of May 1, 2001 (incorporated by reference to
    Exhibit 4.1 to the Companys Form S-8
    Registration Statement No. 333-60190)                                                                                               
| | 3.2     |  |  |  |  | Bylaws of the Company (Restated as of
    December 31, 1996)                                                                                                                                                                                                                             
| | 4.1     |  |  |  |  | Specimen Common Stock certificate                                                                                                                                                                                                                                                        
| | 10.1   |  |  |  |  | 1989 Stock Option Plan, amended and restated as
    of May 29, 1998 (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2000)                                                                 
| | 10.2   |  |  |  |  | 1993 Stock Option Plan, amended and restated as
    of May 29, 1998 (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2000)                                                                 
| | 10.3   |  |  |  |  | Form of Stock Option Agreement under 1989 Stock
    Option Plan and 1993 Stock Option Plan                                                                                                                                                                                               
| | 10.4   |  |  |  |  | 1996 Stock Option Plan, as amended
    January 24, 2000 (incorporated by reference to Exhibit 10.4
    to the Companys Annual Report on Form 10-K for the
    year ended December 31, 1999)                                                                                             
| | **10.5 |  |  |  |  | Form of Incentive Stock Option Agreement under
    1996 Stock Option Plan                                                                                                                                                                                                                
| | **10.6 |  |  |  |  | Form of Non-qualified Stock Option Agreement
    under 1996 Stock Option Plan                                                                                                                                                                                                            
| | 10.7   |  |  |  |  | Form of Stock Option Agreement for Directors
    under 1996 Stock Option Plan (incorporated by reference to
    Exhibit 10.8 to the Companys Form S-1
    Registration Statement No. 333-16509)                                                                                         
| | 10.8   |  |  |  |  | Form of Change in Control Agreement between the
    Company and each of Joseph H. Argue III, David C. Farries,
    and Steve D. Stephens (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2000) 
| | 10.9   |  |  |  |  | Form of Change in Control Agreement between the
    Company and Dale Andreas, Kenneth Olan, and Walter L. Ward, Jr.
    (incorporated by reference to Exhibit 10.10 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2002)                            
| | 10.10  |  |  |  |  | Employment Agreement, amended and restated as of
    February 17, 2001, between the Company and Walter E.
    Johnson (incorporated by reference to Exhibit 10.11 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2000)                              
| |  10.11 |  |  |  |  | Restricted Stock Plan (incorporated by reference
    to Appendix B to the Companys Proxy Statement dated
    March 16, 2001 for its 2001 Annual Meeting of Shareholders)                                                                                                                
| | 10.12  |  |  |  |  | Form of Restricted Stock Agreement under the
    Restricted Stock Plan (incorporated by reference to
    Exhibit 4.6 to the Companys Form S-8
    Registration Statement No. 333-60190)                                                                                                 
| | 10.13  |  |  |  |  | Non-Employee Directors Deferred Fee Plan
    (incorporated by reference to Exhibit 4.3 to the
    Companys Form S-8 Registration Statement
    No. 333-74452)                                                                                                                           
| | 10.14  |  |  |  |  | Form of Deferral Election Form under Non-Employee
    Directors Deferred Fee Plan (incorporated by reference to
    Exhibit 4.4 to the Companys Form S-8 Registration
    Statement No. 333-74452)                                                                                      
| | 10.15   |  |  |  |  | Purchase and Sale Agreement between TCP
    Renaissance Partners, L.P. and Southwest Bank of
    Texas, N.A., dated May 24, 2002 (incorporated by
    reference to Exhibit 10.1 to the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    September 30, 2002)
| | 10.16  |  |  |  |  | 1996 Stock Option Plan, Amended and Restated as
    of June 4, 2002 (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2002)                                                                      
| | 10.17  |  |  |  |  | Change in Control Agreement between the Company
    and Paul B. Murphy, Jr., Amended and Restated as of
    June 4, 2002 (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2002)                 
| | 10.18  |  |  |  |  | Form of Change in Control Agreement [Three Year]
    between the Company and Scott J. McLean, Terry Kelly, and
    Randall E. Meyer (incorporated by reference to
    Exhibit 10.21 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002)                

47



---



##### 



| |          |  |  |   |  |                                                                                                                                                                                                                                               
| | -------- |  |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.19   |  |  |  |  | Form of Change in Control Agreement [Two Year]
    between the Company and Paul A. Port (incorporated by reference
    to Exhibit 10.22 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002)                 
| | **10.20 |  |  |  |  | First Amendment to Change In Control Agreement
    [Two Year], dated as of June 4, 2002 between the Company
    and David C. Farries, Joseph H. Argue III, Steve D. Stephens,
    and Walter L. Ward, Jr.                                     
| | 10.21   |  |  |  |  | Form of Change in Control Agreement between the
    Company and John Drew and Marilyn Manis-Hassanein (incorporated
    by reference to Exhibit 10.9 to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    2002)
| | **10.22 |  |  |  |  | Employment Agreement between the Company and
    Charles F. Hall, Jr., dated as of March 10, 2003                                                                                                                                             
| | **10.23 |  |  |  |  | Form of Change of Control Agreement [One Year]
    between the Company and Laurence L. Lehman, III                                                                                                                                            
| | **21.1   |  |  |  |  | List of subsidiaries of the Company                                                                                                                                                                                                           
| | **23.1   |  |  |  |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                         
| | **31.1   |  |  |  |  | Certification of the Chief Executive Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                    
| | **31.2   |  |  |  |  | Certification of the Chief Financial Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                    
| | **32.1   |  |  |  |  | Certification of the Chief Executive Officer
    Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002                                                                                    
| | **32.2   |  |  |  |  | Certification of the Chief Financial Officer
    Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002                                                                                    



---



|  |                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | All Exhibits except for those filed herewith and
    as otherwise indicated are incorporated herein by reference to
    the Exhibits bearing the same Exhibit numbers in the
    Companys Form S-1 Registration Statement
    No. 333-16509.



|   |                
|-- | ---------------
|** | Filed herewith.



|  |                                                             
|- | ------------------------------------------------------------
| | Management contract or compensatory plan or
    arrangement.



|    |                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company has other long-term debt agreements
    that meet the exclusion set forth in
    Section 601(b)(4)(iii)(A) of Regulation S-K. The
    Company hereby agrees to furnish a copy of such agreement to the
    Commission upon request.

48



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                                        
| | ---------------------------------------
| | SOUTHWEST BANCORPORATION OF TEXAS, INC.



| |     |                        
| | --- | -----------------------
| | By: | /s/ PAUL B. MURPHY, JR.

| | 
| | 
| | 



| |                        
| | -----------------------
| | Paul B. Murphy, Jr.    
| | Chief Executive Officer

Date: February 26, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|                                                 |  |                                                                                        |  |                   |  | 
|------------------------------------------------ |  | -------------------------------------------------------------------------------------- |  | ----------------- |  | 
|                                                 |  |                                                                                        |  |                  
|Signature                                        |  | Title                                                                                  |  | Date             
|                                                 |  |                                                                                        |  |                  
|                                                
|/s/ WALTER E. JOHNSONWalter E. Johnson           |  | Chairman of the Board and Director                                                     |  | February 26, 2004
|                                                
|/s/ PAUL B. MURPHY, JR.Paul B. Murphy, Jr        |  | Director and Chief Executive Officer
    (Principal Executive Officer)                 |  | February 26, 2004
|                                                
|/s/ RANDALL E. MEYERRandall E. Meyer             |  | Executive Vice President and Chief Financial
    Officer (Principal Financial Officer) |  | February 26, 2004
|                                                
|/s/ SCOTT J. MCLEANScott J. McLean               |  | President                                                                              |  | February 26, 2004
|                                                
|/s/ LAURENCE L. LEHMAN IIILaurence L. Lehman III |  | Senior Vice President and Controller (Principal
    Accounting Officer)                |  | February 26, 2004
|                                                
|/s/ CARIN M. BARTHCarin M. Barth                 |  | Director                                                                               |  | February 26, 2004
|                                                
|/s/ JOHN B. BROCK IIIJohn B. Brock III           |  | Director                                                                               |  | February 26, 2004
|                                                
|/s/ ERNEST H. COCKRELLErnest H. Cockrell         |  | Director                                                                               |  | February 26, 2004
|                                                
|/s/ J. DAVID HEANEYJ. David Heaney               |  | Director                                                                               |  | February 26, 2004
|                                                
|/s/ PAUL W. HOBBYPaul W. Hobby                   |  | Director                                                                               |  | February 26, 2004

49



---



##### 



|                                                   |  |          |  |                   |  | 
|-------------------------------------------------- |  | -------- |  | ----------------- |  | 
|                                                   |  |          |  |                  
|Signature                                          |  | Title    |  | Date             
|                                                   |  |          |  |                  
|                                                  
|/s/ JOHN W. JOHNSONJohn W. Johnson                 |  | Director |  | February 26, 2004
|                                                  
|/s/ BARRY M. LEWISBarry M. Lewis                   |  | Director |  | February 26, 2004
|                                                  
|/s/ FRED R. LUMMISFred R. Lummis                   |  | Director |  | February 26, 2004
|                                                  
|/s/ ANDRES PALANDJOGLOUAndres Palandjoglou         |  | Director |  | February 26, 2004
|                                                  
|/s/ ADOLPH A. PFEFFER, JR.Adolph A. Pfeffer, Jr.   |  | Director |  | February 26, 2004
|                                                  
|/s/ WILHELMINA E. ROBERTSONWilhelmina E. Robertson |  | Director |  | February 26, 2004
|                                                  
|/s/ THOMAS F. SORIERO, SR.Thomas F. Soriero, Sr.   |  | Director |  | February 26, 2004
|                                                  
|/s/ STANLEY D. STEARNS, JR.Stanley D. Stearns, Jr. |  | Director |  | February 26, 2004

50



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                  |                                                                                                                        |      |  |    | 
|--------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                  |                                                                                                                        | Page
|                                  |                                                                                                                        |     
|Consolidated Financial Statements |                                                                                                                        |      |  |   
|                                  | Report of Independent Auditors                                                                                         |      |  | 52 | 
|                                  | Consolidated Balance Sheet as of
    December 31, 2003 and 2002                                                        |      |  | 53 | 
|                                  | Consolidated Statement of Income for the Years
    Ended December 31, 2003, 2002 and 2001                              |      |  | 54 | 
|                                  | Consolidated Statement of Changes in
    Shareholders Equity for the Years Ended December 31,
    2003, 2002 and 2001 |      |  | 55 | 
|                                  | Consolidated Statement of Cash Flows for the
    Years Ended December 31, 2003, 2002 and 2001                          |      |  | 56 | 
|                                  | Notes to Consolidated Financial Statements                                                                             |      |  | 57 | 

51



---



##### 



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders

Southwest Bancorporation of Texas, Inc.:


In our opinion, the accompanying consolidated
balance sheet and the related consolidated statements of income,
of changes in shareholders equity, and of cash flows
present fairly, in all material respects, the consolidated
financial position of Southwest Bancorporation of Texas, Inc.
and Subsidiaries (the Company) at December 31,
2003 and 2002, and the consolidated results of their operations
and their 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.
These financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.



| |                           
| | --------------------------
| | PRICEWATERHOUSECOOPERS LLP

Houston, Texas

February 25, 2004


52



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |           |           | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                                   |                                                                                                                                                                                                   |                                           
|                                                   |                                                                                                                                                                                                   | December 31,                              
|                                                   |                                                                                                                                                                                                   |                                           
|                                                   |                                                                                                                                                                                                   | 2003                                       |           | 2002     
|                                                   |                                                                                                                                                                                                   |                                            |           |          
|                                                   |                                                                                                                                                                                                   |                                           
|                                                   |                                                                                                                                                                                                   | (Dollars in thousands, except             
|                                                   |                                                                                                                                                                                                   | per share amounts)                        
|ASSETS                                            
|Cash and due from banks                            |                                                                                                                                                                                                   | $                                          | 390,890   |           |           | $ | 472,257   |          
|Federal funds sold and other cash equivalents      |                                                                                                                                                                                                   |                                            | 94,908    |           |           |   | 63,107    |          
|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|                                                   |                                                                                                                                                                                                   | Total cash and cash equivalents            |           |           | 485,798   |   |           |           | 535,364   | 
|Securities  available for sale                    |                                                                                                                                                                                                   |                                            | 1,549,398 |           |           |   | 1,201,200 |          
|Loans held for sale                                |                                                                                                                                                                                                   |                                            | 96,899    |           |           |   | 101,389   |          
|Loans held for investment                          |                                                                                                                                                                                                   |                                            | 3,491,673 |           |           |   | 3,117,951 |          
|Allowance for loan losses                          |                                                                                                                                                                                                   |                                            | (43,008   | )         |           |   | (36,696   | )        
|Premises and equipment, net                        |                                                                                                                                                                                                   |                                            | 117,951   |           |           |   | 92,227    |          
|Accrued interest receivable                        |                                                                                                                                                                                                   |                                            | 21,630    |           |           |   | 20,160    |          
|Goodwill                                           |                                                                                                                                                                                                   |                                            | 25,647    |           |           |   | 2,590     |          
|Core deposit intangibles                           |                                                                                                                                                                                                   |                                            | 6,185     |           |           |   |          |          
|Other assets                                       |                                                                                                                                                                                                   |                                            | 193,563   |           |           |   | 137,772   |          
|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|                                                   |                                                                                                                                                                                                   | Total assets                               |           | $         | 5,945,736 |   |           | $         | 5,171,957 | 
|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|                                                  
|LIABILITIES AND SHAREHOLDERS
    EQUITY          
|Deposits:                                          |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|                                                   | Demand  noninterest-bearing                                                                                                                                                                      |                                            | $         | 1,513,038 |           |   | $         | 1,290,323 |          
|                                                   | Demand  interest-bearing                                                                                                                                                                         |                                            |           | 43,452    |           |   |           | 36,222    |          
|                                                   | Money market accounts                                                                                                                                                                             |                                            |           | 1,709,755 |           |   |           | 1,618,417 |          
|                                                   | Savings                                                                                                                                                                                           |                                            |           | 131,059   |           |   |           | 97,119    |          
|                                                   | Time, $100 and over                                                                                                                                                                               |                                            |           | 642,590   |           |   |           | 518,108   |          
|                                                   | Other time                                                                                                                                                                                        |                                            |           | 363,345   |           |   |           | 351,860   |          
|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|                                                   |                                                                                                                                                                                                   | Total deposits                             |           |           | 4,403,239 |   |           |           | 3,912,049 | 
|Securities sold under repurchase agreements        |                                                                                                                                                                                                   |                                            | 285,571   |           |           |   | 275,443   |          
|Other borrowings                                   |                                                                                                                                                                                                   |                                            | 679,812   |           |           |   | 515,430   |          
|Junior subordinated deferrable interest debentures |                                                                                                                                                                                                   |                                            | 51,547    |           |           |   |          |          
|Accrued interest payable                           |                                                                                                                                                                                                   |                                            | 1,822     |           |           |   | 1,654     |          
|Other liabilities                                  |                                                                                                                                                                                                   |                                            | 24,424    |           |           |   | 21,858    |          
|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|                                                   |                                                                                                                                                                                                   | Total liabilities                          |           |           | 5,446,415 |   |           |           | 4,726,434 | 
|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|Commitments and contingencies                      |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|Shareholders equity:                              |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|                                                   | Common stock  $1 par value,
    150,000,000 shares authorized; 34,229,143 issued and
    34,213,899 outstanding at December 31, 2003; 33,856,065
    issued and outstanding at December 31, 2002 |                                            |           | 34,229    |           |   |           | 33,856    |          
|                                                   | Additional paid-in capital                                                                                                                                                                        |                                            |           | 95,394    |           |   |           | 87,651    |          
|                                                   | Retained earnings                                                                                                                                                                                 |                                            |           | 368,069   |           |   |           | 310,758   |          
|                                                   | Accumulated other comprehensive income                                                                                                                                                            |                                            |           | 2,050     |           |   |           | 13,258    |          
|                                                   | Treasury stock, at cost 
    15,244 shares and 0 shares, respectively                                                                                                                            |                                            |           | (421      | )         |   |           |          |          
|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|                                                   |                                                                                                                                                                                                   | Total shareholders equity                 |           |           | 499,321   |   |           |           | 445,523   | 
|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          
|                                                   |                                                                                                                                                                                                   | Total liabilities and shareholders equity |           | $         | 5,945,736 |   |           | $         | 5,171,957 | 
|                                                   |                                                                                                                                                                                                   |                                            |           |           |           |   |           |          

The accompanying notes are an integral part of
the consolidated financial statements.

53



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |         |        |         | 
|-------------------------- | -------------------------------------------- | ------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                           |                                              |                          
|                           |                                              | Year Ended December 31,  
|                           |                                              |                          
|                           |                                              | 2003                      |                                                         | 2002    |        | 2001   
|                           |                                              |                           |                                                         |         |        |        
|                           |                                              |                          
|                           |                                              | (Dollars in thousands,   
|                           |                                              | except per share amounts)
|Interest income:           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           | Loans                                        |                           | $                                                       | 188,525 |        |         | $      | 180,658 |        |         | $      | 205,123 |       
|                           | Securities:                                  |                           |                                                         |         |        |         |        |         |        |         |        |         |       
|                           |                                              | Taxable                   |                                                         |         | 43,959 |         |        |         | 52,533 |         |        |         | 50,377 |        
|                           |                                              | Tax-exempt                |                                                         |         | 5,651  |         |        |         | 4,426  |         |        |         | 2,920  |        
|                           | Federal funds sold and other                 |                           |                                                         | 968     |        |         |        | 798     |        |         |        | 2,727   |       
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           |                                              |                           | Total interest income                                   |         |        | 239,103 |        |         |        | 238,415 |        |         |        | 261,147 | 
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|Interest expense:          |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           | Deposits                                     |                           |                                                         | 36,971  |        |         |        | 48,962  |        |         |        | 85,834  |       
|                           | Borrowings                                   |                           |                                                         | 8,754   |        |         |        | 10,817  |        |         |        | 15,324  |       
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           |                                              |                           | Total interest expense                                  |         |        | 45,725  |        |         |        | 59,779  |        |         |        | 101,158 | 
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           |                                              |                           | Net interest income                                     |         |        | 193,378 |        |         |        | 178,636 |        |         |        | 159,989 | 
|Provision for loan losses  |                                              |                           | 12,000                                                  |         |        |         | 11,750 |         |        |         | 7,500  |        
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           |                                              |                           | Net interest income after provision for loan
    losses |         |        | 181,378 |        |         |        | 166,886 |        |         |        | 152,489 | 
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|Noninterest income:        |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           | Service charges on deposit accounts          |                           |                                                         | 40,065  |        |         |        | 33,936  |        |         |        | 25,676  |       
|                           | Investment services                          |                           |                                                         | 9,712   |        |         |        | 9,302   |        |         |        | 7,244   |       
|                           | Other fee income                             |                           |                                                         | 19,409  |        |         |        | 12,584  |        |         |        | 13,931  |       
|                           | Bank-owned life insurance income             |                           |                                                         | 6,009   |        |         |        | 4,860   |        |         |        | 4,517   |       
|                           | Other operating income                       |                           |                                                         | 6,351   |        |         |        | 4,090   |        |         |        | 3,606   |       
|                           | Gain on sale of loans, net                   |                           |                                                         | 4,150   |        |         |        | 3,882   |        |         |        | 3,170   |       
|                           | Gain on sale of securities, net              |                           |                                                         | 1,224   |        |         |        | 1,737   |        |         |        | 14      |       
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           |                                              |                           | Total noninterest income                                |         |        | 86,920  |        |         |        | 70,391  |        |         |        | 58,158  | 
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|Noninterest expenses:      |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           | Salaries and employee benefits               |                           |                                                         | 103,746 |        |         |        | 87,562  |        |         |        | 78,049  |       
|                           | Occupancy expense                            |                           |                                                         | 29,690  |        |         |        | 24,066  |        |         |        | 21,532  |       
|                           | Professional services                        |                           |                                                         | 9,640   |        |         |        | 8,626   |        |         |        | 7,530   |       
|                           | Losses on deposit accounts                   |                           |                                                         | 1,771   |        |         |        | 3,855   |        |         |        | 1,698   |       
|                           | Merger-related expenses                      |                           |                                                         | 3,000   |        |         |        |        |        |         |        |        |       
|                           | Core deposit intangible amortization expense |                           |                                                         | 1,368   |        |         |        |        |        |         |        |        |       
|                           | Other operating expenses                     |                           |                                                         | 30,947  |        |         |        | 26,929  |        |         |        | 24,352  |       
|                           | Minority interest                            |                           |                                                         |        |        |         |        | 40      |        |         |        | 24      |       
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           |                                              |                           | Total noninterest expenses                              |         |        | 180,162 |        |         |        | 151,078 |        |         |        | 133,185 | 
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           |                                              |                           | Income before income taxes                              |         |        | 88,136  |        |         |        | 86,199  |        |         |        | 77,462  | 
|Provision for income taxes |                                              |                           | 27,407                                                  |         |        |         | 26,993 |         |        |         | 24,745 |        
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           | Net income                                   |                           | $                                                       | 60,729  |        |         | $      | 59,206  |        |         | $      | 52,717  |       
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|Earnings per common share: |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           |                                              | Basic                     |                                                         | $       | 1.78   |         |        | $       | 1.77   |         |        | $       | 1.60   |        
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|                           |                                              | Diluted                   |                                                         | $       | 1.74   |         |        | $       | 1.72   |         |        | $       | 1.55   |        
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        
|Dividends per common share |                                              | $                         | 0.10                                                    |         |        | $       |       |         |        | $       |       |        
|                           |                                              |                           |                                                         |         |        |         |        |         |        |         |        |        

The accompanying notes are an integral part of
the consolidated financial statements.

54



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY

|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |        |        |  
|-------------------------- | --------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ---------- | ---------- | - | -------- | ------ | ------------- | - | ----------- | ------ | ------------- | - | ------ | ------- | ------ | ------ | - | ------ | - | ------ | - | ---- | ---- | - | - | ------- | ------ | ------ | -
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   | Accumulated |        |               |   |       
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        | Other         |   |             |        |              
|                           |                                                                                                                 | Common Stock                                                                                                                     |            | Additional |   |          |        | Comprehensive |   |             |        | Total        
|                           |                                                                                                                 |                                                                                                                                  |            | Paid-in    |   | Retained |        | Income        |   | Treasury    |        | Shareholders
|                           |                                                                                                                 | Shares                                                                                                                           |            | Dollars    |   | Capital  |        | Earnings      |   | (Loss)      |        | Stock         |   | Equity
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |       
|                           |                                                                                                                 |                                                                                                                                 
|                           |                                                                                                                 | (Dollars in thousands, except per share amounts)                                                                                
|BALANCE, DECEMBER 31, 2000 |                                                                                                                 |                                                                                                                                  | 32,705,909 |            |   | $        | 32,706 |               |   | $           | 69,735 |               |   | $      | 198,835 |        |        | $ | (3,107 | ) |        | $ | (44  | )    |   | $ | 298,125 |       
|                           | Exercise of stock options                                                                                       |                                                                                                                                  |            | 219,221    |   |          |        | 219           |   |             |        | 3,441         |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         | 3,660  |       
|                           | Deferred compensation amortization                                                                              |                                                                                                                                  |            |            |   |          |        |               |   |             |        | 233           |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         | 233    |       
|                           | Issuance of treasury stock for options                                                                          |                                                                                                                                  |            | (1,032     | ) |          |        | (1            | ) |             |        | (21           | ) |        |         |        |        |   |        |   |        |   |      | 44   |   |   |         | 22     |       
|                           | Comprehensive income:                                                                                           |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |        |       
|                           |                                                                                                                 | Net income for the year ended December 31,
    2001                                                                              |            |            |   |          |        |               |   |             |        |               |   |        |         |        | 52,717 |   |        |   |        |   |      |      |   |   |         |        | 52,717 |  
|                           |                                                                                                                 | Net change in unrealized appreciation
    (depreciation) on securities available for sale, net of deferred
    taxes of ($3,879) |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   | 6,605  |   |      |      |   |   |         |        | 6,605  |  
|                           |                                                                                                                 | Reclassification adjustment for losses included
    in net income, net of deferred taxes of ($204)                               |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   | 372    |   |      |      |   |   |         |        | 372    |  
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |       
|                           |                                                                                                                 | Total comprehensive income                                                                                                       |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |        | 59,694 |  
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |       
|BALANCE, DECEMBER 31, 2001 |                                                                                                                 |                                                                                                                                  | 32,924,098 |            |   |          | 32,924 |               |   |             | 73,388 |               |   |        | 251,552 |        |        |   | 3,870  |   |        |   |     |      |   |   | 361,734 |       
|                           | Exercise of stock options                                                                                       |                                                                                                                                  |            | 769,703    |   |          |        | 770           |   |             |        | 13,572        |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         | 14,342 |       
|                           | Issuance of restricted common stock, net                                                                        |                                                                                                                                  |            | 162,264    |   |          |        | 162           |   |             |        | (162          | ) |        |         |        |        |   |        |   |        |   |      |      |   |   |         |       |       
|                           | Deferred compensation amortization                                                                              |                                                                                                                                  |            |            |   |          |        |               |   |             |        | 853           |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         | 853    |       
|                           | Comprehensive income:                                                                                           |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |        |       
|                           |                                                                                                                 | Net income for the year ended December 31,
    2002                                                                              |            |            |   |          |        |               |   |             |        |               |   |        |         |        | 59,206 |   |        |   |        |   |      |      |   |   |         |        | 59,206 |  
|                           |                                                                                                                 | Net change in unrealized appreciation on
    securities available for sale, net of deferred taxes of ($6,195)                    |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   | 11,427 |   |      |      |   |   |         |        | 11,427 |  
|                           |                                                                                                                 | Reclassification adjustment for gains included in
    net income, net of deferred taxes of $696                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   | (1,264 | ) |      |      |   |   |         |        | (1,264 | )
|                           |                                                                                                                 | Minimum pension liability, net of taxes of $418                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   | (775   | ) |      |      |   |   |         |        | (775   | )
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |       
|                           |                                                                                                                 | Total comprehensive income                                                                                                       |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |        | 68,594 |  
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |       
|BALANCE, DECEMBER 31, 2002 |                                                                                                                 |                                                                                                                                  | 33,856,065 |            |   |          | 33,856 |               |   |             | 87,651 |               |   |        | 310,758 |        |        |   | 13,258 |   |        |   |     |      |   |   | 445,523 |       
|                           | Exercise of stock options                                                                                       |                                                                                                                                  |            | 319,188    |   |          |        | 319           |   |             |        | 6,294         |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         | 6,613  |       
|                           | Issuance of restricted common stock, net of
    shares forfeited into Treasury, and non-employee director stock |                                                                                                                                  |            | 53,890     |   |          |        | 54            |   |             |        | (49           | ) |        |         |        |        |   |        |   |        |   |      | (5   | ) |   |         |       |       
|                           | Purchase of treasury stock                                                                                      |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      | (416 | ) |   |         | (416   | )     
|                           | Deferred compensation amortization                                                                              |                                                                                                                                  |            |            |   |          |        |               |   |             |        | 1,498         |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         | 1,498  |       
|                           | Cash dividends paid, $0.10 per share                                                                            |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         | (3,418 | )      |   |        |   |        |   |      |      |   |   |         | (3,418 | )     
|                           | Comprehensive income:                                                                                           |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |        |       
|                           |                                                                                                                 | Net income for the year ended December 31,
    2003                                                                              |            |            |   |          |        |               |   |             |        |               |   |        |         |        | 60,729 |   |        |   |        |   |      |      |   |   |         |        | 60,729 |  
|                           |                                                                                                                 | Net change in unrealized appreciation on
    securities available for sale, net of deferred taxes of $5,109                      |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   | (9,484 | ) |      |      |   |   |         |        | (9,484 | )
|                           |                                                                                                                 | Reclassification adjustment for gains included in
    net income, net of deferred taxes of $849                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   | (1,576 | ) |      |      |   |   |         |        | (1,576 | )
|                           |                                                                                                                 | Minimum pension liability, net of taxes of $80                                                                                   |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   | (148   | ) |      |      |   |   |         |        | (148   | )
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |       
|                           |                                                                                                                 | Total comprehensive income                                                                                                       |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |        | 49,521 |  
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |       
|BALANCE, DECEMBER 31, 2003 |                                                                                                                 |                                                                                                                                  | 34,229,143 |            |   | $        | 34,229 |               |   | $           | 95,394 |               |   | $      | 368,069 |        |        | $ | 2,050  |   |        | $ | (421 | )    |   | $ | 499,321 |       
|                           |                                                                                                                 |                                                                                                                                  |            |            |   |          |        |               |   |             |        |               |   |        |         |        |        |   |        |   |        |   |      |      |   |   |         |       

The accompanying notes are an integral part of
the consolidated financial statements.

55



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                         |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |          |          |        | 
|-------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ----------------------------------------- | -------- | ---------- | ------ | ------- | -------- | -------- | ------- | ------- | -------- | -------- | ------ | 
|                                                         |                                                                                       |                                                                                          
|                                                         |                                                                                       | Year Ended December 31,                                                                  
|                                                         |                                                                                       |                                                                                          
|                                                         |                                                                                       | 2003                                                                                      |                                           | 2002     |            | 2001  
|                                                         |                                                                                       |                                                                                           |                                           |          |            |       
|                                                         |                                                                                       |                                                                                          
|                                                         |                                                                                       | (Dollars in thousands)                                                                   
|Cash flows from operating activities:                    |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|                                                         | Net income                                                                            |                                                                                           | $                                         | 60,729   |            |        | $       | 59,206   |          |         | $       | 52,717   |         
|                                                         | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                           |                                           |          |            |        |         |          |          |         |         |          |         
|                                                         |                                                                                       | Provision for loan losses                                                                 |                                           |          | 12,000     |        |         |          | 11,750   |         |         |          | 7,500    |       
|                                                         |                                                                                       | Deferred tax expense (benefit)                                                            |                                           |          | (640       | )      |         |          | 2,758    |         |         |          | (463     | )     
|                                                         |                                                                                       | Depreciation                                                                              |                                           |          | 11,927     |        |         |          | 9,201    |         |         |          | 7,735    |       
|                                                         |                                                                                       | Valuation adjustments for mortgage servicing
    rights, net                              |                                           |          | (2,371     | )      |         |          | 2,371    |         |         |          |         |       
|                                                         |                                                                                       | Realized gain on securities available for sale,
    net                                   |                                           |          | (1,224     | )      |         |          | (1,737   | )       |         |          | (14      | )     
|                                                         |                                                                                       | Amortization and accretion of securities
    premiums and discounts, net                 |                                           |          | 11,176     |        |         |          | 6,058    |         |         |          | 583      |       
|                                                         |                                                                                       | Amortization of mortgage servicing rights                                                 |                                           |          | 4,806      |        |         |          | 4,180    |         |         |          | 3,130    |       
|                                                         |                                                                                       | Amortization of computer software                                                         |                                           |          | 4,927      |        |         |          | 3,677    |         |         |          | 2,707    |       
|                                                         |                                                                                       | Amortization of core deposit intangibles                                                  |                                           |          | 1,368      |        |         |          |         |         |         |          |         |       
|                                                         |                                                                                       | Other amortization                                                                        |                                           |          | 1,498      |        |         |          | 853      |         |         |          | 490      |       
|                                                         |                                                                                       | Minority interest in net income of consolidated
    subsidiary                            |                                           |          |           |        |         |          | 40       |         |         |          | 24       |       
|                                                         |                                                                                       | Gain on sale of loans, net                                                                |                                           |          | (4,150     | )      |         |          | (3,882   | )       |         |          | (3,170   | )     
|                                                         |                                                                                       | Gain on sale of subsidiary                                                                |                                           |          |           |        |         |          | (1,068   | )       |         |          |         |       
|                                                         |                                                                                       | Origination of loans held for sale and mortgage
    servicing rights                      |                                           |          | (267,693   | )      |         |          | (200,706 | )       |         |          | (145,001 | )     
|                                                         |                                                                                       | Proceeds from sales of loans                                                              |                                           |          | 274,137    |        |         |          | 188,227  |         |         |          | 144,645  |       
|                                                         |                                                                                       | Income tax benefit from exercise of stock options                                         |                                           |          | 1,898      |        |         |          | 6,500    |         |         |          | 1,812    |       
|                                                         |                                                                                       | (Increase) decrease in accrued interest
    receivable, prepaid expenses and other assets |                                           |          | (10,595    | )      |         |          | 28,325   |         |         |          | (7,160   | )     
|                                                         |                                                                                       | Increase (decrease) in accrued interest payable
    and other liabilities                 |                                           |          | (4,174     | )      |         |          | 1,115    |         |         |          | (7,871   | )     
|                                                         |                                                                                       | Other, net                                                                                |                                           |          | (8         | )      |         |          | (839     | )       |         |          | (391     | )     
|                                                         |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|                                                         |                                                                                       |                                                                                           | Net cash provided by operating activities |          |            | 93,611 |         |          |          | 116,029 |         |          |          | 57,273 | 
|                                                         |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|Cash flows from investing activities:                    |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|                                                         |                                                                                       | Proceeds from maturity and call of securities
    available for sale                      |                                           |          | 71,119     |        |         |          | 25,370   |         |         |          | 137,972  |       
|                                                         |                                                                                       | Proceeds from sale of securities available for
    sale                                   |                                           |          | 652,529    |        |         |          | 139,436  |         |         |          | 80,782   |       
|                                                         |                                                                                       | Proceeds from sale of subsidiary, net of cash sold                                        |                                           |          |           |        |         |          | (3,003   | )       |         |          |         |       
|                                                         |                                                                                       | Principal paydowns of mortgage-backed securities
    available for sale                   |                                           |          | 533,194    |        |         |          | 445,632  |         |         |          | 182,096  |       
|                                                         |                                                                                       | Purchase of securities available for sale                                                 |                                           |          | (1,573,915 | )      |         |          | (724,668 | )       |         |          | (629,515 | )     
|                                                         |                                                                                       | Purchase of Federal Reserve Bank stock                                                    |                                           |          | (28        | )      |         |          | (294     | )       |         |          | (762     | )     
|                                                         |                                                                                       | Proceeds from redemption of Federal Home
    Loan Bank stock                              |                                           |          | 6,765      |        |         |          | 5,699    |         |         |          | 10,126   |       
|                                                         |                                                                                       | Purchase of Federal Home Loan Bank stock                                                  |                                           |          | (5,046     | )      |         |          | (24,395  | )       |         |          |         |       
|                                                         |                                                                                       | Net increase in loans held for investment                                                 |                                           |          | (280,191   | )      |         |          | (461,126 | )       |         |          | (242,520 | )     
|                                                         |                                                                                       | Proceeds from sale of premises and equipment                                              |                                           |          | 82         |        |         |          | 1,905    |         |         |          | 1,324    |       
|                                                         |                                                                                       | Purchase of premises and equipment                                                        |                                           |          | (32,531    | )      |         |          | (46,947  | )       |         |          | (18,857  | )     
|                                                         |                                                                                       | Purchase of mortgage servicing rights                                                     |                                           |          | (281       | )      |         |          | (804     | )       |         |          | (318     | )     
|                                                         |                                                                                       | Purchase of Bank-owned life insurance policies                                            |                                           |          | (30,000    | )      |         |          |         |         |         |          | (50,000  | )     
|                                                         |                                                                                       | Purchase of Maxim Financial Holdings, Inc. (net
    of cash acquired of $142,658)         |                                           |          | 79,618     |        |         |          |         |         |         |          |         |       
|                                                         |                                                                                       | Investment in unconsolidated equity investees                                             |                                           |          | (3,053     | )      |         |          | (862     | )       |         |          | (302     | )     
|                                                         |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|                                                         | Net cash used in investing activities                                                 |                                                                                           |                                           | (581,738 | )          |        |         | (644,057 | )        |         |         | (529,974 | )       
|                                                         |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|Cash flows from financing activities:                    |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|                                                         |                                                                                       | Net increase in noninterest-bearing demand
    deposits                                   |                                           |          | 153,445    |        |         |          | 309,613  |         |         |          | 95,456   |       
|                                                         |                                                                                       | Net increase (decrease) in time deposits                                                  |                                           |          | 61,395     |        |         |          | (33,882  | )       |         |          | 5,197    |       
|                                                         |                                                                                       | Net increase in other interest-bearing deposits                                           |                                           |          | 34,814     |        |         |          | 231,470  |         |         |          | 234,110  |       
|                                                         |                                                                                       | Net increase (decrease) in securities sold under
    repurchase agreements                |                                           |          | 10,128     |        |         |          | (82,958  | )       |         |          | 146,601  |       
|                                                         |                                                                                       | Net increase (decrease) in other short-term
    borrowings                                |                                           |          | 27,242     |        |         |          | 186,212  |         |         |          | (76,050  | )     
|                                                         |                                                                                       | Proceeds from long-term borrowings                                                        |                                           |          | 200,000    |        |         |          | 100,000  |         |         |          |         |       
|                                                         |                                                                                       | Payments on long-term borrowings                                                          |                                           |          | (100,391   | )      |         |          | (361     | )       |         |          | (333     | )     
|                                                         |                                                                                       | Issuance of junior subordinated deferrable
    interest debentures, net of issuance cost  |                                           |          | 51,047     |        |         |          |         |         |         |          |         |       
|                                                         |                                                                                       | Payments of cash dividends                                                                |                                           |          | (3,418     | )      |         |          |         |         |         |          |         |       
|                                                         |                                                                                       | Net proceeds from exercise of stock options                                               |                                           |          | 4,715      |        |         |          | 7,842    |         |         |          | 1,870    |       
|                                                         |                                                                                       | Purchase of treasury stock                                                                |                                           |          | (416       | )      |         |          |         |         |         |          |         |       
|                                                         |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|                                                         | Net cash provided by financing activities                                             |                                                                                           |                                           | 438,561  |            |        |         | 717,936  |          |         |         | 406,851  |         
|                                                         |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|Net increase (decrease) in cash and cash
    equivalents |                                                                                       |                                                                                           | (49,566                                   | )        |            |        | 189,908 |          |          |         | (65,850 | )       
|Cash and cash equivalents at beginning of period         |                                                                                       |                                                                                           | 535,364                                   |          |            |        | 345,456 |          |          |         | 411,306 |         
|                                                         |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         
|Cash and cash equivalents at end of period               |                                                                                       | $                                                                                         | 485,798                                   |          |            | $      | 535,364 |          |          | $       | 345,456 |         
|                                                         |                                                                                       |                                                                                           |                                           |          |            |        |         |          |          |         |         |         

The accompanying notes are an integral part of
the consolidated financial statements.

56



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Nature of
Operations and Summary of Significant Accounting
Policies



| |                                                   
| | --------------------------------------------------
| | Basis of Presentation and Nature of
    Operations

The consolidated financial statements include the
accounts of Southwest Bancorporation of Texas, Inc. (the
Company) and its direct and indirect wholly-owned
subsidiaries except for those where it has been determined that
the Company is not the primary beneficiary as defined by
Financial Accounting Standards Board Interpretation No. 46
(FIN No. 46). The consolidated financial
statements also include the accounts of First National Bank of
Bay City, a 58% owned indirect subsidiary of the Company,
through November 1, 2002. On this date, the Company sold
its interest in this subsidiary. All material intercompany
accounts and transactions have been eliminated.

Substantially all of the Companys revenue
and income is derived from the operations of Southwest Bank of
Texas National Association (the Bank) and Mitchell
Mortgage Company, LLC (Mitchell). The Bank provides
a full range of commercial and private banking services to small
and middle market businesses and individuals primarily in the
Houston metropolitan area. Mitchell originates, sells and
services single family residential mortgages, residential and
commercial construction loans and commercial mortgages.

On July 1, 2003, the Company completed its
merger with Maxim Financial Holdings, Inc. (Maxim),
whereby Maxim was merged into the Company. Maxims results
of operations have been included in the consolidated financial
statements since the acquisition date. See
Note 2  Merger Related Activity for
further discussion of the merger.



| |                       
| | ----------------------
| | Managements Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported
amounts of income and expenses during the reporting periods.
Actual results could differ from those estimates.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers federal funds sold, due
from bank demand accounts and other highly liquid investments
purchased with an original maturity of three months or less to
be cash equivalents. The Company classifies investments in money
market funds as securities and not as cash equivalents.

The Company maintains noninterest-bearing cash
reserve balances with the Federal Reserve Bank. The average of
such cash balances was approximately $14.2 million and $13.0
million for the years ended December 31, 2003 and 2002,
respectively.



| |           
| | ----------
| | Securities

Debt securities which management intends and has
the ability to hold to maturity are classified as held to
maturity. Securities held to maturity are stated at cost,
increased by accretion of discounts and reduced by amortization
of premiums, both computed by the interest method. The Company
had no held to maturity debt securities at December 31,
2003 and 2002.

Securities to be held for indefinite periods of
time, including securities that management intends to use as
part of its asset/liability strategy, or that may be sold in
response to changes in interest rates, changes in prepayment
risk, the need to increase regulatory capital or other similar
factors, are classified as available for sale and are carried at
fair value. Fair values of securities are estimated based on
available market quotations. Unrealized holding gains and
temporary losses, net of taxes, on available for sale securities
are reported as a separate component of other comprehensive
income until realized. Premiums and discounts on securities

57



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

available for sale are amortized/accreted as an
adjustment to the securities yield based upon the interest
method. Gains and losses on the sale of available for sale
securities are determined using the specific identification
method.

Trading securities are carried at fair value.
Realized and unrealized gains and losses on trading securities
are recognized in the consolidated statement of income as they
occur. The Company held no trading securities at
December 31, 2003 and 2002.

The Company reviews its financial position,
liquidity and future plans in evaluating the criteria for
classifying investment securities. Securities are classified
among categories at the time the securities are purchased.
Declines in the fair value of individual held to maturity and
available for sale securities below their cost that are other
than temporary would result in write-downs, as a realized loss,
of the individual securities to their fair value. The Company
believes that none of the unrealized losses should be considered
other than temporary.



| |      
| | -----
| | Loans

Loans held for investment are reported at the
principal amount outstanding, net of unearned discounts and
deferred loan fees, and including unamortized premiums. Interest
income is accrued on the unpaid principal balance.

Loans on which the accrual of interest has been
discontinued are designated as nonaccrual loans. Loans are
designated as nonaccrual when reasonable doubt exists as to the
full collection of interest and principal. When a loan is placed
on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income.
Income on such loans is then recognized only to the extent that
cash is received and where the future collection of interest and
principal is probable. Interest accruals are resumed on such
loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management,
the loans are estimated to be fully collectible as to both
principal and interest.

A loan is considered impaired, based on current
information and events, if management believes that the Company
will be unable to collect all amounts due according to the
contractual terms of the loan agreement. All amounts due
according to the contractual terms means that both the
contractual interest payments and the contractual principal
payments of a loan will be collected as scheduled in the loan
agreement. An insignificant delay or insignificant shortfall in
the amount of payment does not require a loan to be considered
impaired. 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. If the measure
of the impaired loan is less than the recorded investment in the
loan, a specific reserve is established for the shortfall as a
component of the Banks allowance for loan loss
methodology. All nonaccrual loans are considered impaired at
December 31, 2003 and 2002.

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 held for sale are carried at the lower of
cost or market, which is computed by the aggregate method
(unrealized losses are offset by unrealized gains). The carrying
amount of loans held for sale is adjusted by gains and losses
generated from corresponding hedging transactions entered into
to protect loss of value from increases in interest rates. Hedge
positions are also used to protect the pipeline of loan
applications in process from increases in interest rates. Gains
and losses resulting from changes in the market value of the
inventory and open hedge positions are netted.

58



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Allowance for Loan Losses

The allowance for loan losses is established
through a provision for such losses charged against operations.
Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes is
adequate to reflect the risks inherent in the existing loan
portfolio and is based on evaluations of the collectibility and
prior loss experience of loans. In making its evaluation,
management considers growth in the loan portfolio, the
diversification by industry of the Companys commercial
loan portfolio, the effect of changes in the local real estate
market on collateral values, the results of recent regulatory
examinations, the affects on the loan portfolio of current
economic indicators and their probable impact on borrowers, the
amount of charge-offs for current and prior periods, the amount
of nonperforming loans and related collateral, and the
evaluation of its loan portfolio by the loan review function.

The evaluation of the adequacy of loan collateral
is often based upon estimates and appraisals. Because of
changing economic conditions, the valuations determined from
such estimates and appraisals may also change. Accordingly, the
Company may ultimately incur losses which vary from
managements current estimates. Adjustments to the
allowance for loan losses are reported in the period such
adjustments become known or are reasonably estimable.



| |                    
| | -------------------
| | Loan Fees and Costs

Nonrefundable loan origination and commitment
fees net of certain direct costs associated with originating
loans held for investment are deferred and recognized as an
adjustment to the related loan yield. Such fees associated with
originating loans held for sale are deferred and recognized as a
portion of the gain or loss on sale of loans.



| |                       
| | ----------------------
| | Premises and Equipment

Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation expense
is computed using the straight-line method and is charged to
operating expense over the estimated useful lives of the assets.
Depreciation expense has been computed principally using
estimated lives of thirty to forty years for premises, three to
five years for hardware and software, and five to ten years for
furniture and equipment. Leasehold improvements are amortized
using the straight-line method over the shorter of the initial
term of the respective lease or the estimated useful life of the
improvement. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. When assets are retired or
otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting
gain or loss is reflected in income for the period.



| |                        
| | -----------------------
| | Other Real Estate Owned

Real estate acquired through foreclosure is
carried at the lower of the recorded investment in the property
or its fair value less estimated selling costs. Prior to
foreclosure, the value of the underlying collateral of the loan
is written down to its estimated fair value less estimated
selling costs by a charge to the allowance for loan losses, if
necessary. Any subsequent write-downs are charged against
operations. Operating expenses of such properties are included
in other operating expenses in the accompanying consolidated
statement of income.



| |                                            
| | -------------------------------------------
| | Investments in Unconsolidated
    Investees

Investments in unconsolidated investees are
accounted for using the equity method of accounting when the
Company has the ability to exercise significant influence, but
not control, over the investees. The cost method of accounting
is used when the Company has neither the ability to exercise
significant influence, nor control, over the investee. Such
investments are monitored for impairment as significant events
occur.

59



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                   
| | ------------------
| | Mortgage Servicing

Mortgage servicing rights represent the right to
receive future mortgage servicing fees. The Company recognizes
as separate assets the right to service mortgage loans for
others, whether the servicing rights are acquired through a
separate purchase or through loan origination by allocating
total costs incurred between the loan and the servicing rights
retained based on their relative fair values. Mortgage servicing
rights are amortized in proportion to, and over the period of,
estimated net servicing income. The Company periodically
evaluates the carrying value of the mortgage servicing rights in
relation to the present value of the estimated future net
servicing revenue based on managements best estimate of
the amount and timing of expected future cash flows, including
assumptions about loan repayment rates, credit loss experience,
and costs to service, as well as discount rates that consider
the risk involved.

Mortgage servicing rights are reported as a
component of other assets in the accompanying consolidated
balance sheet. Fair values are based on quoted market prices in
active markets for loans and loan servicing rights. For
purchased mortgage servicing rights, the cost of acquiring loan
servicing contracts is capitalized to the extent such costs do
not exceed the amount by which the present value of estimated
future servicing revenue exceeds the present value of expected
future servicing costs.

Mortgage loans serviced for others are not
included in the consolidated balance sheet. The unpaid principal
balance of mortgage loans serviced for others was approximately
$931.0 million, $1.07 billion, and $1.28 billion at
December 31, 2003, 2002 and 2001, respectively. The
decrease in the balance of mortgage loans serviced for others is
due to the high level of refinancing activity experienced during
the last two years.

Custodial escrow balances maintained in
connection with the foregoing loan servicing, and included in
demand deposits, were approximately $20.7 million and
$30.2 million at December 31, 2003 and 2002,
respectively.



| |                                            
| | -------------------------------------------
| | Earnings and Dividends per Common
    Share

Basic earnings per common share is computed by
dividing income available for common shareholders by the
weighted average number of common shares outstanding for the
period. Diluted earnings per common share is computed by
dividing income available for common shareholders, adjusted for
any changes in income that would result from the assumed
conversion of all potential dilutive common shares, by the sum
of the weighted average number of common shares outstanding and
the effect of all potential dilutive common shares outstanding
for the period.

Cash dividends per common share represent the
historical cash dividends of the Company. Dividends are recorded
as a payable on the declaration date.



| |             
| | ------------
| | Income Taxes

Deferred income taxes are provided utilizing the
liability method whereby deferred income tax assets or
liabilities are recognized for the tax consequences in future
years of differences in the tax bases of assets and liabilities
and their financial reporting amounts based on enacted tax laws
and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company applies the intrinsic value method in
accounting for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25 (APB
25). In 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, (SFAS
No. 123) which, if fully adopted by the Company,
would change the

60



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

method the Company applies in recognizing the
expense of its stock-based compensation plans for awards
subsequent to 1994. Adoption of the expense recognition
provisions of SFAS No. 123 is optional and the Company
decided not to elect these provisions of SFAS No. 123.
However, pro forma disclosures as if the Company adopted the
expense recognition provisions of SFAS No. 123 are required
by SFAS No. 123 and are presented below.

If the fair value based method of accounting
under SFAS No. 123 had been applied, the Companys net
income available for common shareholders and earnings per common
share would have been reduced to the pro forma amounts indicated
below (assuming that the fair value of options granted during
the year are amortized over the vesting period):

|                                                   |             |                           |   |        |  |      |   |        |  |  |   |        | 
|-------------------------------------------------- | ----------- | ------------------------- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|                                                   |             |                          
|                                                   |             | Year Ended December 31,  
|                                                   |             |                          
|                                                   |             | 2003                      |   | 2002   |  | 2001
|                                                   |             |                           |   |        |  |     
|                                                   |             |                          
|                                                   |             | (Dollars in thousands,   
|                                                   |             | except per share amounts)
|Net income                                         |             |                           |   |        |  |      |   |        |  |  |   |       
|                                                   | As reported |                           | $ | 60,729 |  |      | $ | 59,206 |  |  | $ | 52,717 | 
|                                                   | Pro forma   |                           | $ | 58,312 |  |      | $ | 57,009 |  |  | $ | 50,267 | 
|Stock-based compensation cost, net of income taxes |             |                           |   |        |  |      |   |        |  |  |   |       
|                                                   | As reported |                           | $ | 1,034  |  |      | $ | 586    |  |  | $ | 159    | 
|                                                   | Pro forma   |                           | $ | 3,451  |  |      | $ | 2,783  |  |  | $ | 2,609  | 
|Basic earnings per common share                    |             |                           |   |        |  |      |   |        |  |  |   |       
|                                                   | As reported |                           | $ | 1.78   |  |      | $ | 1.77   |  |  | $ | 1.60   | 
|                                                   | Pro forma   |                           | $ | 1.71   |  |      | $ | 1.70   |  |  | $ | 1.53   | 
|Diluted earnings per common share                  |             |                           |   |        |  |      |   |        |  |  |   |       
|                                                   | As reported |                           | $ | 1.74   |  |      | $ | 1.72   |  |  | $ | 1.55   | 
|                                                   | Pro forma   |                           | $ | 1.67   |  |      | $ | 1.65   |  |  | $ | 1.48   | 

The effects of applying SFAS No. 123 in the
above pro forma disclosure are not indicative of future amounts.
The Company anticipates making awards in the future under its
stock-based compensation plans.



| |                                     
| | ------------------------------------
| | Derivative Financial
    Instruments

The Company recognizes all derivative financial
instruments, such as forward option contracts and commitments to
sell mortgage loans, in the consolidated financial statements at
fair value regardless of the purpose or intent for holding the
instrument. Changes in the fair value of derivative financial
instruments are either recognized periodically in income or in
shareholders equity as a component of other comprehensive
income depending on whether the derivative financial instrument
qualifies and is designated for hedge accounting, and if so,
whether it qualifies as a fair value hedge or a cash flow hedge.
Generally, changes in fair values of derivatives accounted for
as fair value hedges are recorded in income along with the
portions of the changes in the fair value of the hedged items
that relate to the hedged risk(s). Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent
they are effective as hedges, are recorded in other
comprehensive income net of deferred taxes. Changes in fair
values of derivatives not qualifying as hedges are reported in
the statement of income. For the years ended December 31,
2003, 2002, and 2001, the impact of the Companys
derivative financial instruments was immaterial.



| |                                            
| | -------------------------------------------
| | Off-Balance Sheet Financial
    Instruments

In the ordinary course of business the Company
has entered into off-balance sheet financial instruments
consisting of commitments to extend credit, commitments to sell
mortgage loans, commercial letters of credit

61



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

On January 17, 2003, the Financial
Accounting Standards Board (FASB) issued FIN
No. 46, Consolidation of Variable Interest Entities,
which addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51
(ARB No. 51), Consolidated Financial
Statements, to certain entities in which equity investors do
not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties. FIN No. 46 applies immediately
to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after December 15,
2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1,
2003. As a result of the adoption of FIN No. 46, the
accounts and transactions of SWBT Statutory Trust I (the
Trust) have not been consolidated, even though the Company
owns all of the Trusts outstanding common stock.

On May 15, 2003, the FASB approved Statement
of Financial Accounting Standards (SFAS)
No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many
of those instruments, including mandatorily redeemable preferred
securities, were previously classified as equity or as mezzanine
debt. On October 29, 2003, the FASB deferred the effective
date for certain provisions of SFAS No. 150. The
Company adopted this statement with no impact on its financial
condition or results of operations.

On December 16, 2003, the American Institute
of Certified Public Accountants (AICPA) issued
Statement of Position 03-3 (SOP 03-3),
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. SOP 03-3 provides guidance on the accounting
for differences between contractual and expected cash flows from
the purchasers initial investment in loans or debt
securities acquired in a transfer, if those differences are
attributable, at least in part, to credit quality. Among other
things, SOP 03-3: (1) prohibits the recognition of the
excess of contractual cash flows over expected cash flows as an
adjustment of yield, loss accrual, or valuation allowance at the
time of purchase; (2) requires that subsequent increases in
expected cash flows be recognized prospectively through an
adjustment of yield; and (3) requires the subsequent
decreases in expected cash flows be recognized as an impairment.
In addition, SOP 03-3 prohibits the creation or carrying
over of a valuation allowance in the initial accounting of all
loans within its scope that are acquired in a transfer.
SOP 03-3 becomes effective for loans or debt securities
acquired in fiscal years beginning after December 15, 2004.
The Company does not expect the requirements of SOP 03-3 to
have a material impact on its financial condition or results of
operations.



| |                    
| | -------------------
| | Segment Information

In accordance with SFAS No. 131, Disclosure
about Segments of an Enterprise and Related Information, the
Company uses the management approach for reporting
business segment information. The management approach designates
the internal organization that is used by management for making
operating decisions and assessing performance as the source of
the Companys reportable segments.

The Company considers its business as two
operating segments: the bank and the mortgage company. The
Company has disclosed results of operations relating to the two
segments in Note 17 to the consolidated financial
statements.

62



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                  
| | -----------------
| | Reclassifications

Certain previously reported amounts have been
reclassified to conform to the 2003 financial statement
presentation. These reclassifications had no effect on net
income or shareholders equity.

2.     Merger Related
Activity

On October 27, 2003, the Company and its
wholly-owned subsidiary, Southwest Bank of Texas National
Association (the Bank), entered into an Agreement
and Plan of Merger (the Merger Agreement) with
Reunion Bancshares, Inc., (Reunion), the parent of
Lone Star Bank in Dallas, whereby Reunion will merge into the
Company. The Merger Agreement, which is subject to the approval
of Reunions shareholders and various regulatory
authorities, provides for an all-cash transaction with
$43.5 million paid at closing and an additional
$6.5 million to be deposited in an escrow account. The
release of this account is contingent upon the performance of
the loan portfolio and other potential liabilities over a
three-year period. The acquisition closed on January 31, 2004,
and the purchase price was funded through the proceeds of the
trust preferred securities offering discussed in Note 10.
Lone Star Bank has five banking center locations in Dallas,
$222.8 million in assets, $162.6 million in loans, and
$203.2 million in deposits at December 31, 2003. The
Dallas/Fort Worth market represents an attractive growth
opportunity for the Company.

On July 1, 2003, the Company completed its
merger with Maxim, whereby Maxim merged into the Company. Maxim
is the parent company of MaximBank located in Galveston County,
Texas. The addition of the eight Maxim locations expands the
Companys branch network to include Galveston County, Texas.

The merger was an all-cash transaction valued at
$63.0 million. The source of the funds for the merger was
available cash.

The purchase price has been allocated to the
assets acquired and the liabilities assumed based on their
estimated fair values at the date of the merger. The excess of
the purchase price over the estimated fair values of the net
assets acquired was $23.1 million, which was recorded as
goodwill, none of which is expected to be deductible for tax
purposes. Goodwill is evaluated annually for possible impairment
under the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets.

63



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the
date of the merger.

|                          |  |              |          |  
|------------------------- |  | ------------ | -------- | -
|                          |  | July 1, 2003
|                          |  |             
|                          |  | (Dollars in 
|                          |  | thousands)  
|Cash                      |  | $            | 142,658  |  
|Securities                |  |              | 59,781   |  
|Loans                     |  |              | 98,362   |  
|Loan premium              |  |              | 6,678    |  
|Allowance for loan losses |  |              | (1,426   | )
|Goodwill                  |  |              | 23,057   |  
|Core deposit intangibles  |  |              | 7,553    |  
|Other assets              |  |              | 12,125   |  
|Deposits                  |  |              | (241,129 | )
|Deposit premium           |  |              | (407     | )
|Borrowings                |  |              | (37,531  | )
|Other liabilities         |  |              | (6,681   | )
|                          |  |              |          |  
|Cash paid                 |  | $            | 63,040   |  
|                          |  |              |          |  

Core deposit intangibles (CDI) are
amortized using an economic life method based on deposit
attrition projections derived from nationally-observed patterns
within the banking industry. As a result, CDI amortization will
decline over time with most of the amortization during the
initial years. CDI is being amortized over a weighted average
period of eight and one-half years with no residual value.

The unaudited pro forma combined results, as if
Maxim had been included in operations at January 1, 2002,
are estimated to be as follows.

|                                                                               |  |                         |         |      |  |   |         | 
|------------------------------------------------------------------------------ |  | ----------------------- | ------- | ---- |  | - | ------- | 
|                                                                               |  |                        
|                                                                               |  | Pro Forma              
|                                                                               |  | Year Ended December 31,
|                                                                               |  |                        
|                                                                               |  | 2003                    |         | 2002
|                                                                               |  |                         |         |     
|                                                                               |  |                        
|                                                                               |  | (Dollars in thousands, 
|                                                                               |  | except per share       
|                                                                               |  | amounts)               
|Net interest income after provision for loan
    losses and noninterest income |  | $                       | 275,927 |      |  | $ | 250,113 | 
|Income before income taxes                                                     |  |                         | 93,262  |      |  |   | 87,448  | 
|Net income                                                                     |  |                         | 64,339  |      |  |   | 60,328  | 
|Earnings per common share, basic                                               |  | $                       | 1.89    |      |  | $ | 1.80    | 
|Earnings per common share, diluted                                             |  | $                       | 1.85    |      |  | $ | 1.75    | 

Maxim recorded a gain on sale of securities of
$5.3 million in the second quarter of 2003, which has been
recorded in the pro forma results above. These pro forma results
are not necessarily indicative of what actually would have
occurred if the merger had been completed as of the beginning of
each fiscal period presented, nor are they necessarily
indicative of future consolidated results.

64



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

3.     Securities

The amortized cost and fair value of securities
classified as available for sale is as follows:

|                    |                                       |                                     |   |                  |           |      |   |            |        |  |   |        |        |   |   |           |           | 
|------------------- | ------------------------------------- | ----------------------------------- | - | ---------------- | --------- | ---- | - | ---------- | ------ |  | - | ------ | ------ | - | - | --------- | --------- | 
|                    |                                       |                                    
|                    |                                       | December 31, 2003                  
|                    |                                       |                                    
|                    |                                       |                                     |   |                  |           |     
|                    |                                       |                                     |   | Gross Unrealized |           |     
|                    |                                       | Amortized                           |   |                  |           |     
|                    |                                       | Cost                                |   | Gain             |           | Loss |   | Fair Value
|                    |                                       |                                     |   |                  |           |      |   |           
|                    |                                       |                                    
|                    |                                       | (Dollars in thousands)             
|Available for sale: |                                       |                                     |   |                  |           |      |   |            |        |  |   |        |        |   |   |          
|                    | U.S. Government and agency securities |                                     | $ | 250,359          |           |      | $ | 841        |        |  | $ | (102   | )      |   | $ | 251,098   |          
|                    | Mortgage-backed securities            |                                     |   | 1,101,988        |           |      |   | 7,078      |        |  |   | (8,320 | )      |   |   | 1,100,746 |          
|                    | Municipal securities                  |                                     |   | 152,927          |           |      |   | 5,905      |        |  |   | (754   | )      |   |   | 158,078   |          
|                    | Federal Reserve Bank stock            |                                     |   | 4,459            |           |      |   |           |        |  |   |       |        |   |   | 4,459     |          
|                    | Federal Home Loan Bank stock          |                                     |   | 25,469           |           |      |   |           |        |  |   |       |        |   |   | 25,469    |          
|                    | Other securities                      |                                     |   | 9,455            |           |      |   | 93         |        |  |   |        |        |   |   | 9,548     |          
|                    |                                       |                                     |   |                  |           |      |   |            |        |  |   |        |        |   |   |          
|                    |                                       | Total securities available for sale |   | $                | 1,544,657 |      |   | $          | 13,917 |  |   | $      | (9,176 | ) |   | $         | 1,549,398 | 
|                    |                                       |                                     |   |                  |           |      |   |            |        |  |   |        |        |   |   |          

|                    |                                       |                                     |   |                  |           |      |   |            |        |  |   |        |        |   |   |         |           | 
|------------------- | ------------------------------------- | ----------------------------------- | - | ---------------- | --------- | ---- | - | ---------- | ------ |  | - | ------ | ------ | - | - | ------- | --------- | 
|                    |                                       |                                    
|                    |                                       | December 31, 2002                  
|                    |                                       |                                    
|                    |                                       |                                     |   |                  |           |     
|                    |                                       |                                     |   | Gross Unrealized |           |     
|                    |                                       | Amortized                           |   |                  |           |     
|                    |                                       | Cost                                |   | Gain             |           | Loss |   | Fair Value
|                    |                                       |                                     |   |                  |           |      |   |           
|                    |                                       |                                    
|                    |                                       | (Dollars in thousands)             
|Available for sale: |                                       |                                     |   |                  |           |      |   |            |        |  |   |        |        |   |   |        
|                    | U.S. Government and agency securities |                                     | $ | 142,032          |           |      | $ | 1,323      |        |  | $ |       |        |   | $ | 143,355 |          
|                    | Mortgage-backed securities            |                                     |   | 869,872          |           |      |   | 18,077     |        |  |   | (1,194 | )      |   |   | 886,755 |          
|                    | Municipal securities                  |                                     |   | 105,143          |           |      |   | 3,634      |        |  |   | (190   | )      |   |   | 108,587 |          
|                    | Federal Reserve Bank stock            |                                     |   | 4,431            |           |      |   |           |        |  |   |       |        |   |   | 4,431   |          
|                    | Federal Home Loan Bank stock          |                                     |   | 27,188           |           |      |   |           |        |  |   |       |        |   |   | 27,188  |          
|                    | Other securities                      |                                     |   | 30,777           |           |      |   | 107        |        |  |   |       |        |   |   | 30,884  |          
|                    |                                       |                                     |   |                  |           |      |   |            |        |  |   |        |        |   |   |        
|                    |                                       | Total securities available for sale |   | $                | 1,179,443 |      |   | $          | 23,141 |  |   | $      | (1,384 | ) |   | $       | 1,201,200 | 
|                    |                                       |                                     |   |                  |           |      |   |            |        |  |   |        |        |   |   |        

Management believes that based upon the credit
quality of the debt securities, none of the unrealized loss on
securities is considered other-than-temporary at
December 31, 2003. No securities have been in a continuous
unrealized loss position for twelve months or more.

65



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The scheduled maturities of securities classified
as available for sale is as follows:

|                    |                                    |                                     |         |                   |           |           |         |            |           |  |         |         |           |  |         |         |           | 
|------------------- | ---------------------------------- | ----------------------------------- | ------- | ----------------- | --------- | --------- | ------- | ---------- | --------- |  | ------- | ------- | --------- |  | ------- | ------- | --------- | 
|                    |                                    |                                     |         |                  
|                    |                                    | December 31, 2003                   |         | December 31, 2002
|                    |                                    |                                     |         |                  
|                    |                                    | Amortized                           |         |                   |           | Amortized |         |           
|                    |                                    | Cost                                |         | Fair Value        |           | Cost      |         | Fair Value
|                    |                                    |                                     |         |                   |           |           |         |           
|                    |                                    |                                    
|                    |                                    | (Dollars in thousands)             
|Available for sale: |                                    |                                     |         |                   |           |           |         |            |           |  |         |         |           |  |         |        
|                    | Within one year                    |                                     | $       | 24,833            |           |           | $       | 25,056     |           |  | $       | 12,057  |           |  | $       | 12,566  |          
|                    | After one year through five years  |                                     |         | 231,279           |           |           |         | 232,022    |           |  |         | 130,977 |           |  |         | 132,086 |          
|                    | After five years through ten years |                                     |         | 19,248            |           |           |         | 19,962     |           |  |         | 20,857  |           |  |         | 21,417  |          
|                    | Over ten years                     |                                     |         | 127,926           |           |           |         | 132,136    |           |  |         | 83,284  |           |  |         | 85,873  |          
|                    |                                    |                                     |         |                   |           |           |         |            |           |  |         |         |           |  |         |        
|                    |                                    |                                     | 403,286 |                   |           |           | 409,176 |            |           |  | 247,175 |         |           |  | 251,942 |        
|                    | Mortgage-backed securities         |                                     |         | 1,101,988         |           |           |         | 1,100,746  |           |  |         | 869,872 |           |  |         | 886,755 |          
|                    | Federal Reserve Bank stock         |                                     |         | 4,459             |           |           |         | 4,459      |           |  |         | 4,431   |           |  |         | 4,431   |          
|                    | Federal Home Loan Bank stock       |                                     |         | 25,469            |           |           |         | 25,469     |           |  |         | 27,188  |           |  |         | 27,188  |          
|                    | Other securities                   |                                     |         | 9,455             |           |           |         | 9,548      |           |  |         | 30,777  |           |  |         | 30,884  |          
|                    |                                    |                                     |         |                   |           |           |         |            |           |  |         |         |           |  |         |        
|                    |                                    | Total securities available for sale |         | $                 | 1,544,657 |           |         | $          | 1,549,398 |  |         | $       | 1,179,443 |  |         | $       | 1,201,200 | 
|                    |                                    |                                     |         |                   |           |           |         |            |           |  |         |         |           |  |         |        

Securities with a carrying value of
$921.6 million and $700.7 million at December 31,
2003 and 2002, respectively, have been pledged to collateralize
repurchase agreements, public deposits, and other items.

Gross gains of $2.2 million,
$2.3 million, and $602,000 and gross losses of $961,000,
$562,000, and $588,000 were recognized on sales of investment
securities for the years ended December 31, 2003, 2002, and
2001, respectively. The tax expense applicable to these net
realized gains and losses was $429,000, $608,000, and $5,000,
respectively.

4.     Loans

A summary of loans outstanding classified by
purpose follows:

|                               |                                                |                        |           |         |           |   |           |         |           | 
|------------------------------ | ---------------------------------------------- | ---------------------- | --------- | ------- | --------- | - | --------- | ------- | --------- | 
|                               |                                                |                       
|                               |                                                | December 31,          
|                               |                                                |                       
|                               |                                                | 2003                   |           | 2002   
|                               |                                                |                        |           |        
|                               |                                                |                       
|                               |                                                | (Dollars in thousands)
|Commercial and industrial      |                                                | $                      | 1,451,760 |         |           | $ | 1,299,737 |        
|Real estate:                   |                                                |                        |           |         |           |   |           |        
|                               | Construction and land development              |                        |           | 709,914 |           |   |           | 752,451 |          
|                               | 1-4 family residential                         |                        |           | 562,954 |           |   |           | 447,581 |          
|                               | Other                                          |                        |           | 575,155 |           |   |           | 487,999 |          
|Consumer                       |                                                |                        | 193,554   |         |           |   | 138,128   |        
|Less:                          |                                                |                        |           |         |           |   |           |        
|                               | Unearned income and fees, net of related costs |                        |           | (1,664  | )         |   |           | (7,945  | )        
|                               | Allowance for loan losses                      |                        |           | (43,008 | )         |   |           | (36,696 | )        
|                               |                                                |                        |           |         |           |   |           |        
|Loans held for investment, net |                                                |                        | 3,448,665 |         |           |   | 3,081,255 |        
|Loans held for sale            |                                                |                        | 96,899    |         |           |   | 101,389   |        
|                               |                                                |                        |           |         |           |   |           |        
|                               |                                                | Total loans, net       |           | $       | 3,545,564 |   |           | $       | 3,182,644 | 
|                               |                                                |                        |           |         |           |   |           |        

66



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

An analysis of the allowance for loan losses,
which includes activity related to allowances on impaired loans
calculated in accordance with SFAS No. 114 and activity
related to other loan loss allowances determined in accordance
with SFAS No. 5, is as follows:

|                                             |  |                         |        |      |  |      |        |   |  |   |        |  
|-------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2003                    |        | 2002 |  | 2001
|                                             |  |                         |        |      |  |     
|                                             |  |                        
|                                             |  | (Dollars in thousands) 
|Allowance for loan losses, beginning balance |  | $                       | 36,696 |      |  | $    | 31,390 |   |  | $ | 28,150 |  
|Provision charged against operations         |  |                         | 12,000 |      |  |      | 11,750 |   |  |   | 7,500  |  
|Charge-offs                                  |  |                         | (8,265 | )    |  |      | (7,092 | ) |  |   | (5,030 | )
|Recoveries                                   |  |                         | 1,151  |      |  |      | 736    |   |  |   | 770    |  
|Allowance acquired through Maxim merger      |  |                         | 1,426  |      |  |      |       |   |  |   |       |  
|Adjustment for sale of subsidiary            |  |                         |       |      |  |      | (88    | ) |  |   |       |  
|                                             |  |                         |        |      |  |      |        |   |  |   |        |  
|Allowance for loan losses, ending balance    |  | $                       | 43,008 |      |  | $    | 36,696 |   |  | $ | 31,390 |  
|                                             |  |                         |        |      |  |      |        |   |  |   |        |  

The following is a summary of loans considered to
be impaired:

|                                                          |                                             |                        |        |        |  |   |        |        | 
|--------------------------------------------------------- | ------------------------------------------- | ---------------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                          |                                             |                       
|                                                          |                                             | December 31,          
|                                                          |                                             |                       
|                                                          |                                             | 2003                   |        | 2002  
|                                                          |                                             |                        |        |       
|                                                          |                                             |                       
|                                                          |                                             | (Dollars in thousands)
|Impaired loans with no SFAS No. 114
    valuation reserve |                                             | $                      | 12,568 |        |  | $ | 14,508 |       
|Impaired loans with a SFAS No. 114
    valuation reserve  |                                             |                        | 4,240  |        |  |   | 8,538  |       
|                                                          |                                             |                        |        |        |  |   |        |       
|                                                          | Total recorded investment in impaired loans |                        | $      | 16,808 |  |   | $      | 23,046 | 
|                                                          |                                             |                        |        |        |  |   |        |       
|Valuation allowance related to impaired loans             |                                             | $                      | 2,768  |        |  | $ | 3,646  |       
|                                                          |                                             |                        |        |        |  |   |        |       

The average recorded investment in impaired loans
during 2003, 2002, and 2001 was $19.9 million,
$22.1 million, and $15.5 million, respectively.
Interest income on impaired loans of $296,000, $456,000, and
$425,000 was recognized for cash payments received in 2003, 2002
and 2001, respectively. The decrease in the valuation allowance
related to impaired loans is the result of a change in the
composition of these loans and charge-offs recorded in 2003.

The Company has loans, deposits, and other
transactions with its principal shareholders, officers,
directors and organizations with which such persons are
associated which were made in the ordinary course of business.
The aggregate amount of term loans to such related parties was
$59.2 million and $46.6 million at December 31,
2003 and 2002, respectively. Following is an analysis of
activity with respect to these amounts:

|                                                   |  |                        |         |      |  |   |        |  
|-------------------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------ | -
|                                                   |  |                       
|                                                   |  | December 31,          
|                                                   |  |                       
|                                                   |  | 2003                   |         | 2002
|                                                   |  |                        |         |     
|                                                   |  |                       
|                                                   |  | (Dollars in thousands)
|Balance, beginning of year                         |  | $                      | 46,562  |      |  | $ | 11,838 |  
|New loans                                          |  |                        | 37,199  |      |  |   | 36,418 |  
|Repayments                                         |  |                        | (24,554 | )    |  |   | (1,694 | )
|                                                   |  |                        |         |      |  |   |        |  
|Balance, end of year                               |  | $                      | 59,207  |      |  | $ | 46,562 |  
|                                                   |  |                        |         |      |  |   |        |  
|Revolving lines of credit to related parties       |  | $                      | 78,292  |      |  | $ | 73,389 |  
|Amount outstanding under revolving lines of credit |  |                        | 43,209  |      |  |   | 39,979 |  

67



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

5.     Premises and
Equipment

Premises and equipment consist of the following:

|                                               |  |                        |         |      |  |   |         |  
|---------------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | -
|                                               |  |                       
|                                               |  | December 31,          
|                                               |  |                       
|                                               |  | 2003                   |         | 2002
|                                               |  |                        |         |     
|                                               |  |                       
|                                               |  | (Dollars in thousands)
|Land                                           |  | $                      | 20,035  |      |  | $ | 14,499  |  
|Premises and leasehold improvements            |  |                        | 87,689  |      |  |   | 72,066  |  
|Furniture and equipment                        |  |                        | 91,842  |      |  |   | 71,631  |  
|                                               |  |                        |         |      |  |   |         |  
|                                               |  |                        | 199,566 |      |  |   | 158,196 |  
|Less accumulated depreciation and amortization |  |                        | (81,615 | )    |  |   | (65,969 | )
|                                               |  |                        |         |      |  |   |         |  
|                                               |  | $                      | 117,951 |      |  | $ | 92,227  |  
|                                               |  |                        |         |      |  |   |         |  



|   |                                          
|-- | -----------------------------------------
|6. | Goodwill and Core Deposit
    Intangibles

Changes in the carrying amount of the
Companys goodwill and core deposit intangibles for the
twelve months ended December 31, 2003 were as follows:

|                           |                           |                        |        |              |  |   |       |        |  
|-------------------------- | ------------------------- | ---------------------- | ------ | ------------ |  | - | ----- | ------ | -
|                           |                           |                        |        | Core Deposit
|                           |                           | Goodwill               |        | Intangibles 
|                           |                           |                        |        |             
|                           |                           |                       
|                           |                           | (Dollars in thousands)
|Balance, December 31, 2002 |                           | $                      | 2,590  |              |  | $ |      |       
|                           | Acquisition of Maxim Bank |                        |        | 23,057       |  |   |       | 7,553  |  
|                           | Amortization              |                        |        |             |  |   |       | (1,368 | )
|                           |                           |                        |        |              |  |   |       |       
|Balance, December 31, 2003 |                           | $                      | 25,647 |              |  | $ | 6,185 |       
|                           |                           |                        |        |              |  |   |       |       

The following table shows the current period and
estimated future amortization expense for core deposit
intangibles.

|                                      |            |                        |       |       | 
|------------------------------------- | ---------- | ---------------------- | ----- | ----- | 
|                                      |            | Core Deposit          
|                                      |            | Intangibles           
|                                      |            |                       
|                                      |            | (Dollars in thousands)
|Twelve months ended December 31, 2003 |            | $                      | 1,368 |      
|Estimate for year ended December 31,  |            |                        |       |      
|                                      | 2004       |                        | $     | 2,109 | 
|                                      | 2005       |                        |       | 1,272 | 
|                                      | 2006       |                        |       | 787   | 
|                                      | 2007       |                        |       | 576   | 
|                                      | 2008       |                        |       | 470   | 
|                                      | Thereafter |                        |       | 971   | 

68



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

7.     Other
Assets

Other assets consist of the following:

|                                          |  |                        |         |      |  |   |         | 
|----------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                                          |  |                       
|                                          |  | December 31,          
|                                          |  |                       
|                                          |  | 2003                   |         | 2002
|                                          |  |                        |         |     
|                                          |  |                       
|                                          |  | (Dollars in thousands)
|Other real estate and foreclosed property |  | $                      | 4,248   |      |  | $ | 760     | 
|Deferred income taxes                     |  |                        | 2,561   |      |  |   | 1,792   | 
|Bankers acceptances                      |  |                        | 2,422   |      |  |   | 572     | 
|Investment in unconsolidated investees    |  |                        | 11,915  |      |  |   | 7,345   | 
|Cash value of Bank-owned life insurance   |  |                        | 121,665 |      |  |   | 87,511  | 
|Factored receivables                      |  |                        | 31,958  |      |  |   | 23,034  | 
|Mortgage servicing rights, net            |  |                        | 8,299   |      |  |   | 8,257   | 
|Other                                     |  |                        | 10,495  |      |  |   | 8,501   | 
|                                          |  |                        |         |      |  |   |         | 
|                                          |  | $                      | 193,563 |      |  | $ | 137,772 | 
|                                          |  |                        |         |      |  |   |         | 

Investments in unconsolidated investees represent
equity investments in the Trust and enterprises that primarily
make investments in middle market businesses in the form of debt
and equity capital. Unfunded commitments to unconsolidated
investees were approximately $3.8 million at
December 31, 2003. The Company has no other guarantees of
investee activity.

8.     Mortgage
Servicing Rights

The Company originates residential and commercial
mortgage loans both for its own portfolio and to sell to
investors with servicing rights retained through its ownership
of Mitchell. Mitchell also purchases mortgage servicing rights.

Mortgage servicing assets are periodically
evaluated for impairment based upon the fair value of the rights
as compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such as
interest rates and original loan term (primarily 15 and
30 years). Fair value is determined using prices for
similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions.
In periods of falling market interest rates, accelerated loan
prepayment speeds can adversely impact the fair value of these
mortgage-servicing rights relative to their book value. In the
event that the fair value of these assets were to increase in
the future, the Company can recognize the increased fair value
to the extent of the impairment allowance but cannot recognize
an asset in excess of its amortized book value. Any provision
and subsequent recovery would be recorded as a component of
other fee income in the consolidated statement of income.

69



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes the changes in
capitalized mortgage servicing rights for the periods indicated:

|                               |                        |                         |        |        |   |   |        |        |  
|------------------------------ | ---------------------- | ----------------------- | ------ | ------ | - | - | ------ | ------ | -
|                               |                        |                        
|                               |                        | Year Ended December 31,
|                               |                        |                        
|                               |                        | 2003                    |        | 2002  
|                               |                        |                         |        |       
|                               |                        |                        
|                               |                        | (Dollars in thousands) 
|Mortgage servicing rights:     |                        |                         |        |        |   |   |        |       
|Balance, beginning of period   |                        | $                       | 10,628 |        |   | $ | 12,008 |       
|                               | Originations           |                         |        | 2,196  |   |   |        | 1,996  |  
|                               | Purchases              |                         |        | 281    |   |   |        | 804    |  
|                               | Scheduled amortization |                         |        | (754   | ) |   |        | (1,176 | )
|                               | Payoff amortization    |                         |        | (4,052 | ) |   |        | (3,004 | )
|                               |                        |                         |        |        |   |   |        |       
|Balance, end of period         |                        |                         | 8,299  |        |   |   | 10,628 |       
|                               |                        |                         |        |        |   |   |        |       
|Valuation allowance:           |                        |                         |        |        |   |   |        |       
|Balance, beginning of period   |                        |                         | 2,371  |        |   |   |       |       
|                               | Provision              |                         |        | 234    |   |   |        | 2,700  |  
|                               | Recovery               |                         |        | (2,605 | ) |   |        | (329   | )
|                               |                        |                         |        |        |   |   |        |       
|Balance, end of period         |                        |                         |       |        |   |   | 2,371  |       
|                               |                        |                         |        |        |   |   |        |       
|Mortgage servicing rights, net |                        | $                       | 8,299  |        |   | $ | 8,257  |       
|                               |                        |                         |        |        |   |   |        |       

The fair value of these servicing rights was
approximately $10.9 million and $9.8 million at
December 31, 2003 and 2002, respectively. The fair value of
servicing rights was determined using discount rates ranging
from 9.5% to 20.5% and prepayment speeds ranging from 156.6% to
1,257.1% of standard Public Securities Association prepayment
speeds, depending upon the stratification of the specific
mortgage servicing right. A decrease in mortgage interest rates
of 25 basis points and 50 basis points would result in an
estimated fair value of capitalized mortgage servicing rights of
$10.0 million and $9.3 million, respectively, as of
December 31, 2003.

The managed servicing portfolio totaled
$931.0 million at December 31, 2003 and
$1.07 billion at December 31, 2002. Capitalized
mortgage servicing rights represent 89 basis points and
77 basis points of the portfolio serviced at
December 31, 2003 and 2002, respectively.

To the extent that capitalized mortgage servicing
rights exceed fair value, a valuation allowance is recorded.
During the third quarter of 2003, the Company recognized a
non-cash, pretax, recovery of the carrying value of the mortgage
servicing asset of $2.6 million in accordance with the
quarterly revaluation of the capitalized mortgage servicing
costs. With this recovery, the Companys valuation
allowance originally recorded in the third quarter of 2002 has
been fully recovered.

The provision for capitalized mortgage servicing
rights in excess of fair value and subsequent recovery are
included in other fee income in the consolidated statement of
income for the years ended December 31, 2003 and 2002. No
such provision was recognized in 2001.

70



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

9.     Deposits

At December 31, 2003, scheduled maturities
of time deposits are summarized as follows:

|           |  |                        |           | 
|---------- |  | ---------------------- | --------- | 
|           |  | December 31,          
|           |  | 2003                  
|           |  |                       
|           |  | (Dollars in thousands)
|2004       |  | $                      | 781,515   | 
|2005       |  |                        | 150,073   | 
|2006       |  |                        | 24,927    | 
|2007       |  |                        | 37,077    | 
|2008       |  |                        | 12,297    | 
|Thereafter |  |                        | 46        | 
|           |  |                        |           | 
|           |  | $                      | 1,005,935 | 
|           |  |                        |           | 

At December 31, 2003 and 2002, the aggregate
amount of deposits from related parties was $85.5 million
and $111.9 million, respectively.

Brokered deposits were $156.4 million and
$149.4 million at December 31, 2003 and 2002,
respectively. The Banks brokered deposits are attributable
to a major treasury management relationship whereby the Bank
provides banking and treasury management services to mortgage
companies throughout the United States. Under this relationship,
a referring source, whose business is to lend money to mortgage
companies, introduces its customers to the Bank. Deposits
garnered as a result of those introductions are classified as
brokered deposits for financial and regulatory reporting
purposes.



|    |                                                       
|--- | ------------------------------------------------------
|10. | Junior Subordinated Deferrable Interest
    Debentures

In October 2003, the Company formed the Trust to
issue trust preferred securities. On October 7, 2003, the
Trust issued in a private placement $50.0 million in trust
preferred securities in the form of its floating rate Capital
Securities and issued to the Company $1.5 million of trust
common securities. The Trust used the proceeds to purchase
$51.5 million of the Companys floating rate junior
subordinated deferrable interest debentures due
December 17, 2033 (the Debentures). The
interest rate on the Debentures was 4% at December 31,
2003. The Debentures are the sole assets of the Trust and are
subordinate to all of the Companys existing and future
obligations for borrowed or purchased money, obligations under
letters of credit and certain derivative contracts, and any
guarantees by the Company of any of such obligations. The
$51.0 million in proceeds, net of issuance costs, from this
offering were used to fund the cash purchase price for Reunion.
See Note 2  Merger Related Activity
for further discussion of the merger.

The trust preferred securities issued by the
Trust are included in the Tier 1 capital of the Company for
regulatory capital purposes. The Federal Reserve may in the
future disallow inclusion of trust preferred securities as Tier
1 capital due to the requirements of FIN No. 46. On
July 2, 2003, the Federal Reserve Board issued a
supervisory letter instructing bank holding companies to
continue to include the trust preferred securities in the
calculation of Tier 1 capital for regulatory capital purposes
until further notice. The Federal Reserve Board has indicated
that it intends to review the regulatory implications of the
changes in accounting treatment of subsidiary trusts that issue
trust preferred securities. 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 purposes. As of December 31, 2003, if the
Company were not permitted to include the $50.0 million in
trust preferred securities in its Tier 1 capital, the Company
would still meet the regulatory minimums required to be
adequately capitalized.

71



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Companys obligations under the
Debentures, the related indenture, the trust agreement relating
to the trust securities, and the guarantee constitute a full and
unconditional guarantee by the Company of the obligations of the
Trust under the trust preferred securities.

The Debentures are subject to redemption at the
option of the Company, subject to prior regulatory approval, in
whole or in part on or after December 17, 2008, or in full
within 90 days after the occurrence of certain events that
either would have a negative tax effect on the Trust or the
Company, would cause the trust preferred securities to no longer
qualify as Tier 1 capital, or would result in the Trust
being treated as an investment company. Upon repayment of the
Debentures at their stated maturity or following their earlier
redemption, the Trust will use the proceeds of such repayment to
redeem an equivalent amount of outstanding trust preferred
securities and trust common securities.

11.     Securities
Sold under Repurchase Agreements and Other Borrowings

Securities sold under repurchase agreements and
short-term borrowings generally represent borrowings with
maturities ranging from one to thirty days. The Companys
long-term borrowings generally consist of borrowings with the
Federal Home Loan Bank (FHLB) with original
maturities of one year. Short-term borrowings consist of federal
funds purchased and overnight borrowings with the FHLB.
Information relating to these borrowings is summarized as
follows:

|                                             |                                         |                        |   |         |   |  |   |         |  
|-------------------------------------------- | --------------------------------------- | ---------------------- | - | ------- | - |  | - | ------- | -
|                                             |                                         |                       
|                                             |                                         | December 31,          
|                                             |                                         |                       
|                                             |                                         | 2003                   |   | 2002   
|                                             |                                         |                        |   |        
|                                             |                                         |                       
|                                             |                                         | (Dollars in thousands)
|Securities sold under repurchase agreements: |                                         |                        |   |         |   |  |   |        
|                                             | Average                                 |                        | $ | 261,320 |   |  | $ | 271,304 |  
|                                             | Period-end                              |                        |   | 285,571 |   |  |   | 275,443 |  
|                                             | Maximum month-end balance during period |                        |   | 303,764 |   |  |   | 323,815 |  
|Interest rate:                               |                                         |                        |   |         |   |  |   |        
|                                             | Weighted average for the period         |                        |   | 0.88    | % |  |   | 1.45    | %
|                                             | Weighted average at period-end          |                        |   | 0.72    | % |  |   | 1.15    | %
|Short-term borrowings:                       |                                         |                        |   |         |   |  |   |        
|                                             | Average                                 |                        | $ | 276,193 |   |  | $ | 326,675 |  
|                                             | Period-end                              |                        |   | 473,154 |   |  |   | 408,381 |  
|                                             | Maximum month-end balance during period |                        |   | 473,154 |   |  |   | 501,736 |  
|Interest rate:                               |                                         |                        |   |         |   |  |   |        
|                                             | Weighted average for the period         |                        |   | 1.11    | % |  |   | 1.74    | %
|                                             | Weighted average at period-end          |                        |   | 0.98    | % |  |   | 1.26    | %
|Long-term borrowings:                        |                                         |                        |   |         |   |  |   |        
|                                             | Average                                 |                        | $ | 172,744 |   |  | $ | 42,162  |  
|                                             | Period-end                              |                        |   | 206,658 |   |  |   | 107,049 |  
|                                             | Maximum month-end balance during period |                        |   | 306,824 |   |  |   | 107,172 |  
|Interest rate:                               |                                         |                        |   |         |   |  |   |        
|                                             | Weighted average for the period         |                        |   | 1.68    | % |  |   | 2.83    | %
|                                             | Weighted average at period-end          |                        |   | 1.30    | % |  |   | 2.28    | %

Securities sold under repurchase agreements
generally include U.S. Government and agency securities and
are maintained in safekeeping by correspondent banks. The
Company enters into these repurchase agreements as a service to
its customers.

72



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Subject to certain limitations, the Bank may
borrow funds from the FHLB in the form of advances. Credit
availability from the FHLB to the Bank is based on the
Banks financial and operating condition. Borrowings from
the FHLB by the Bank were approximately $203.3 million and
$353.3 million at December 31, 2003 and 2002,
respectively, and are included as a component of other
borrowings in the accompanying consolidated balance sheet. In
addition to creditworthiness, the Bank must own a minimum amount
of FHLB capital stock. This minimum is 5.00% of outstanding FHLB
advances. Unused borrowing capacity at December 31, 2003
was approximately $496.0 million.

At December 31, 2003, the contractual
maturities of long-term borrowings are as follows:

|           |  |              |         | 
|---------- |  | ------------ | ------- | 
|           |  | December 31,
|           |  | 2003        
|           |  |             
|           |  | (Dollars in 
|           |  | thousands)  
|2004       |  | $            | 200,421 | 
|2005       |  |              | 457     | 
|2006       |  |              | 494     | 
|2007       |  |              | 534     | 
|2008       |  |              | 988     | 
|Thereafter |  |              | 3,764   | 
|           |  |              |         | 
|           |  | $            | 206,658 | 
|           |  |              |         | 

12.     Income
Taxes

The income tax provision (benefit) for the years
ended December 31, 2003, 2002 and 2001 is composed of the
following:

|         |       |                        |        |        |  |      |        |        |  |   |        |        | 
|-------- | ----- | ---------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|         |       | 2003                   |        | 2002   |  | 2001
|         |       |                        |        |        |  |     
|         |       |                       
|         |       | (Dollars in thousands)
|Current  |       | $                      | 28,047 |        |  | $    | 24,235 |        |  | $ | 25,208 |       
|Deferred |       |                        | (640   | )      |  |      | 2,758  |        |  |   | (463   | )     
|         |       |                        |        |        |  |      |        |        |  |   |        |       
|         | Total |                        | $      | 27,407 |  |      | $      | 26,993 |  |   | $      | 24,745 | 
|         |       |                        |        |        |  |      |        |        |  |   |        |       

73



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The types of temporary differences between the
tax bases of assets and liabilities and their financial
reporting amounts that give rise to deferred income tax assets
and liabilities and their approximate tax effects are as follows:

|                               |                                                  |                               |   |                   |        |             |       |        |        |  |   |        |        |   |       |       |        | 
|------------------------------ | ------------------------------------------------ | ----------------------------- | - | ----------------- | ------ | ----------- | ----- | ------ | ------ |  | - | ------ | ------ | - | ----- | ----- | ------ | 
|                               |                                                  |                               |   |                  
|                               |                                                  | December 31, 2003             |   | December 31, 2002
|                               |                                                  |                               |   |                  
|                               |                                                  | Temporary                     |   | Tax               |        | Temporary   |       | Tax   
|                               |                                                  | Differences                   |   | Effect            |        | Differences |       | Effect
|                               |                                                  |                               |   |                   |        |             |       |       
|                               |                                                  |                              
|                               |                                                  | (Dollars in thousands)       
|Future deductible differences: |                                                  |                               |   |                   |        |             |       |        |        |  |   |        |        |   |       |      
|                               | Allowance for loan losses                        |                               | $ | 31,264            |        |             | $     | 10,942 |        |  | $ | 25,346 |        |   | $     | 8,871 |       
|                               | Mortgage servicing rights                        |                               |   | 3,558             |        |             |       | 1,245  |        |  |   | 2,208  |        |   |       | 773   |       
|                               | Bank premises                                    |                               |   |                  |        |             |       |       |        |  |   | 2,380  |        |   |       | 833   |       
|                               | Unfunded pension liability                       |                               |   | 1,420             |        |             |       | 497    |        |  |   | 1,193  |        |   |       | 418   |       
|                               | Other                                            |                               |   | 961               |        |             |       | 336    |        |  |   | 1,133  |        |   |       | 397   |       
|                               |                                                  |                               |   |                   |        |             |       |        |        |  |   |        |        |   |       |      
|                               |                                                  | Deferred income tax asset     |   | $                 | 37,203 |             |       |        | 13,020 |  |   | $      | 32,260 |   |       |       | 11,292 | 
|                               |                                                  |                               |   |                   |        |             |       |        |        |  |   |        |        |   |       |      
|Future taxable differences:    |                                                  |                               |   |                   |        |             |       |        |        |  |   |        |        |   |       |      
|                               | Unrealized gain on securities available for sale |                               | $ | 4,741             |        |             |       | 1,763  |        |  | $ | 21,757 |        |   |       | 7,725 |       
|                               | Market discount on securities                    |                               |   | 1,626             |        |             |       | 569    |        |  |   | 2,349  |        |   |       | 822   |       
|                               | Federal Home Loan Bank stock dividends           |                               |   | 2,304             |        |             |       | 806    |        |  |   | 2,722  |        |   |       | 953   |       
|                               | Bank premises                                    |                               |   | 8,792             |        |             |       | 3,077  |        |  |   |       |        |   |       |      |       
|                               | Core deposit intangibles and loan premiums       |                               |   | 12,126            |        |             |       | 4,244  |        |  |   |       |        |   |       |      |       
|                               |                                                  |                               |   |                   |        |             |       |        |        |  |   |        |        |   |       |      
|                               |                                                  | Deferred income tax liability |   | $                 | 29,589 |             |       |        | 10,459 |  |   | $      | 26,828 |   |       |       | 9,500  | 
|                               |                                                  |                               |   |                   |        |             |       |        |        |  |   |        |        |   |       |      
|Net deferred tax asset         |                                                  |                               |   |                   |        | $           | 2,561 |        |        |  |   |        |        | $ | 1,792 |      
|                               |                                                  |                               |   |                   |        |             |       |        |        |  |   |        |        |   |       |      

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

|                                                 |  |                         |       |      |  |      |       |   |  |  |       |  
|------------------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                 |  |                        
|                                                 |  | Year Ended December 31,
|                                                 |  |                        
|                                                 |  | 2003                    |       | 2002 |  | 2001
|                                                 |  |                         |       |      |  |     
|Statutory federal income tax rate                |  |                         | 35.00 | %    |  |      | 35.00 | % |  |  | 35.00 | %
|Tax-exempt income from Bank-owned life insurance |  |                         | (2.38 | )    |  |      | (1.90 | ) |  |  | (2.02 | )
|Tax-exempt interest income                       |  |                         | (2.59 | )    |  |      | (1.95 | ) |  |  | (1.49 | )
|Other                                            |  |                         | 1.07  |      |  |      | 0.16  |   |  |  | 0.45  |  
|                                                 |  |                         |       |      |  |      |       |   |  |  |       |  
|Effective income tax rate                        |  |                         | 31.10 | %    |  |      | 31.31 | % |  |  | 31.94 | %
|                                                 |  |                         |       |      |  |      |       |   |  |  |       |  

13.     Employee
Benefits



| |                              
| | -----------------------------
| | Stock-Based Compensation Plan

The Company sponsors, and currently grants awards
under, the Southwest Bancorporation of Texas, Inc. 1996 Stock
Option Plan (the Stock Option Plan), which is a
stock-based compensation plan as described below. The Company
has also sponsored similar stock-based compensation plans in
prior years.



| |                      
| | ---------------------
| | The Stock Option Plan

Under the 1996 Stock Option Plan, the Company is
authorized to issue up to 4,500,000 shares of common stock
pursuant to Awards granted in the form of incentive
stock options which qualify under

74



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Section 422 of the Internal Revenue Code of
1986, as amended (the Code), nonqualified stock
options which do not qualify under Section 422 of the Code,
and stock appreciation rights. Awards may be granted to selected
employees and directors of the Company or any subsidiary. The
Stock Option Plan provides that the exercise price of any
qualified incentive stock option may not be less than the fair
market value of the common stock on the date of grant, and that
the exercise price of any nonqualified stock option may be equal
to, greater than or less than the fair market value of the
common stock on the date of grant.

The Company granted 618,600, 638,000 and 386,725
stock options in 2003, 2002 and 2001, respectively. These stock
options were granted with an exercise price as determined in
each individual grant agreement. The majority of the options
granted vest over a five year period commencing on the date of
grant (i.e., 60% vest on the third anniversary of the date of
grant and 20% vest on each of the next two anniversaries of the
date of grant) with the remaining options vesting over a period
not to exceed five years.

In accordance with APB 25, compensation expense
is recognized for discounted stock options granted and for
performance-based stock options granted (but not for the stock
options having exercise prices equal to the fair market value on
the date of grant). The Company has recognized $0, $19,000 and
$33,000 of compensation expense in connection with these grants
in 2003, 2002 and 2001, respectively.

A summary of the status of the Companys
stock options as of December 31, 2003, 2002, and 2001 and
the change during the years is as follows:

|                                     |  |            |           |          |  |            |       |          |  |            |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|------------------------------------ |  | ---------- | --------- | -------- |  | ---------- | ----- | -------- |  | ---------- | --------- | -------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                                     |  |            |           |          |  |           
|                                     |  | 2003       |           | 2002     |  | 2001      
|                                     |  |            |           |          |  |           
|                                     |  | Number of  |           | Weighted |  | Number of  |       | Weighted |  | Number of  |           | Weighted
|                                     |  | Shares     |           | Average  |  | Shares     |       | Average  |  | Shares     |           | Average 
|                                     |  | Underlying |           | Exercise |  | Underlying |       | Exercise |  | Underlying |           | Exercise
|                                     |  | Options    |           | Prices   |  | Options    |       | Prices   |  | Options    |           | Prices  
|                                     |  |            |           |          |  |            |       |          |  |            |           |         
|Outstanding at beginning of the year |  |            | 2,573,096 |          |  | $          | 20.01 |          |  |            | 2,735,933 |          |  | $ | 14.72 |  |  |  | 2,630,613 |   |  | $ | 12.06 | 
|Granted at-the-money                 |  |            | 618,600   |          |  |            | 31.04 |          |  |            | 638,000   |          |  |   | 31.20 |  |  |  | 386,725   |   |  |   | 30.40 | 
|Exercised                            |  |            | (319,188  | )        |  |            | 14.68 |          |  |            | (769,703  | )        |  |   | 10.31 |  |  |  | (219,221  | ) |  |   | 9.00  | 
|Forfeited                            |  |            | (78,455   | )        |  |            | 32.29 |          |  |            | (31,134   | )        |  |   | 22.35 |  |  |  | (62,184   | ) |  |   | 19.62 | 
|                                     |  |            |           |          |  |            |       |          |  |            |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding at end of year           |  |            | 2,794,053 |          |  | $          | 22.72 |          |  |            | 2,573,096 |          |  | $ | 20.00 |  |  |  | 2,735,933 |   |  | $ | 14.72 | 
|                                     |  |            |           |          |  |            |       |          |  |            |           |          |  |   |       |  |  |  |           |   |  |   |       | 
|Exercisable at end of year           |  |            | 1,277,675 |          |  | $          | 15.06 |          |  |            | 1,200,105 |          |  | $ | 12.42 |  |  |  | 1,619,187 |   |  | $ | 10.06 | 
|                                     |  |            |           |          |  |            |       |          |  |            |           |          |  |   |       |  |  |  |           |   |  |   |       | 

The fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes stock
option valuation model with the following weighted-average
assumptions for grants in 2003, 2002 and 2001: dividend yield of
0.65%, 0.00%, and 0.00%, respectively; risk-free interest rates
of 2.45%, 4.33% and 5.92%, respectively; the expected lives of
options of 5 years; and a volatility of 32.64%, 29.76% and
29.26%, respectively. The weighted average fair value of options
granted during the year is as follows:

|                                                                       |  |      |      |      |  |      |       |  |  |   |       | 
|---------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                       |  | 2003 |      | 2002 |  | 2001
|                                                                       |  |      |      |      |  |     
|Weighted-average fair value of options granted
    at-the-money        |  | $    | 9.52 |      |  | $    | 10.68 |  |  | $ | 11.24 | 
|Weighted-average fair value of all options
    granted during the year |  | $    | 9.52 |      |  | $    | 10.68 |  |  | $ | 11.24 | 

75



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding and exercisable at December 31,
2003:

|                         |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | --- | ----------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                     |  |         
|                         |  | Options Outstanding |           |                    
|                         |  |                     |           | Options Exercisable
|                         |  |                     |           | Weighted            |  |          |     |            
|                         |  |                     |           | Average             |  | Weighted |     |             |  | Weighted
|                         |  |                     |           | Remaining           |  | Average  |     |             |  | Average 
|                         |  | Number              |           | Contractual         |  | Exercise |     | Number      |  | Exercise
|Range of Exercise Prices |  | Outstanding         |           | Life                |  | Price    |     | Exercisable |  | Price   
|                         |  |                     |           |                     |  |          |     |             |  |         
|$0.20 to $5.20           |  |                     | 193,800   |                     |  |          | *   |             |  | $        | 3.03  |  |  |  | 193,800   |  |  | $ | 3.03  | 
|$5.35 to $11.16          |  |                     | 343,159   |                     |  |          | 3.0 |             |  |          | 8.61  |  |  |  | 343,159   |  |  |   | 8.61  | 
|$11.72 to $15.25         |  |                     | 100,520   |                     |  |          | 5.0 |             |  |          | 12.67 |  |  |  | 74,420    |  |  |   | 12.72 | 
|$15.38 to $20.19         |  |                     | 639,356   |                     |  |          | 5.5 |             |  |          | 18.03 |  |  |  | 454,573   |  |  |   | 17.72 | 
|$20.20 to $36.63         |  |                     | 1,386,458 |                     |  |          | 8.6 |             |  |          | 30.29 |  |  |  | 157,283   |  |  |   | 28.63 | 
|$36.63 to $41.91         |  |                     | 130,760   |                     |  |          | 7.8 |             |  |          | 39.26 |  |  |  | 54,440    |  |  |   | 40.26 | 
|                         |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |           |  |  |   |       | 
|$0.20 to $41.91          |  |                     | 2,794,053 |                     |  |          | *   |             |  | $        | 22.72 |  |  |  | 1,277,675 |  |  | $ | 15.06 | 
|                         |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |           |  |  |   |       | 



---



|  |                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | All options, with an exercise price between $0.20
    to $5.20, are exercisable while the employee remains an employee
    at the Company and cease to be exercisable three months after
    termination of employment.

The Restricted Stock
Plan

Under the Restricted Stock Plan implemented in
2001, the Company is authorized to issue up to 300,000 shares of
common stock pursuant to Awards granted thereunder.
The shares of common stock are issued to the participant at the
time the Award is made or at some later date, and the shares are
subject to certain restrictions against disposition and certain
obligations to forfeit such shares to the Company under certain
circumstances.

The Company granted Awards covering 53,500,
118,000, and 47,355 shares of common stock at a
weighted-average fair value of $30.52, $32.29, and $31.75 in
2003, 2002, and 2001, respectively. The shares covered by these
Awards generally vest over a five year period commencing on
the date of grant; provided, however, that 100% of the shares
may vest earlier if certain performance standards have been met
by the Company.

In accordance with APB 25, compensation
expense is recognized for the performance-based Awards granted
under the Restricted Stock Plan. The Company has recognized
$1.5 million, $834,000, and $200,000 of compensation
expense in connection with the above Awards in 2003, 2002, and
2001, respectively.

A summary of the status of the Companys
restricted stock awards as of December 31, 2003, 2002, and
2001 and the change during the years is as follows:

|                                          |  |           |         |           |  |           |         |   |  |  |         | 
|----------------------------------------- |  | --------- | ------- | --------- |  | --------- | ------- | - |  |  | ------- | 
|                                          |  | 2003      |         | 2002      |  | 2001     
|                                          |  |           |         |           |  |          
|                                          |  | Number    |         | Number    |  | Number   
|                                          |  | of Shares |         | of Shares |  | of Shares
|                                          |  |           |         |           |  |          
|Outstanding at beginning of the year      |  |           | 162,264 |           |  |           | 47,335  |   |  |  |        | 
|Awards granted                            |  |           | 53,500  |           |  |           | 118,000 |   |  |  | 47,335  | 
|Awards vested                             |  |           | (64,345 | )         |  |           |        |   |  |  |        | 
|Awards cancelled                          |  |           | (4,514  | )         |  |           | (3,071  | ) |  |  |        | 
|                                          |  |           |         |           |  |           |         |   |  |  |         | 
|Outstanding at end of year                |  |           | 146,905 |           |  |           | 162,264 |   |  |  | 47,335  | 
|                                          |  |           |         |           |  |           |         |   |  |  |         | 
|Shares available for award at end of year |  |           | 88,750  |           |  |           | 137,736 |   |  |  | 252,665 | 
|                                          |  |           |         |           |  |           |         |   |  |  |         | 

76



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Non-Employee
Directors Deferred Fee Plan

On November 28, 2001, the Directors of the
Company approved and adopted a Non-Employee Directors Deferred
Fee Plan, pursuant to which each Director of the Company and
each Director of the Bank may elect to defer receipt of all or
one-half of his compensation for serving as a director,
committee member or committee chairman for a period of time
selected by the Director that terminates no later than the date
he ceases to be a Board member. The deferred amounts credited to
his account during each calendar quarter are deemed to be
invested in a number of shares of the Companys common
stock determined by dividing the amount of the Directors
compensation deferred for that quarter by the closing sale price
of the common stock reported by NASDAQ on the last trading day
of the quarter and multiplying that result by 1.25 (rounding up
to the nearest whole share). Payment from the Directors
account will commence as soon as reasonably practicable after
the earlier of the directors termination as a member of
the Companys or Banks Board of Directors or the date
specified by the director when he elects to make the deferral.
The payment from each account will be either lump sum or up to
five installments of the Companys common stock. A total of
25,000 shares of Company common stock have been reserved
for issuance under the Non-Employee Directors Deferred Fee Plan.
The Company has credited 25,000 phantom stock units to Director
accounts under this plan.



| |              
| | -------------
| | Benefit Plans

The Company has adopted a contributory profit
sharing plan pursuant to Internal Revenue Code
Section 401(k) covering substantially all employees
(the 401(k) Plan). Each year the Company
determines, at its discretion, the amount of matching
contributions. The Company presently matches 100% of the
employee contributions not to exceed 5% of the employees
annual compensation. Total plan expense charged to the
Companys operations for the years ended December 31,
2003, 2002, and 2001 was $3.0 million, $2.5 million
and $2.2 million, respectively.

The 401(k) Plan provides that the Company may
contribute shares of common stock of the Company (valued at the
fair market value on the date of contribution) instead of cash.
No shares were issued to the 401(k) Plan in 2003, 2002, and 2001.

Prior to December 31, 2000, Citizens
Bankers, Inc. (Citizens) had a defined benefit
pension plan covering substantially all of their employees. The
benefits under the plan were based on years of service and the
employees final average monthly compensation. Effective
December 31, 2000, the Company curtailed the defined
benefit pension plan. Pursuant to the curtailment, no further
benefits will be accrued under the plan from and after
December 31, 2000 and no individual who is not currently a
participant in the plan shall be eligible to become a
participant in the plan. Each participant who was an employee at
December 31, 2000 became 100% vested in his or her accrued
benefit on December 31, 2000. The total pension benefit
obligation under the plan is immaterial to the consolidated
financial statements.

77



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

14. Earnings Per Common Share

Earnings per common share is computed as follows:

|                                                                   |                                                                |                           |        |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------------------------ | -------------------------------------------------------------- | ------------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                   |                                                                |                          
|                                                                   |                                                                | Year Ended December 31,  
|                                                                   |                                                                |                          
|                                                                   |                                                                | 2003                      |        | 2002   |  | 2001
|                                                                   |                                                                |                           |        |        |  |     
|                                                                   |                                                                |                          
|                                                                   |                                                                | (In thousands,           
|                                                                   |                                                                | except per share amounts)
|Net income                                                         |                                                                | $                         | 60,729 |        |  | $    | 59,206 |        |  | $ | 52,717 |       
|                                                                   |                                                                |                           |        |        |  |      |        |        |  |   |        |       
|Divided by average common shares and common share
    equivalents: |                                                                |                           |        |        |  |      |        |        |  |   |        |       
|                                                                   | Average common shares outstanding                              |                           |        | 34,044 |  |      |        | 33,476 |  |   |        | 32,855 | 
|                                                                   | Average common shares issuable under the stock
    option plan |                           |        | 814    |  |      |        | 970    |  |   |        | 1,221  | 
|                                                                   |                                                                |                           |        |        |  |      |        |        |  |   |        |       
|                                                                   | Total average common shares and common share
    equivalents   |                           |        | 34,858 |  |      |        | 34,446 |  |   |        | 34,076 | 
|                                                                   |                                                                |                           |        |        |  |      |        |        |  |   |        |       
|Basic earnings per common share                                    |                                                                | $                         | 1.78   |        |  | $    | 1.77   |        |  | $ | 1.60   |       
|                                                                   |                                                                |                           |        |        |  |      |        |        |  |   |        |       
|Diluted earnings per common share                                  |                                                                | $                         | 1.74   |        |  | $    | 1.72   |        |  | $ | 1.55   |       
|                                                                   |                                                                |                           |        |        |  |      |        |        |  |   |        |       

Stock options outstanding of 144,165, 148,734,
and 94,759 for the years ended December 2003, 2002, and 2001,
respectively, have not been included in diluted earnings per
share because to do so would have been antidilutive for the
periods presented. Stock options are antidilutive when the
exercise price is higher than the current market price of the
Companys common stock.

15.     Commitments
and Contingencies



| |           
| | ----------
| | Litigation

The Company is involved in various litigation
that arises in the normal course of business. In the opinion of
management, after consultation with its legal counsel, such
litigation is not expected to have a material adverse effect on
the Companys consolidated financial position, results of
operations or cash flows.



| |       
| | ------
| | Leases

At December 31, 2003 the Company has certain
noncancelable operating leases which cover the companys
premises with approximate future minimum annual rental payments
as follows:

|           |  |              |        | 
|---------- |  | ------------ | ------ | 
|           |  | Year Ended  
|           |  | December 31,
|           |  |             
|           |  | (Dollars in 
|           |  | thousands)  
|2004       |  | $            | 5,166  | 
|2005       |  |              | 5,068  | 
|2006       |  |              | 4,348  | 
|2007       |  |              | 526    | 
|2008       |  |              | 263    | 
|Thereafter |  |              | 5,416  | 
|           |  |              |        | 
|           |  | $            | 20,787 | 
|           |  |              |        | 

The Company leases a portion of the available
space in owned buildings that is not utilized. Lease rental
income for years ended December 31, 2003, 2002, and 2001
was $1.9 million, $1.5 million, and $737,000,
respectively. Rent expense for the years ended December 31,
2003, 2002 and 2001 was $5.0 million,

78



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

$5.4 million, and $6.5 million,
respectively. Lease rental income and rent expense are included
in other operating income and other operating expenses,
respectively, on the Consolidated Statement of Income.

At December 31, 2003, future minimum lease
payments to be received from long-term leases are as follows:

|           |  |              |       | 
|---------- |  | ------------ | ----- | 
|           |  | Year Ended  
|           |  | December 31,
|           |  |             
|           |  | (Dollars in 
|           |  | thousands)  
|2004       |  | $            | 1,945 | 
|2005       |  |              | 1,786 | 
|2006       |  |              | 1,581 | 
|2007       |  |              | 1,066 | 
|2008       |  |              | 415   | 
|Thereafter |  |              | 871   | 
|           |  |              |       | 
|           |  | $            | 7,664 | 
|           |  |              |       | 

16.     Regulatory
Capital Compliance

The Company and the Bank are subject to
regulatory risk-based capital requirements that assign risk
factors to all assets, including off-balance sheet items such as
loan commitments and standby letters of credit. 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 consolidated financial statements. Capital is
separated into two categories, Tier 1 and Tier 2,
which combine for total capital. At December 31, 2003, the
Companys and Banks Tier 1 capital consists of
their respective shareholders equity adjusted for trust
preferred securities, goodwill, and various other intangibles
and Tier 2 consists of the allowance for loan losses
subject to certain limitations. The guidelines require total
capital of 8% of risk-weighted assets.

In conjunction with risk-based capital
guidelines, the regulators have issued capital leverage
guidelines. The Tier 1 leverage ratio consists of
Tier 1 capital as a percent of average assets. The minimum
Tier 1 leverage ratio for all banks is 3%, with a higher
minimum ratio dependent upon the condition of the individual
bank. The 3% minimum was established to make certain that all
banks have a minimum capital level to support their assets,
regardless of risk profile.

As of December 31, 2003, the most recent
notification from the regulators categorized the Bank as
well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events
since that notification that management believes have changed
the category.

79



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table compares the Companys
and the Banks reported leverage and risk-weighted capital
ratios as of December 31, 2003 and 2002 to the minimum
regulatory standards:

|                        |                                           |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |   |  |   |         |  |  |  |       |  
|----------------------- | ----------------------------------------- | ---------------------- |  | --------------- | ------- | ----------------- |  | ----------------- | ----- | ------------------ |  | ----- | ------- |  |  |  | ---- | - |  | - | ------- |  |  |  | ----- | -
|                        |                                           |                        |  |                 |         |                   |  |                   |       |                   
|                        |                                           |                        |  |                 |         |                   |  |                   |       | Minimum to Be Well
|                        |                                           |                        |  |                 |         |                   |  | Capitalized Under
|                        |                                           |                        |  | Minimum Capital |         | Prompt Corrective
|                        |                                           | Actual                 |  | Requirement     |         | Action Provisions
|                        |                                           |                        |  |                 |         |                  
|                        |                                           | Amount                 |  | Ratio           |         | Amount            |  | Ratio             |       | Amount             |  | Ratio
|                        |                                           |                        |  |                 |         |                   |  |                   |       |                    |  |      
|                        |                                           |                       
|                        |                                           | (Dollars in thousands)
|As of December 31, 2003 |                                           |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |   |  |   |         |  |  | 
|                        | Total Capital (to Risk Weighted Assets):  |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  | $               | 558,858 |                   |  |                   | 11.90 | %                  |  | $     | 375,630 |  |  |  | 8.00 | % |  | $ | N/A     |  |  |  | N/A   | %
|                        |                                           | The Bank               |  |                 | 504,960 |                   |  |                   | 10.77 |                    |  |       | 375,132 |  |  |  | 8.00 |   |  |   | 468,915 |  |  |  | 10.00 |  
|                        | Tier I Capital (to Risk Weighted Assets): |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 515,850 |                   |  |                   | 10.99 |                    |  |       | 187,815 |  |  |  | 4.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 461,438 |                   |  |                   | 9.84  |                    |  |       | 187,566 |  |  |  | 4.00 |   |  |   | 375,132 |  |  |  | 8.00  |  
|                        | Tier I Capital (to Average Assets):       |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 515,850 |                   |  |                   | 9.15  |                    |  |       | 169,086 |  |  |  | 3.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 461,438 |                   |  |                   | 8.20  |                    |  |       | 168,917 |  |  |  | 3.00 |   |  |   | 281,529 |  |  |  | 5.00  |  
|As of December 31, 2002 |                                           |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |   |  |   |         |  |  | 
|                        | Total Capital (to Risk Weighted Assets):  |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 465,545 |                   |  |                   | 11.68 |                    |  |       | 318,794 |  |  |  | 8.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 450,853 |                   |  |                   | 11.33 |                    |  |       | 318,418 |  |  |  | 8.00 |   |  |   | 398,023 |  |  |  | 10.00 |  
|                        | Tier I Capital (to Risk Weighted Assets): |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 428,849 |                   |  |                   | 10.76 |                    |  |       | 159,397 |  |  |  | 4.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 413,643 |                   |  |                   | 10.39 |                    |  |       | 159,209 |  |  |  | 4.00 |   |  |   | 318,418 |  |  |  | 8.00  |  
|                        | Tier I Capital (to Average Assets):       |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 428,849 |                   |  |                   | 9.43  |                    |  |       | 136,389 |  |  |  | 3.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 413,643 |                   |  |                   | 8.59  |                    |  |       | 144,524 |  |  |  | 3.00 |   |  |   | 240,873 |  |  |  | 5.00  |  

The Company and the Bank are also subject to
certain restrictions on the amount of dividends that they may
declare without prior regulatory approval.

17.     Segment
Information

The Company has two operating segments: the bank
and the mortgage company. Each segment is managed separately
because each business requires different marketing strategies
and each offers different products and services.

The Company evaluates each segments
performance based on the revenue and expense from its
operations. Intersegment financing arrangements are accounted
for at current market rates as if they were with third parties.

80



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Summarized financial information by operating
segment for the years ended December 31, 2003, 2002 and
2001 follows:

|                           |  |                         |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|-------------------------- |  | ----------------------- | --------- | -------- |  | ------------ | ------- | ------------ |  | ---- | -------- | -------- |  | ------------ | --------- | ------------ |  | - | --------- |  |  | - | ------- |  |  | - | -------- | - |  | - | --------- | 
|                           |  |                        
|                           |  | Year Ended December 31,
|                           |  |                        
|                           |  |                         |           |         
|                           |  | 2003                    |           | 2002    
|                           |  |                         |           |         
|                           |  | Bank                    |           | Mortgage |  | Eliminations |         | Consolidated |  | Bank |          | Mortgage |  | Eliminations |           | Consolidated
|                           |  |                         |           |          |  |              |         |              |  |      |          |          |  |              |           |             
|                           |  |                        
|                           |  | (Dollars in thousands) 
|Interest income            |  | $                       | 229,081   |          |  | $            | 15,571  |              |  | $    | (5,549   | )        |  | $            | 239,103   |              |  | $ | 228,795   |  |  | $ | 15,821  |  |  | $ | (6,201   | ) |  | $ | 238,415   | 
|Interest expense           |  |                         | 45,725    |          |  |              | 5,549   |              |  |      | (5,549   | )        |  |              | 45,725    |              |  |   | 59,779    |  |  |   | 6,201   |  |  |   | (6,201   | ) |  |   | 59,779    | 
|                           |  |                         |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|Net interest income        |  |                         | 183,356   |          |  |              | 10,022  |              |  |      |         |          |  |              | 193,378   |              |  |   | 169,016   |  |  |   | 9,620   |  |  |   |         |   |  |   | 178,636   | 
|Provision for loan losses  |  |                         | 11,185    |          |  |              | 815     |              |  |      |         |          |  |              | 12,000    |              |  |   | 11,422    |  |  |   | 328     |  |  |   |         |   |  |   | 11,750    | 
|Noninterest income         |  |                         | 76,955    |          |  |              | 9,965   |              |  |      |         |          |  |              | 86,920    |              |  |   | 66,209    |  |  |   | 4,182   |  |  |   |         |   |  |   | 70,391    | 
|Noninterest expense        |  |                         | 168,539   |          |  |              | 11,623  |              |  |      |         |          |  |              | 180,162   |              |  |   | 141,520   |  |  |   | 9,558   |  |  |   |         |   |  |   | 151,078   | 
|                           |  |                         |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|Income before income taxes |  | $                       | 80,587    |          |  | $            | 7,549   |              |  | $    |         |          |  | $            | 88,136    |              |  | $ | 82,283    |  |  | $ | 3,916   |  |  | $ |         |   |  | $ | 86,199    | 
|                           |  |                         |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|Total assets               |  | $                       | 5,916,434 |          |  | $            | 287,656 |              |  | $    | (258,354 | )        |  | $            | 5,945,736 |              |  | $ | 5,146,959 |  |  | $ | 288,952 |  |  | $ | (263,954 | ) |  | $ | 5,171,957 | 
|                           |  |                         |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                           |  |                         |           |          |  |              |         |              |  |   |          |   |  |   |           | 
|-------------------------- |  | ----------------------- | --------- | -------- |  | ------------ | ------- | ------------ |  | - | -------- | - |  | - | --------- | 
|                           |  |                        
|                           |  | Year Ended December 31,
|                           |  |                        
|                           |  |                        
|                           |  | 2001                   
|                           |  |                        
|                           |  | Bank                    |           | Mortgage |  | Eliminations |         | Consolidated
|                           |  |                         |           |          |  |              |         |             
|                           |  |                        
|                           |  | (Dollars in thousands) 
|Interest income            |  | $                       | 251,547   |          |  | $            | 19,499  |              |  | $ | (9,899   | ) |  | $ | 261,147   | 
|Interest expense           |  |                         | 101,158   |          |  |              | 9,899   |              |  |   | (9,899   | ) |  |   | 101,158   | 
|                           |  |                         |           |          |  |              |         |              |  |   |          |   |  |   |           | 
|Net interest income        |  |                         | 150,389   |          |  |              | 9,600   |              |  |   |         |   |  |   | 159,989   | 
|Provision for loan losses  |  |                         | 7,169     |          |  |              | 331     |              |  |   |         |   |  |   | 7,500     | 
|Noninterest income         |  |                         | 50,935    |          |  |              | 7,223   |              |  |   |         |   |  |   | 58,158    | 
|Noninterest expense        |  |                         | 124,427   |          |  |              | 8,758   |              |  |   |         |   |  |   | 133,185   | 
|                           |  |                         |           |          |  |              |         |              |  |   |          |   |  |   |           | 
|Income before income taxes |  | $                       | 69,728    |          |  | $            | 7,734   |              |  | $ |         |   |  | $ | 77,462    | 
|                           |  |                         |           |          |  |              |         |              |  |   |          |   |  |   |           | 
|Total assets               |  | $                       | 4,380,659 |          |  | $            | 263,526 |              |  | $ | (243,029 | ) |  | $ | 4,401,156 | 
|                           |  |                         |           |          |  |              |         |              |  |   |          |   |  |   |           | 

Intersegment interest was paid to the Bank by the
mortgage company in the amount of $5.5 million,
$6.2 million, and $9.9 million for the years ended
December 31, 2003, 2002, and 2001, respectively. Advances
from the Bank to the mortgage company of $258.4 million,
$264.0 million, and $243.0 million were eliminated in
consolidation at December 31, 2003, 2002, and 2001,
respectively.

81



---



##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

18.     Financial
Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk

In the normal course of business, the Company
becomes a party to various financial transactions that generally
do not involve funding. These transactions involve various
risks, including market and credit risk. Since these
transactions generally are not funded, they do not necessarily
represent future liquidity requirements. They are referred to as
financial instruments with off-balance sheet risk and are not
reflected on the balance sheet. The Company offers these
financial instruments to enable its customers to meet their
financing objectives and to manage their interest rate risk.
Supplying these instruments provides the Company with an ongoing
source of fee income. These financial instruments include loan
commitments, letters of credit, commitments to sell mortgage
loans to permanent investors and financial guarantees on GNMA
mortgage-backed securities administered. The Company has
commitments to make additional equity investments in enterprises
that primarily make investments in middle market businesses in
the form of debt and equity capital. These financial instruments
involve, to varying degrees, elements of credit risk in excess
of the amounts recognized in the financial statements.

The approximate contractual amounts of financial
instruments with off-balance sheet risk are as follows:

|                                                                 |  |                        |           |              |  |   |           | 
|---------------------------------------------------------------- |  | ---------------------- | --------- | ------------ |  | - | --------- | 
|                                                                 |  | December 31,           |           | December 31,
|                                                                 |  | 2003                   |           | 2002        
|                                                                 |  | Contract               |           | Contract    
|                                                                 |  | Amount                 |           | Amount      
|                                                                 |  |                        |           |             
|                                                                 |  |                       
|                                                                 |  | (Dollars in thousands)
|Unfunded loan commitments including unfunded
    lines of credit |  | $                      | 2,135,973 |              |  | $ | 1,644,722 | 
|Standby letters of credit                                        |  |                        | 227,041   |              |  |   | 166,822   | 
|Commercial letters of credit                                     |  |                        | 9,528     |              |  |   | 7,261     | 
|Unfunded commitments to unconsolidated investees                 |  |                        | 3,753     |              |  |   | 5,726     | 
|Commitments to sell mortgage loans                               |  |                        | 10,577    |              |  |   | 46,202    | 
|Guarantees on GNMA securities administered                       |  |                        | 86,045    |              |  |   | 82,482    | 

The Companys exposure to credit loss in the
event of nonperformance by the other party to the loan
commitments and letters of credit is limited to the contractual
amount of those instruments. The Company uses the same credit
policies in evaluating loan commitments and letters of credit as
it does for on-balance sheet instruments. 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.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being fully
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit
are conditional commitments by the Company to guarantee the
performance of a customer to a third party. The Company
evaluates each customers credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
managements credit evaluation of the counterparty.
Collateral held varies but may include certificates of deposit,
accounts receivable, inventory, property, plant and equipment,
and real property.

The contract amounts for commitments to sell
mortgage loans to permanent investors represent an agreement to
sell mortgages currently in the process of funding and
commitment terms are generally less than 90 days. The
balance at any given date represents recent activity at the
mortgage company. The contract amount does not represent
exposure to credit loss.

The Company administers GNMA mortgage-backed
securities on which it guarantees payment of monthly principal
and interest to the security holders. The underlying loans are
guaranteed by FHA and VA mortgage insurance and are
collateralized by real estate. In the event of mortgagor
default, the Company may only incur losses of costs that may
exceed reimbursement limitations established by FHA or VA. The

82



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Company believes its exposure is immaterial, and
the contract amount does not represent the Companys
exposure to credit loss.

The Company originates real estate, commercial,
construction and consumer loans primarily to customers in the
eight county area in and around Houston. Although the Company
has a diversified loan portfolio, a substantial portion of its
customers ability to honor their contracts is dependent
upon the local Houston economy and the real estate market.

The Company maintains funds on deposit at
correspondent banks which at times exceed the federally insured
limits. Management of the Company monitors the balance in these
accounts and periodically assesses the financial condition of
correspondent banks.

19.     Fair Values
of Financial Instruments

The fair value of financial instruments provided
below represents estimates of fair values at a point in time.
Significant estimates regarding economic conditions, loss
experience, risk characteristics associated with particular
financial instruments and other factors were used for the
purposes of this disclosure. These estimates are subjective in
nature and involve matters of judgment. Therefore, they cannot
be determined with precision. Changes in the assumptions could
have a material impact on the amounts estimated.

The estimated fair values disclosed do not
reflect the value of assets and liabilities that are not
considered financial instruments. In addition, the value of
long-term relationships with depositors (core deposit
intangibles) and other customers is only reflected for deposits
acquired through mergers accounted for as a purchase. The value
of these unrecorded items is believed to be significant.

Because of the wide range of valuation techniques
and the numerous estimates which must be made, it may be
difficult to make reasonable comparisons of the Companys
fair value information to that of other financial institutions.
It is important that the many uncertainties discussed above be
considered when using the estimated fair value disclosures and
to realize that because of these uncertainties, the aggregate
fair value amount should in no way be construed as
representative of the underlying value of the Company.

The following methods and assumptions were used
by the Company in estimating its fair value disclosures for
financial instruments:

Cash and Cash
Equivalents:The carrying amounts for
cash and cash equivalents approximate their fair values.

Securities:Fair
values for investment securities are based on quoted market
prices. The fair value of stock in the Federal Home
Loan Bank of Dallas and the Federal Reserve Bank is
estimated to be equal to its carrying amount given it is not a
publicly traded equity security, it has an adjustable dividend
rate, and transactions in the stock are executed at the stated
par value.

Loans Held for Sale:Fair values of loans held for sale are estimated based on
outstanding commitments from investors or current market prices
for similar loans.

Loans and Accrued Interest
Receivable:For variable-rate loans
that reprice frequently and with no significant change in credit
risk, fair values are based on carrying values. The fair value
of all other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair
values for impaired loans are estimated using discounted cash
flow analyses or underlying collateral values, where applicable.
The carrying amount of accrued interest approximates its fair
value.

Derivatives.Fair
value is defined as the amount that the Company would receive or
pay to terminate the contracts at the reporting date. Market or
dealer quotes were used to value the instruments.

83



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Off-Balance-Sheet
Instruments:The fair values of the
Companys lending commitments, letters of credit,
commitments to sell loans and guarantees are based on fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the
counterparties credit standing. The fair value of the
Companys option contracts are based on the estimated
amounts the Company would receive from terminating the contracts
at the reporting date.

Deposit Liabilities and Accrued Interest
Payable:The fair values disclosed for
demand deposits (e.g. interest and noninterest checking and
money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date. Fair values for
fixed-rate time deposits are estimated using a discounted cash
flow analysis, using interest rates currently being offered on
certificates with similar remaining maturities. The carrying
amount of accrued interest approximates its fair value.

Borrowings:The fair
value of federal funds purchased, securities sold under
repurchase agreements, junior subordinated deferrable interest
debentures, and other borrowings are estimated using discounted
cash flow analysis using interest rates currently offered for
borrowings with similar maturities.

The following table summarizes the carrying
values and estimated fair values of financial instruments (all
of which are held for purposes other than trading):

|            |                                               |                        |   |                   |  |          |   |            |  |  |   |           |  |  |   |           | 
|----------- | --------------------------------------------- | ---------------------- | - | ----------------- |  | -------- | - | ---------- |  |  | - | --------- |  |  | - | --------- | 
|            |                                               |                        |   |                  
|            |                                               | December 31, 2003      |   | December 31, 2002
|            |                                               |                        |   |                  
|            |                                               | Carrying               |   | Estimated         |  | Carrying |   | Estimated 
|            |                                               | Amount                 |   | Fair Value        |  | Amount   |   | Fair Value
|            |                                               |                        |   |                   |  |          |   |           
|            |                                               |                       
|            |                                               | (Dollars in thousands)
|ASSETS     
|            | Cash and due from banks                       |                        | $ | 390,890           |  |          | $ | 390,890    |  |  | $ | 472,257   |  |  | $ | 472,257   | 
|            | Federal funds sold and other cash equivalents |                        |   | 94,908            |  |          |   | 94,908     |  |  |   | 63,107    |  |  |   | 63,107    | 
|            | Securities available for sale                 |                        |   | 1,549,398         |  |          |   | 1,549,398  |  |  |   | 1,201,200 |  |  |   | 1,201,200 | 
|            | Loans held for sale                           |                        |   | 96,899            |  |          |   | 96,899     |  |  |   | 101,389   |  |  |   | 102,350   | 
|            | Loans held for investment, net of allowance   |                        |   | 3,448,665         |  |          |   | 3,427,411  |  |  |   | 3,081,255 |  |  |   | 3,073,425 | 
|            | Accrued interest receivable                   |                        |   | 21,630            |  |          |   | 21,630     |  |  |   | 20,160    |  |  |   | 20,160    | 
|LIABILITIES
|            | Deposits                                      |                        | $ | 4,403,239         |  |          | $ | 4,092,790  |  |  | $ | 3,912,049 |  |  | $ | 3,756,819 | 
|            | Securities sold under repurchase agreements   |                        |   | 285,571           |  |          |   | 285,460    |  |  |   | 275,443   |  |  |   | 275,362   | 
|            | Borrowings                                    |                        |   | 731,359           |  |          |   | 732,099    |  |  |   | 515,430   |  |  |   | 516,661   | 
|            | Accrued interest payable                      |                        |   | 1,822             |  |          |   | 1,822      |  |  |   | 1,654     |  |  |   | 1,654     | 

The fair value of the Companys derivatives
and off-balance sheet instruments was immaterial at
December 31, 2003 and 2002.

84



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

20.     Supplemental
Cash Flow Information

Supplemental cash flow information for the years
ended December 31, 2003, 2002, and 2001 is as follows:

|                                             |                                             |                        |        |       |  |      |        |       |  |   |         |        | 
|-------------------------------------------- | ------------------------------------------- | ---------------------- | ------ | ----- |  | ---- | ------ | ----- |  | - | ------- | ------ | 
|                                             |                                             |                       
|                                             |                                             | December 31,          
|                                             |                                             |                       
|                                             |                                             | 2003                   |        | 2002  |  | 2001
|                                             |                                             |                        |        |       |  |     
|                                             |                                             |                       
|                                             |                                             | (Dollars in thousands)
|Cash paid for interest                       |                                             | $                      | 45,557 |       |  | $    | 60,687 |       |  | $ | 104,101 |       
|Cash paid for income taxes                   |                                             |                        | 30,850 |       |  |      | 13,050 |       |  |   | 18,600  |       
|Non-cash investing and financing activities: |                                             |                        |        |       |  |      |        |       |  |   |         |       
|                                             | Loans transferred to foreclosed real estate |                        |        | 4,393 |  |      |        | 1,115 |  |   |         | 1,550  | 
|                                             | Investment securities transferred to loans  |                        |        |      |  |      |        |      |  |   |         | 10,250 | 

The Company purchased all of the capital stock of
Maxim for $63.0 million. In conjunction with the
acquisition, liabilities were assumed as follows:

|                                |                     |                        |         |         | 
|------------------------------- | ------------------- | ---------------------- | ------- | ------- | 
|                                |                     | July 1, 2003          
|                                |                     |                       
|                                |                     | (Dollars in thousands)
|Fair value of assets acquired   |                     | $                      | 348,788 |        
|Cash paid for the capital stock |                     |                        | (63,040 | )      
|                                |                     |                        |         |        
|                                | Liabilities assumed |                        | $       | 285,748 | 
|                                |                     |                        |         |        

21.     Parent
Company Only Condensed Financial Statements

The balance sheet, statement of income and
statement of cash flows for the parent company are as follows:

BALANCE SHEET

|                                         |                                            |                        |         |         |  |   |         |         | 
|---------------------------------------- | ------------------------------------------ | ---------------------- | ------- | ------- |  | - | ------- | ------- | 
|                                         |                                            |                       
|                                         |                                            | December 31,          
|                                         |                                            |                       
|                                         |                                            | 2003                   |         | 2002   
|                                         |                                            |                        |         |        
|                                         |                                            |                       
|                                         |                                            | (Dollars in thousands)
|ASSETS                                  
|                                        
|Cash and cash equivalents                |                                            | $                      | 48,720  |         |  | $ | 273     |        
|Securities  available for sale          |                                            |                        | 2,257   |         |  |   | 12,146  |        
|Investment in subsidiary                 |                                            |                        | 498,784 |         |  |   | 431,237 |        
|Other assets                             |                                            |                        | 2,053   |         |  |   | 1,867   |        
|                                         |                                            |                        |         |         |  |   |         |        
|                                         | Total assets                               |                        | $       | 551,814 |  |   | $       | 445,523 | 
|                                         |                                            |                        |         |         |  |   |         |        
|                                        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Borrowings                               |                                            | $                      | 51,547  |         |  | $ |        |        
|Accrued interest payable                 |                                            |                        | 493     |         |  |   |        |        
|Other liabilities                        |                                            |                        | 453     |         |  |   |        |        
|Shareholders equity                     |                                            |                        | 499,321 |         |  |   | 445,523 |        
|                                         |                                            |                        |         |         |  |   |         |        
|                                         | Total liabilities and shareholders equity |                        | $       | 551,814 |  |   | $       | 445,523 | 
|                                         |                                            |                        |         |         |  |   |         |        

85



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

STATEMENT OF INCOME

|                                             |                                    |                         |        |        |   |      |        |        |   |   |        |        |  
|-------------------------------------------- | ---------------------------------- | ----------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                             |                                    |                        
|                                             |                                    | Year Ended December 31,
|                                             |                                    |                        
|                                             |                                    | 2003                    |        | 2002   |   | 2001
|                                             |                                    |                         |        |        |   |     
|                                             |                                    |                        
|                                             |                                    | (Dollars in thousands) 
|Interest income on securities                |                                    | $                       | 100    |        |   | $    | 118    |        |   | $ | 141    |       
|Interest expense on borrowings               |                                    |                         | 516    |        |   |      | 106    |        |   |   | 707    |       
|                                             |                                    |                         |        |        |   |      |        |        |   |   |        |       
|                                             | Net interest expense               |                         |        | (416   | ) |      |        | 12     |   |   |        | (566   | )
|                                             |                                    |                         |        |        |   |      |        |        |   |   |        |       
|Other income:                                |                                    |                         |        |        |   |      |        |        |   |   |        |       
|                                             | Dividends received from subsidiary |                         |        | 51,000 |   |      |        | 10,980 |   |   |        |       |  
|                                             | Other operating income             |                         |        |       |   |      |        |       |   |   |        | 8      |  
|                                             | Gain (loss) on sale of securities  |                         |        |       |   |      |        | 334    |   |   |        |       |  
|                                             |                                    |                         |        |        |   |      |        |        |   |   |        |       
|                                             | Total other income                 |                         |        | 51,000 |   |      |        | 11,314 |   |   |        | 8      |  
|                                             |                                    |                         |        |        |   |      |        |        |   |   |        |       
|Operating expenses                           |                                    |                         | 1,661  |        |   |      | 953    |        |   |   | 350    |       
|Equity in undistributed income of subsidiary |                                    |                         | 11,067 |        |   |      | 48,643 |        |   |   | 53,328 |       
|                                             |                                    |                         |        |        |   |      |        |        |   |   |        |       
|                                             | Income before income taxes         |                         |        | 59,990 |   |      |        | 59,016 |   |   |        | 52,420 |  
|                                             | Income tax benefit                 |                         |        | (739   | ) |      |        | (190   | ) |   |        | (297   | )
|                                             |                                    |                         |        |        |   |      |        |        |   |   |        |       
|Net income                                   |                                    | $                       | 60,729 |        |   | $    | 59,206 |        |   | $ | 52,717 |       
|                                             |                                    |                         |        |        |   |      |        |        |   |   |        |       

86



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##### 



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

STATEMENT OF CASH FLOWS

|                                                         |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |        |         |        |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------- | -------- | ------- | ------ | --- | ------- | ------- | ------ | ------ | ------ | ------- | ------ | -
|                                                         |                                                                                       |                                                                                          
|                                                         |                                                                                       | Year Ended December 31,                                                                  
|                                                         |                                                                                       |                                                                                          
|                                                         |                                                                                       | 2003                                                                                      |                                                         | 2002     |         | 2001  
|                                                         |                                                                                       |                                                                                           |                                                         |          |         |       
|                                                         |                                                                                       |                                                                                          
|                                                         |                                                                                       | (Dollars in thousands)                                                                   
|Cash flows from operating activities:                    |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|                                                         | Net income                                                                            |                                                                                           | $                                                       | 60,729   |         |        | $   | 59,206  |         |        | $      | 52,717 |        
|                                                         | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                           |                                                         |          |         |        |     |         |         |        |        |        |        
|                                                         |                                                                                       | Equity in undistributed income of subsidiary                                              |                                                         |          | (11,067 | )      |     |         | (48,643 | )      |        |        | (53,328 | )     
|                                                         |                                                                                       | Depreciation and amortization                                                             |                                                         |          | 1,498   |        |     |         | 853     |        |        |        | 233     |       
|                                                         |                                                                                       | (Increase) decrease in accrued interest
    receivable, prepaid expenses and other assets |                                                         |          | (189    | )      |     |         | (186    | )      |        |        | 3,254   |       
|                                                         |                                                                                       | Increase in accrued interest payable and other
    liabilities                            |                                                         |          | 946     |        |     |         |        |        |        |        |        |       
|                                                         |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|                                                         |                                                                                       |                                                                                           | Net cash provided by operating activities               |          |         | 51,917 |     |         |         | 11,230 |        |        |         | 2,876  |  
|                                                         |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|Cash flow from investing activities:                     |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|                                                         | Purchase of securities available for sale                                             |                                                                                           |                                                         | (2,128   | )       |        |     | (7,968  | )       |        |        | (4,942 | )      
|                                                         | Sales of securities available for sale                                                |                                                                                           |                                                         | 12,025   |         |        |     |        |         |        |        | 1,953  |        
|                                                         | Investments in subsidiaries                                                           |                                                                                           |                                                         | (2,873   | )       |        |     | (845    | )       |        |        | (2,869 | )      
|                                                         | Purchase of Maxim Financial Holdings, Inc. (net
    of cash acquired of $142,658)     |                                                                                           |                                                         | 79,618   |         |        |     |        |         |        |        |       |        
|                                                         | Contributions to subsidiaries                                                         |                                                                                           |                                                         | (142,540 | )       |        |     |        |         |        |        |       |        
|                                                         |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|                                                         |                                                                                       | Net cash used in investing activities                                                     |                                                         |          | (55,898 | )      |     |         | (8,813  | )      |        |        | (5,858  | )     
|                                                         |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|Cash flows from financing activities:                    |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|                                                         | Proceeds from borrowings                                                              |                                                                                           |                                                         | 51,547   |         |        |     |        |         |        |        |       |        
|                                                         | Payments on borrowings                                                                |                                                                                           |                                                         |         |         |        |     | (10,000 | )       |        |        | (3,000 | )      
|                                                         | Payments of dividends on common stock                                                 |                                                                                           |                                                         | (3,418   | )       |        |     |        |         |        |        |       |        
|                                                         | Net proceeds from issuance of common stock                                            |                                                                                           |                                                         | 4,715    |         |        |     | 7,842   |         |        |        | 1,870  |        
|                                                         | Purchase of treasury stock                                                            |                                                                                           |                                                         | (416     | )       |        |     |        |         |        |        |       |        
|                                                         |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|                                                         |                                                                                       |                                                                                           | Net cash provided by (used in) financing
    activities |          |         | 52,428 |     |         |         | (2,158 | )      |        |         | (1,130 | )
|                                                         |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|Net increase (decrease) in cash and cash
    equivalents |                                                                                       |                                                                                           | 48,447                                                  |          |         |        | 259 |         |         |        | (4,112 | )     
|Cash and cash equivalents at beginning of period         |                                                                                       |                                                                                           | 273                                                     |          |         |        | 14  |         |         |        | 4,126  |       
|                                                         |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       
|Cash and cash equivalents at end of period               |                                                                                       | $                                                                                         | 48,720                                                  |          |         | $      | 273 |         |         | $      | 14     |       
|                                                         |                                                                                       |                                                                                           |                                                         |          |         |        |     |         |         |        |        |       

87



---



##### 



EXHIBIT INDEX

(c) *Exhibits(1)

| |         |  |  |   |  |                                                                                                                                                                                                                                                                                          
| | ------- |  |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1     |  |  |  |  | Articles of Incorporation of the Company,
    restated as of May 1, 2001 (incorporated by reference to
    Exhibit 4.1 to the Companys Form S-8
    Registration Statement No. 333-60190)                                                                                               
| | 3.2     |  |  |  |  | Bylaws of the Company (Restated as of
    December 31, 1996)                                                                                                                                                                                                                             
| | 4.1     |  |  |  |  | Specimen Common Stock certificate                                                                                                                                                                                                                                                        
| | 10.1   |  |  |  |  | 1989 Stock Option Plan, amended and restated as
    of May 29, 1998 (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2000)                                                                 
| | 10.2   |  |  |  |  | 1993 Stock Option Plan, amended and restated as
    of May 29, 1998 (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2000)                                                                 
| | 10.3   |  |  |  |  | Form of Stock Option Agreement under 1989 Stock
    Option Plan and 1993 Stock Option Plan                                                                                                                                                                                               
| | 10.4   |  |  |  |  | 1996 Stock Option Plan, as amended
    January 24, 2000 (incorporated by reference to Exhibit 10.4
    to the Companys Annual Report on Form 10-K for the
    year ended December 31, 1999)                                                                                             
| | **10.5 |  |  |  |  | Form of Incentive Stock Option Agreement under
    1996 Stock Option Plan                                                                                                                                                                                                                
| | **10.6 |  |  |  |  | Form of Non-qualified Stock Option Agreement
    under 1996 Stock Option Plan                                                                                                                                                                                                            
| | 10.7   |  |  |  |  | Form of Stock Option Agreement for Directors
    under 1996 Stock Option Plan (incorporated by reference to
    Exhibit 10.8 to the Companys Form S-1
    Registration Statement No. 333-16509)                                                                                         
| | 10.8   |  |  |  |  | Form of Change in Control Agreement between the
    Company and each of Joseph H. Argue III, David C. Farries,
    and Steve D. Stephens (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2000) 
| | 10.9   |  |  |  |  | Form of Change in Control Agreement between the
    Company and Dale Andreas, Kenneth Olan, and Walter L. Ward, Jr.
    (incorporated by reference to Exhibit 10.10 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2002)                            
| | 10.10  |  |  |  |  | Employment Agreement, amended and restated as of
    February 17, 2001, between the Company and Walter E.
    Johnson (incorporated by reference to Exhibit 10.11 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2000)                              
| |  10.11 |  |  |  |  | Restricted Stock Plan (incorporated by reference
    to Appendix B to the Companys Proxy Statement dated
    March 16, 2001 for its 2001 Annual Meeting of Shareholders)                                                                                                                
| | 10.12  |  |  |  |  | Form of Restricted Stock Agreement under the
    Restricted Stock Plan (incorporated by reference to
    Exhibit 4.6 to the Companys Form S-8
    Registration Statement No. 333-60190)                                                                                                 
| | 10.13  |  |  |  |  | Non-Employee Directors Deferred Fee Plan
    (incorporated by reference to Exhibit 4.3 to the
    Companys Form S-8 Registration Statement
    No. 333-74452)                                                                                                                           
| | 10.14  |  |  |  |  | Form of Deferral Election Form under Non-Employee
    Directors Deferred Fee Plan (incorporated by reference to
    Exhibit 4.4 to the Companys Form S-8 Registration
    Statement No. 333-74452)                                                                                      
| | 10.15   |  |  |  |  | Purchase and Sale Agreement between TCP
    Renaissance Partners, L.P. and Southwest Bank of
    Texas, N.A., dated May 24, 2002 (incorporated by
    reference to Exhibit 10.1 to the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    September 30, 2002)
| | 10.16  |  |  |  |  | 1996 Stock Option Plan, Amended and Restated as
    of June 4, 2002 (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2002)                                                                      
| | 10.17  |  |  |  |  | Change in Control Agreement between the Company
    and Paul B. Murphy, Jr., Amended and Restated as of
    June 4, 2002 (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2002)                 
| | 10.18  |  |  |  |  | Form of Change in Control Agreement [Three Year]
    between the Company and Scott J. McLean, Terry Kelly, and
    Randall E. Meyer (incorporated by reference to
    Exhibit 10.21 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002)                

88



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##### 



| |          |  |  |   |  |                                                                                                                                                                                                                                               
| | -------- |  |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.19   |  |  |  |  | Form of Change in Control Agreement [Two Year]
    between the Company and Paul A. Port (incorporated by reference
    to Exhibit 10.22 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002)                 
| | **10.20 |  |  |  |  | First Amendment to Change In Control Agreement
    [Two Year], dated as of June 4, 2002 between the Company
    and David C. Farries, Joseph H. Argue III, Steve D. Stephens,
    and Walter L. Ward, Jr.                                     
| | 10.21   |  |  |  |  | Form of Change in Control Agreement between the
    Company and John Drew and Marilyn Manis-Hassanein (incorporated
    by reference to Exhibit 10.9 to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    2002)
| | **10.22 |  |  |  |  | Employment Agreement between the Company and
    Charles F. Hall, Jr., dated as of March 10, 2003                                                                                                                                             
| | **10.23 |  |  |  |  | Form of Change of Control Agreement [One Year]
    between the Company and Laurence L. Lehman, III                                                                                                                                            
| | **21.1   |  |  |  |  | List of subsidiaries of the Company                                                                                                                                                                                                           
| | **23.1   |  |  |  |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                         
| | **31.1   |  |  |  |  | Certification of the Chief Executive Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                    
| | **31.2   |  |  |  |  | Certification of the Chief Financial Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                    
| | **32.1   |  |  |  |  | Certification of the Chief Executive Officer
    Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002                                                                                    
| | **32.2   |  |  |  |  | Certification of the Chief Financial Officer
    Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002                                                                                    



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|    |                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | All Exhibits except for those filed herewith and
    as otherwise indicated are incorporated herein by reference to
    the Exhibits bearing the same Exhibit numbers in the
    Companys Form S-1 Registration Statement
    No. 333-16509.  
|   
|**  | Filed herewith.                                                                                                                                                                                                                                
|   
|   | Management contract or compensatory plan or
    arrangement.                                                                                                                                                                                   
|   
|(1) | The Company has other long-term debt agreements
    that meet the exclusion set forth in
    Section 601(b)(4)(iii)(A) of Regulation S-K. The
    Company hereby agrees to furnish a copy of such agreement to the
    Commission upon request.

89