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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q

[X]         QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES
EXCHANGE ACT OF 1934


For the Quarter Ended March 31,
2004

OR

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

There were 34,315,852 shares of the
Registrants Common Stock outstanding as of the close of
business on April 26, 2004.



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SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES

INDEX TO FORM 10-Q

|                                                                                                       |                                                                                                                                   |      |    |   | 
|------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------- | ---- | -- | - | 
|                                                                                                       |                                                                                                                                   | Page
|                                                                                                       |                                                                                                                                   |     
|PART
    I.  FINANCIAL INFORMATION                                                                     |                                                                                                                                   |      |    |  
|Item 1.  Financial
    Statements                                                                      |                                                                                                                                   |      |    |  
|                                                                                                       | Report of Independent
    Accountants                                                                                             |      |    | 2 | 
|                                                                                                       | Condensed Consolidated
    Balance Sheet as of March 31, 2004 and December 31,
    2003 (unaudited)                               |      |    | 3 | 
|                                                                                                       | Condensed Consolidated
    Statement of Income for the Three Months Ended March 31,
    2004 and 2003 (unaudited)                 |      |    | 4 | 
|                                                                                                       | Condensed Consolidated
    Statement of Changes in Shareholders Equity for the Three
    Months Ended March 31, 2004 (unaudited) |      |    | 5 | 
|                                                                                                       | Condensed Consolidated
    Statement of Cash Flows for the Three Months Ended
    March 31, 2004 and 2003 (unaudited)             |      |    | 6 | 
|                                                                                                       | Notes to Condensed
    Consolidated Financial Statements (unaudited)                                                              |      |    | 7 | 
|Item
    2.  Managements Discussion and Analysis of
    Financial Condition and Results of Operations |                                                                                                                                   |      | 14 |  
|Item
    3.  Quantitative and Qualitative Disclosures About
    Market Risk                            |                                                                                                                                   |      | 36 |  
|Item 4.  Controls
    and Procedures                                                                   |                                                                                                                                   |      | 36 |  
|PART II.  OTHER
    INFORMATION                                                                        |                                                                                                                                   |      |    |  
|Item 1.  Legal
    Proceedings                                                                         |                                                                                                                                   |      | 37 |  
|Item 2.  Changes
    in Securities and Use of Proceeds                                                 |                                                                                                                                   |      | 37 |  
|Item 3.  Defaults
    upon Senior Securities                                                           |                                                                                                                                   |      | 37 |  
|Item
    4.  Submission of Matters to a Vote of Security
    Holders                                   |                                                                                                                                   |      | 37 |  
|Item 5.  Other
    Information                                                                         |                                                                                                                                   |      | 37 |  
|Item 6.  Exhibits
    and Reports on Form 8-K                                                          |                                                                                                                                   |      | 37 |  
|Signatures                                                                                             |                                                                                                                                   |      | 38 |  
|Awareness Letter of PricewaterhouseCoopers LLP                                                        
|Certification of CEO pursuant to Section 302                                                          
|Certification of CFO pursuant to Section 302                                                          
|Certification of CEO pursuant to Section 906                                                          
|Certification of CFO pursuant to Section 906                                                          



1



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##### Table of Contents






PART I.  FINANCIAL
INFORMATION




ITEM 1.  Financial
Statements




REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

Southwest Bancorporation of Texas, Inc.:


We have reviewed the accompanying condensed
consolidated balance sheet of Southwest Bancorporation of Texas,
Inc. and Subsidiaries (the Company) as of
March 31, 2004, the related condensed consolidated
statement of income for the three-month periods ended
March 31, 2004 and 2003, the condensed consolidated
statement of changes in shareholders equity for the
three-month period ended March 31, 2004, and the condensed
consolidated statement of cash flows for the three-month periods
ended March 31, 2004 and 2003. These interim financial
statements are the responsibility of the Companys
management.

We conducted our review in accordance with
standards established by the American Institute of Certified
Public Accountants. A review of interim financial information
consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any
material modifications that should be made to the accompanying
condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted
in the United States of America.

We previously audited, in accordance with
auditing standards generally accepted in the United States of
America, the consolidated balance sheet as of December 31,
2003, and the related consolidated statements of income, of
changes in shareholders equity, and of cash flows for the
year then ended (not presented herein), and in our report dated
February 25, 2004, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance
sheet as of December 31, 2003 is fairly stated, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.

/s/     PricewaterhouseCoopers
LLP

Houston, Texas

April 29, 2004


2



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEET


(unaudited)


|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |           |           |           | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------ | ------------ | --------- | --------- | --------- | --------- | --------- | --------- | 
|                                              |                                                                                                                                                                                                           | March 31,                       |                                            | December 31,
|                                              |                                                                                                                                                                                                           | 2004                            |                                            | 2003        
|                                              |                                                                                                                                                                                                           |                                 |                                            |             
|                                              |                                                                                                                                                                                                           |                                
|                                              |                                                                                                                                                                                                           | (Dollars in thousands, except  
|                                              |                                                                                                                                                                                                           | per share amounts)             
|ASSETS                                       
|Cash and due from banks                       |                                                                                                                                                                                                           | $                               | 290,796                                    |              |           | $         | 390,890   |          
|Federal funds sold and other cash equivalents |                                                                                                                                                                                                           |                                 | 52,678                                     |              |           |           | 94,908    |          
|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|                                              |                                                                                                                                                                                                           | Total cash and cash equivalents |                                            |              | 343,474   |           |           |           | 485,798   |          
|Securities  available for sale               |                                                                                                                                                                                                           |                                 | 1,576,977                                  |              |           |           | 1,549,398 |          
|Loans held for sale                           |                                                                                                                                                                                                           |                                 | 101,944                                    |              |           |           | 96,899    |          
|Loans held for investment                     |                                                                                                                                                                                                           |                                 | 3,720,950                                  |              |           |           | 3,491,673 |          
|Allowance for loan losses                     |                                                                                                                                                                                                           |                                 | (48,071                                    | )            |           |           | (43,008   | )        
|Premises and equipment, net                   |                                                                                                                                                                                                           |                                 | 131,347                                    |              |           |           | 117,951   |          
|Accrued interest receivable                   |                                                                                                                                                                                                           |                                 | 21,380                                     |              |           |           | 21,630    |          
|Goodwill                                      |                                                                                                                                                                                                           |                                 | 55,094                                     |              |           |           | 25,647    |          
|Core deposit intangibles                      |                                                                                                                                                                                                           |                                 | 11,661                                     |              |           |           | 6,185     |          
|Other assets                                  |                                                                                                                                                                                                           |                                 | 199,462                                    |              |           |           | 193,563   |          
|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|                                              |                                                                                                                                                                                                           | Total assets                    |                                            | $            | 6,114,218 |           |           | $         | 5,945,736 |          
|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|LIABILITIES AND SHAREHOLDERS
    EQUITY     
|Deposits:                                     |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|                                              | Demand  noninterest-bearing                                                                                                                                                                              |                                 | $                                          | 1,625,647    |           |           | $         | 1,513,038 |          
|                                              | Demand  interest-bearing                                                                                                                                                                                 |                                 |                                            | 72,009       |           |           |           | 43,452    |          
|                                              | Money market accounts                                                                                                                                                                                     |                                 |                                            | 1,843,409    |           |           |           | 1,709,755 |          
|                                              | Savings                                                                                                                                                                                                   |                                 |                                            | 142,213      |           |           |           | 131,059   |          
|                                              | Time, $100 and over                                                                                                                                                                                       |                                 |                                            | 658,675      |           |           |           | 642,590   |          
|                                              | Other time                                                                                                                                                                                                |                                 |                                            | 360,991      |           |           |           | 363,345   |          
|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|                                              |                                                                                                                                                                                                           |                                 | Total deposits                             |              |           | 4,702,944 |           |           |           | 4,403,239 | 
|                                              | Securities sold under repurchase agreements                                                                                                                                                               |                                 |                                            | 305,750      |           |           |           | 285,571   |          
|                                              | Other borrowings                                                                                                                                                                                          |                                 |                                            | 496,708      |           |           |           | 679,812   |          
|                                              | Junior subordinated deferrable interest debentures                                                                                                                                                        |                                 |                                            | 51,547       |           |           |           | 51,547    |          
|                                              | Accrued interest payable                                                                                                                                                                                  |                                 |                                            | 1,505        |           |           |           | 1,822     |          
|                                              | Other liabilities                                                                                                                                                                                         |                                 |                                            | 32,533       |           |           |           | 24,424    |          
|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|                                              |                                                                                                                                                                                                           |                                 | Total liabilities                          |              |           | 5,590,987 |           |           |           | 5,446,415 | 
|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|Commitments and contingencies                 |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|Shareholders equity:                         |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|                                              | Common stock  $1 par value,
    150,000,000 shares authorized; 34,346,435 issued and 34,306,321
    outstanding at March 31, 2004; 34,229,143 issued and
    34,213,899 outstanding at December 31, 2003 |                                 |                                            | 34,346       |           |           |           | 34,229    |          
|                                              | Additional paid-in capital                                                                                                                                                                                |                                 |                                            | 97,721       |           |           |           | 95,394    |          
|                                              | Retained earnings                                                                                                                                                                                         |                                 |                                            | 381,298      |           |           |           | 368,069   |          
|                                              | Accumulated other comprehensive income                                                                                                                                                                    |                                 |                                            | 11,209       |           |           |           | 2,050     |          
|                                              | Treasury stock, at cost  40,114 shares
    and 15,244 shares, respectively                                                                                                                               |                                 |                                            | (1,343       | )         |           |           | (421      | )        
|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|                                              |                                                                                                                                                                                                           |                                 | Total shareholders equity                 |              |           | 523,231   |           |           |           | 499,321   | 
|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          
|                                              |                                                                                                                                                                                                           |                                 | Total liabilities and shareholders equity |              | $         | 6,114,218 |           |           | $         | 5,945,736 | 
|                                              |                                                                                                                                                                                                           |                                 |                                            |              |           |           |           |          

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

3



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENT OF
INCOME


(unaudited)


|                           |                                              |                           |                                                         |        |        |        |       |        |        |        | 
|-------------------------- | -------------------------------------------- | ------------------------- | ------------------------------------------------------- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | 
|                           |                                              |                          
|                           |                                              | Three Months Ended       
|                           |                                              | March 31,                
|                           |                                              |                          
|                           |                                              | 2004                      |                                                         | 2003  
|                           |                                              |                           |                                                         |       
|                           |                                              |                          
|                           |                                              | (Dollars in thousands,   
|                           |                                              | except per share amounts)
|Interest income:           |                                              |                           |                                                         |        |        |        |       |       
|                           | Loans                                        |                           | $                                                       | 49,632 |        |        | $     | 45,156 |       
|                           | Securities:                                  |                           |                                                         |        |        |        |       |        |       
|                           |                                              | Taxable                   |                                                         |        | 12,815 |        |       |        | 10,734 |       
|                           |                                              | Tax-exempt                |                                                         |        | 1,734  |        |       |        | 1,217  |       
|                           | Federal funds sold and other                 |                           |                                                         | 189    |        |        |       | 206    |       
|                           |                                              |                           |                                                         |        |        |        |       |       
|                           |                                              |                           | Total interest income                                   |        |        | 64,370 |       |        |        | 57,313 | 
|                           |                                              |                           |                                                         |        |        |        |       |       
|Interest expense:          |                                              |                           |                                                         |        |        |        |       |       
|                           | Deposits                                     |                           |                                                         | 8,070  |        |        |       | 10,106 |       
|                           | Borrowings                                   |                           |                                                         | 2,932  |        |        |       | 2,126  |       
|                           |                                              |                           |                                                         |        |        |        |       |       
|                           |                                              |                           | Total interest expense                                  |        |        | 11,002 |       |        |        | 12,232 | 
|                           |                                              |                           |                                                         |        |        |        |       |       
|                           |                                              |                           | Net interest income                                     |        |        | 53,368 |       |        |        | 45,081 | 
|Provision for loan losses  |                                              |                           | 2,000                                                   |        |        |        | 3,000 |       
|                           |                                              |                           |                                                         |        |        |        |       |       
|                           |                                              |                           | Net interest income after provision for loan
    losses |        |        | 51,368 |       |        |        | 42,081 | 
|                           |                                              |                           |                                                         |        |        |        |       |       
|Noninterest income:        |                                              |                           |                                                         |        |        |        |       |       
|                           | Service charges on deposit accounts          |                           |                                                         | 11,040 |        |        |       | 9,617  |       
|                           | Investment services                          |                           |                                                         | 2,970  |        |        |       | 2,295  |       
|                           | Other fee income                             |                           |                                                         | 4,953  |        |        |       | 3,648  |       
|                           | Bank-owned life insurance income             |                           |                                                         | 1,491  |        |        |       | 1,190  |       
|                           | Other operating income                       |                           |                                                         | 1,397  |        |        |       | 1,369  |       
|                           | Gain on sale of loans, net                   |                           |                                                         | 577    |        |        |       | 1,099  |       
|                           | Gain on sale of securities, net              |                           |                                                         | 26     |        |        |       | 35     |       
|                           |                                              |                           |                                                         |        |        |        |       |       
|                           |                                              |                           | Total noninterest income                                |        |        | 22,454 |       |        |        | 19,253 | 
|                           |                                              |                           |                                                         |        |        |        |       |       
|Noninterest expenses:      |                                              |                           |                                                         |        |        |        |       |       
|                           | Salaries and employee benefits               |                           |                                                         | 29,243 |        |        |       | 23,826 |       
|                           | Occupancy expense                            |                           |                                                         | 8,258  |        |        |       | 6,500  |       
|                           | Professional services                        |                           |                                                         | 2,320  |        |        |       | 2,067  |       
|                           | Losses on deposit accounts                   |                           |                                                         | 176    |        |        |       | 328    |       
|                           | Merger-related expenses                      |                           |                                                         | 1,522  |        |        |       |       |       
|                           | Core deposit intangible amortization expense |                           |                                                         | 903    |        |        |       |       |       
|                           | Other operating expenses                     |                           |                                                         | 8,924  |        |        |       | 6,790  |       
|                           |                                              |                           |                                                         |        |        |        |       |       
|                           |                                              |                           | Total noninterest expenses                              |        |        | 51,346 |       |        |        | 39,511 | 
|                           |                                              |                           |                                                         |        |        |        |       |       
|                           |                                              |                           | Income before income taxes                              |        |        | 22,476 |       |        |        | 21,823 | 
|Provision for income taxes |                                              |                           | 7,189                                                   |        |        |        | 6,748 |       
|                           |                                              |                           |                                                         |        |        |        |       |       
|                           | Net income                                   |                           | $                                                       | 15,287 |        |        | $     | 15,075 |       
|                           |                                              |                           |                                                         |        |        |        |       |       
|Earnings per common share: |                                              |                           |                                                         |        |        |        |       |       
|                           |                                              | Basic                     |                                                         | $      | 0.45   |        |       | $      | 0.45   |       
|                           |                                              |                           |                                                         |        |        |        |       |       
|                           |                                              | Diluted                   |                                                         | $      | 0.44   |        |       | $      | 0.44   |       
|                           |                                              |                           |                                                         |        |        |        |       |       
|Dividends per common share |                                              | $                         | 0.06                                                    |        |        | $      |      |       
|                           |                                              |                           |                                                         |        |        |        |       |       

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


4



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##### Table of Contents






SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY

(unaudited)


|                           |                                        |                                                                                                               |            |            |  |          |        |               |  |             |        |               |  |        |         |        |        |   |        |  |       |   |        |      |   |   |         |        |        | 
|-------------------------- | -------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ---------- | ---------- |  | -------- | ------ | ------------- |  | ----------- | ------ | ------------- |  | ------ | ------- | ------ | ------ | - | ------ |  | ----- | - | ------ | ---- | - | - | ------- | ------ | ------ | 
|                           |                                        |                                                                                                               |            |            |  |          |        |               |  | 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, 2003 |                                        |                                                                                                               | 34,229,143 |            |  | $        | 34,229 |               |  | $           | 95,394 |               |  | $      | 368,069 |        |        | $ | 2,050  |  |       | $ | (421   | )    |   | $ | 499,321 |       
|                           | Exercise of stock options              |                                                                                                               |            | 117,292    |  |          |        | 117           |  |             |        | 1,970         |  |        |         |        |        |   |        |  |       |   |        |      |   |   |         | 2,087  |       
|                           | Purchase of treasury stock             |                                                                                                               |            |            |  |          |        |               |  |             |        |               |  |        |         |        |        |   |        |  |       |   |        | (922 | ) |   |         | (922   | )     
|                           | Deferred compensation amortization     |                                                                                                               |            |            |  |          |        |               |  |             |        | 357           |  |        |         |        |        |   |        |  |       |   |        |      |   |   |         | 357    |       
|                           | Cash dividends, $0.06 per common share |                                                                                                               |            |            |  |          |        |               |  |             |        |               |  |        |         | (2,058 | )      |   |        |  |       |   |        |      |   |   |         | (2,058 | )     
|                           | Comprehensive income:                  |                                                                                                               |            |            |  |          |        |               |  |             |        |               |  |        |         |        |        |   |        |  |       |   |        |      |   |   |         |        |       
|                           |                                        | Net income for the three months ended
    March 31, 2004                                                      |            |            |  |          |        |               |  |             |        |               |  |        |         |        | 15,287 |   |        |  |       |   |        |      |   |   |         |        | 15,287 | 
|                           |                                        | Net change in unrealized appreciation on
    securities available for sale, net of deferred taxes of ($4,665) |            |            |  |          |        |               |  |             |        |               |  |        |         |        |        |   |        |  | 8,671 |   |        |      |   |   |         |        | 8,671  | 
|                           |                                        | Reclassification adjustment for losses included
    in net income, net of deferred taxes of ($263)            |            |            |  |          |        |               |  |             |        |               |  |        |         |        |        |   |        |  | 488   |   |        |      |   |   |         |        | 488    | 
|                           |                                        |                                                                                                               |            |            |  |          |        |               |  |             |        |               |  |        |         |        |        |   |        |  |       |   |        |      |   |   |         |       
|                           |                                        | Total comprehensive income                                                                                    |            |            |  |          |        |               |  |             |        |               |  |        |         |        |        |   |        |  |       |   |        |      |   |   |         |        | 24,446 | 
|                           |                                        |                                                                                                               |            |            |  |          |        |               |  |             |        |               |  |        |         |        |        |   |        |  |       |   |        |      |   |   |         |       
|BALANCE, MARCH 31, 2004    |                                        |                                                                                                               | 34,346,435 |            |  | $        | 34,346 |               |  | $           | 97,721 |               |  | $      | 381,298 |        |        | $ | 11,209 |  |       | $ | (1,343 | )    |   | $ | 523,231 |       
|                           |                                        |                                                                                                               |            |            |  |          |        |               |  |             |        |               |  |        |         |        |        |   |        |  |       |   |        |      |   |   |         |       

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

5



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS

(unaudited)


|                                                 |                                                                                       |                                                                           |                                   |                                           |       |        |          |          |       |        |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------- | ----------------------------------------- | ----- | ------ | -------- | -------- | ----- | ------ | ------- | -
|                                                 |                                                                                       |                                                                          
|                                                 |                                                                                       | Three Months Ended                                                       
|                                                 |                                                                                       | March 31,                                                                
|                                                 |                                                                                       |                                                                          
|                                                 |                                                                                       | 2004                                                                      |                                   | 2003                                     
|                                                 |                                                                                       |                                                                           |                                   |                                          
|                                                 |                                                                                       |                                                                          
|                                                 |                                                                                       | (Dollars in thousands)                                                   
|Cash flows from operating activities:            |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|                                                 | Net income                                                                            |                                                                           | $                                 | 15,287                                    |       |        | $        | 15,075   |      
|                                                 | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                           |                                   |                                           |       |        |          |          |      
|                                                 |                                                                                       | Provision for loan losses                                                 |                                   |                                           | 2,000 |        |          |          | 3,000 |       
|                                                 |                                                                                       | Depreciation                                                              |                                   |                                           | 3,449 |        |          |          | 2,604 |       
|                                                 |                                                                                       | Realized gain on securities available for sale,
    net                   |                                   |                                           | (26   | )      |          |          | (35   | )     
|                                                 |                                                                                       | Amortization and accretion of securities
    premiums and discounts, net |                                   |                                           | 1,457 |        |          |          | 2,459 |       
|                                                 |                                                                                       | Amortization of mortgage servicing rights                                 |                                   |                                           | 587   |        |          |          | 1,129 |       
|                                                 |                                                                                       | Amortization of computer software                                         |                                   |                                           | 1,479 |        |          |          | 1,098 |       
|                                                 |                                                                                       | Amortization of core deposit intangibles                                  |                                   |                                           | 903   |        |          |          |      |       
|                                                 |                                                                                       | Amortization of deferred compensation                                     |                                   |                                           | 357   |        |          |          | 301   |       
|                                                 |                                                                                       | Income tax benefit from exercise of stock options                         |                                   |                                           | 422   |        |          |          | 222   |       
|                                                 |                                                                                       | Net change in:                                                            |                                   |                                           |       |        |          |          |       |       
|                                                 |                                                                                       |                                                                           | Loans held for sale               |                                           |       | (5,045 | )        |          |       | 13,991 |        
|                                                 |                                                                                       |                                                                           | Other assets and liabilities, net |                                           |       | (4,091 | )        |          |       | (8,926 | )      
|                                                 |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|                                                 |                                                                                       |                                                                           |                                   | Net cash provided by operating activities |       |        | 16,779   |          |       |        | 30,918  |  
|                                                 |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|Cash flows from investing activities:            |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|                                                 | Proceeds from maturity and call of securities
    available for sale                  |                                                                           |                                   | 25,810                                    |       |        |          | 43,474   |      
|                                                 | Proceeds from sale of securities available for
    sale                               |                                                                           |                                   | 340,849                                   |       |        |          | 49,151   |      
|                                                 | Principal paydowns of mortgage-backed securities
    available for sale               |                                                                           |                                   | 62,744                                    |       |        |          | 137,699  |      
|                                                 | Purchase of securities available for sale                                             |                                                                           |                                   | (400,160                                  | )     |        |          | (226,212 | )    
|                                                 | Purchase of Federal Reserve Bank stock                                                |                                                                           |                                   | (1,919                                    | )     |        |          |         |      
|                                                 | Purchase of Federal Home Loan Bank stock                                              |                                                                           |                                   | (11,302                                   | )     |        |          | (167     | )    
|                                                 | Net increase in loans held for investment                                             |                                                                           |                                   | (65,886                                   | )     |        |          | (64,623  | )    
|                                                 | Proceeds from sale of premises and equipment                                          |                                                                           |                                   | 731                                       |       |        |          | 10       |      
|                                                 | Purchase of premises and equipment                                                    |                                                                           |                                   | (16,689                                   | )     |        |          | (5,860   | )    
|                                                 | Purchase of mortgage servicing rights                                                 |                                                                           |                                   |                                          |       |        |          | (87      | )    
|                                                 | Acquisition of Reunion Bancshares, Inc. (net of
    cash acquired of $30,596)         |                                                                           |                                   | (19,404                                   | )     |        |          |         |      
|                                                 | Investment in unconsolidated equity investees                                         |                                                                           |                                   | (278                                      | )     |        |          | (209     | )    
|                                                 |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|                                                 |                                                                                       |                                                                           |                                   | Net cash used in investing activities     |       |        | (85,504  | )        |       |        | (66,824 | )
|                                                 |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|Cash flows from financing activities:            |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|                                                 | Net increase (decrease) in
    noninterest-bearing demand deposits                    |                                                                           |                                   | 54,322                                    |       |        |          | (19,332  | )    
|                                                 | Net increase (decrease) in time deposits                                              |                                                                           |                                   | (6,449                                    | )     |        |          | 108,382  |      
|                                                 | Net increase in other interest-bearing deposits                                       |                                                                           |                                   | 44,767                                    |       |        |          | 11,162   |      
|                                                 | Net increase (decrease) in securities sold
    under repurchase agreements            |                                                                           |                                   | 20,179                                    |       |        |          | (35,936  | )    
|                                                 | Net decrease in other short-term borrowings                                           |                                                                           |                                   | (187,196                                  | )     |        |          | (152,377 | )    
|                                                 | Proceeds from long-term borrowings                                                    |                                                                           |                                   | 2,195                                     |       |        |          |         |      
|                                                 | Payments on long-term borrowings                                                      |                                                                           |                                   | (102                                      | )     |        |          | (95      | )    
|                                                 | Payments of cash dividends                                                            |                                                                           |                                   | (2,058                                    | )     |        |          |         |      
|                                                 | Net proceeds from exercise of stock options                                           |                                                                           |                                   | 1,665                                     |       |        |          | 465      |      
|                                                 | Purchase of treasury stock                                                            |                                                                           |                                   | (922                                      | )     |        |          |         |      
|                                                 |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|                                                 |                                                                                       |                                                                           |                                   | Net cash used in financing activities     |       |        | (73,599  | )        |       |        | (87,731 | )
|                                                 |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|Net decrease in cash and cash equivalents        |                                                                                       |                                                                           | (142,324                          | )                                         |       |        | (123,637 | )       
|Cash and cash equivalents at beginning of period |                                                                                       |                                                                           | 485,798                           |                                           |       |        | 535,364  |         
|                                                 |                                                                                       |                                                                           |                                   |                                           |       |        |          |         
|Cash and cash equivalents at end of period       |                                                                                       | $                                                                         | 343,474                           |                                           |       | $      | 411,727  |         
|                                                 |                                                                                       |                                                                           |                                   |                                           |       |        |          |         

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

6



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


1.     Basis of
Presentation

The unaudited condensed 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). All
material intercompany accounts and transactions have been
eliminated. In the opinion of management, the unaudited
condensed consolidated financial statements reflect all
adjustments, consisting only of normal and recurring
adjustments, necessary for a fair presentation of the
Companys consolidated financial position at March 31,
2004 and December 31, 2003, consolidated net income for the
three months ended March 31, 2004 and 2003, consolidated
cash flows for the three months ended March 31, 2004 and
2003, and consolidated changes in shareholders equity for
the three months ended March 31, 2004. Interim period
results are not necessarily indicative of results of operations
or cash flows for a full-year period.

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 January 31, 2004, Reunion Bancshares,
Inc. (Reunion), parent of Lone Star Bank in Dallas
(Lone Star), was merged with and into the Company.
On July 1, 2003, The Company completed its merger with
Maxim Financial Holdings, Inc., parent company of MaximBank
(Maxim), whereby Maxim was merged into the Company.
The results of operations for Reunion and Maxim have been
included in the consolidated financial statements since their
respective acquisition dates. See Note 2 
Merger Related Activity for further discussion of the
mergers.

The year-end condensed balance sheet data was
derived from audited financial statements, but does not include
all disclosures required by accounting principles generally
accepted in the United States of America. These financial
statements and the notes thereto should be read in conjunction
with the Companys annual report on Form 10-K for the year
ended December 31, 2003.

New
Accounting Pronouncements

On May 15, 2003, the Financial Accounting
Standards Board (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

7



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


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.

On March 9, 2004, the Securities and
Exchange Commission staff issued Staff Accounting Bulletin
No. 105, Application of Accounting Principles to Loan
Commitments. SAB No. 105 summarizes the view of
the staff regarding the application of generally accepted
accounting principles to loan commitments accounted for as
derivative instruments including recognition of the loan
commitment and financial statement disclosures. The Company does
not expect the requirements of SAB No. 105 to have a
material impact on its financial condition or results of
operations.

Reclassifications

Certain previously reported amounts have been
reclassified to conform to the 2004 financial statement
presentation. These reclassifications had no effect on net
income, total assets, or stockholders equity.



| |                         
| | ------------------------
| | 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. 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 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):

|                                                   |             |                        |   |        |  |  |   |        | 
|-------------------------------------------------- | ----------- | ---------------------- | - | ------ |  |  | - | ------ | 
|                                                   |             |                       
|                                                   |             | Three Months Ended    
|                                                   |             | March 31,             
|                                                   |             |                       
|                                                   |             | 2004                   |   | 2003  
|                                                   |             |                        |   |       
|                                                   |             |                       
|                                                   |             | (Dollars in thousands,
|                                                   |             | except per share      
|                                                   |             | amounts)              
|Net income                                         |             |                        |   |        |  |  |   |       
|                                                   | As reported |                        | $ | 15,287 |  |  | $ | 15,075 | 
|                                                   | Pro forma   |                        | $ | 14,677 |  |  | $ | 14,295 | 
|Stock-based compensation cost, net of income taxes |             |                        |   |        |  |  |   |       
|                                                   | As reported |                        | $ | 247    |  |  | $ | 208    | 
|                                                   | Pro forma   |                        | $ | 857    |  |  | $ | 988    | 
|Basic earnings per common share                    |             |                        |   |        |  |  |   |       
|                                                   | As reported |                        | $ | 0.45   |  |  | $ | 0.45   | 
|                                                   | Pro forma   |                        | $ | 0.43   |  |  | $ | 0.42   | 
|Diluted earnings per common share                  |             |                        |   |        |  |  |   |       
|                                                   | As reported |                        | $ | 0.44   |  |  | $ | 0.44   | 
|                                                   | Pro forma   |                        | $ | 0.42   |  |  | $ | 0.41   | 

8



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


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



|   |                        
|-- | -----------------------
|2. | Merger Related Activity

On January 31, 2004, the Company completed its
merger with Lone Star, whereby Lone Star was merged with and
into the Bank. The addition of the five Lone Star branches
expands the Companys branch network to include the Dallas
market and represents an attractive growth opportunity for the
Company.

The merger was a cash transaction with
$43.5 million paid at closing and an additional
$6.5 million deposited into 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 purchase price was funded through the proceeds of
the trust preferred securities offering.

The purchase price has been allocated to the
assets acquired and the liabilities assumed based on their
estimated fair value at the date of the merger. The excess of
the purchase price over the estimated fair values of the net
assets acquired was $29.1 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.

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

|                          |  |                        |          |  
|------------------------- |  | ---------------------- | -------- | -
|                          |  | January 31, 2004      
|                          |  |                       
|                          |  | (Dollars in thousands)
|Cash                      |  | $                      | 30,596   |  
|Securities                |  |                        | 30,946   |  
|Loans                     |  |                        | 163,822  |  
|Loan discount             |  |                        | (1,038   | )
|Allowance for loan losses |  |                        | (2,116   | )
|Goodwill                  |  |                        | 29,111   |  
|Core deposit intangibles  |  |                        | 6,379    |  
|Other assets              |  |                        | 3,784    |  
|Deposits                  |  |                        | (207,026 | )
|Deposit premium           |  |                        | (39      | )
|Borrowings                |  |                        | (2,000   | )
|Other liabilities         |  |                        | (2,419   | )
|                          |  |                        |          |  
|Cash paid                 |  | $                      | 50,000   |  
|                          |  |                        |          |  

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 thirteen and one-third years with no residual value.

9



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


The unaudited pro forma combined historical
results, as if Lone Star and Maxim had been included in
operations at January 1, 2003, are estimated to be as
follows.

|                                                                               |  |                           |        |      |  |   |        | 
|------------------------------------------------------------------------------ |  | ------------------------- | ------ | ---- |  | - | ------ | 
|                                                                               |  |                          
|                                                                               |  | Pro forma                
|                                                                               |  | Three Months Ended       
|                                                                               |  | March 31,                
|                                                                               |  |                          
|                                                                               |  | 2004                      |        | 2003
|                                                                               |  |                           |        |     
|                                                                               |  |                          
|                                                                               |  | (Dollars in thousands,   
|                                                                               |  | except per share amounts)
|Net interest income after provision for loan
    losses and noninterest income |  | $                         | 74,516 |      |  | $ | 67,306 | 
|Income before income taxes                                                     |  |                           | 22,543 |      |  |   | 22,184 | 
|Net income                                                                     |  |                           | 15,334 |      |  |   | 15,420 | 
|Earnings per common share, basic                                               |  | $                         | 0.45   |      |  | $ | 0.46   | 
|Earnings per common share, diluted                                             |  | $                         | 0.44   |      |  | $ | 0.45   | 

These pro forma results are not necessarily
indicative of what actually would have occurred if the mergers
had been completed as of the beginning of each fiscal period
presented, nor are they necessarily indicative of future
consolidated results.



|   |                     
|-- | --------------------
|3. | Comprehensive Income

Comprehensive income consists of the following:

|                                                                                                |  |                        |        |      |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---- |  | - | ------ | -
|                                                                                                |  |                       
|                                                                                                |  | Three Months Ended    
|                                                                                                |  | March 31,             
|                                                                                                |  |                       
|                                                                                                |  | 2004                   |        | 2003
|                                                                                                |  |                        |        |     
|                                                                                                |  |                       
|                                                                                                |  | (Dollars in thousands)
|Net income                                                                                      |  | $                      | 15,287 |      |  | $ | 15,075 |  
|Net change in unrealized appreciation on
    securities available for sale, net of deferred tax |  |                        | 8,671  |      |  |   | (554   | )
|Reclassification adjustment for
    (gains) losses included in net income, net of deferred tax  |  |                        | 488    |      |  |   | (41    | )
|                                                                                                |  |                        |        |      |  |   |        |  
|Total comprehensive income                                                                      |  | $                      | 24,446 |      |  | $ | 14,480 |  
|                                                                                                |  |                        |        |      |  |   |        |  



|   |                          
|-- | -------------------------
|4. | 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 terms (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 accompanying statement of income.

10



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


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

|                               |              |                    |       |      |   |   |        |        |  
|------------------------------ | ------------ | ------------------ | ----- | ---- | - | - | ------ | ------ | -
|                               |              |                   
|                               |              | Three Months Ended
|                               |              | March 31,         
|                               |              |                   
|                               |              | 2004               |       | 2003
|                               |              |                    |       |     
|                               |              |                   
|                               |              | (Dollars in       
|                               |              | thousands)        
|Mortgage servicing rights:     |              |                    |       |      |   |   |        |       
|Balance, beginning of period   |              | $                  | 8,299 |      |   | $ | 10,628 |       
|                               | Originations |                    |       | 214  |   |   |        | 510    |  
|                               | Purchases    |                    |       |     |   |   |        | 86     |  
|                               | Amortization |                    |       | (587 | ) |   |        | (1,129 | )
|                               |              |                    |       |      |   |   |        |       
|Balance, end of period         |              |                    | 7,926 |      |   |   | 10,095 |       
|                               |              |                    |       |      |   |   |        |       
|Valuation allowance:           |              |                    |       |      |   |   |        |       
|Balance, beginning of period   |              |                    |      |      |   |   | 2,371  |       
|                               | Provision    |                    |       |     |   |   |        |       |  
|                               | Recovery     |                    |       |     |   |   |        |       |  
|                               |              |                    |       |      |   |   |        |       
|Balance, end of period         |              |                    |      |      |   |   | 2,371  |       
|                               |              |                    |       |      |   |   |        |       
|Mortgage servicing rights, net |              | $                  | 7,926 |      |   | $ | 7,724  |       
|                               |              |                    |       |      |   |   |        |       

Loans serviced for others totaled
$905.7 million at March 31, 2004 and
$1.05 billion at March 31, 2003. Capitalized mortgage
servicing rights represent 88 basis points and 74 basis
points of the portfolio serviced at March 31, 2004 and
March 31, 2003, respectively.

5.     Earnings Per
Common Share

Earnings per common share is computed as follows:

|                                                                   |                                                                |                       |        |        |  |   |        |        | 
|------------------------------------------------------------------ | -------------------------------------------------------------- | --------------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                                   |                                                                |                      
|                                                                   |                                                                | Three Months Ended   
|                                                                   |                                                                | March 31,            
|                                                                   |                                                                |                      
|                                                                   |                                                                | 2004                  |        | 2003  
|                                                                   |                                                                |                       |        |       
|                                                                   |                                                                |                      
|                                                                   |                                                                | (In thousands, except
|                                                                   |                                                                | per share amounts)   
|Net income                                                         |                                                                | $                     | 15,287 |        |  | $ | 15,075 |       
|                                                                   |                                                                |                       |        |        |  |   |        |       
|Divided by average common shares and common share
    equivalents: |                                                                |                       |        |        |  |   |        |       
|                                                                   | Average common shares                                          |                       |        | 34,272 |  |   |        | 33,877 | 
|                                                                   | Average common shares issuable under the stock
    option plan |                       |        | 869    |  |   |        | 763    | 
|                                                                   |                                                                |                       |        |        |  |   |        |       
|Total average common shares and common share
    equivalents       |                                                                |                       | 35,141 |        |  |   | 34,640 |       
|                                                                   |                                                                |                       |        |        |  |   |        |       
|Basic earnings per common share                                    |                                                                | $                     | 0.45   |        |  | $ | 0.45   |       
|                                                                   |                                                                |                       |        |        |  |   |        |       
|Diluted earnings per common share                                  |                                                                | $                     | 0.44   |        |  | $ | 0.44   |       
|                                                                   |                                                                |                       |        |        |  |   |        |       

Stock options outstanding of 105,000 and 527,000
for the three months ended March 31, 2004 and 2003,
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.

11



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


6.     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 expenses from its
operations. Intersegment financing arrangements are accounted
for at current market rates as if they were with third parties.

Summarized financial information by operating
segment for the three months ended March 31, 2004 and 2003
follows:

|                           |  |                              |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|-------------------------- |  | ---------------------------- | --------- | -------- |  | ------------ | ------- | ------------ |  | ---- | -------- | -------- |  | ------------ | --------- | ------------ |  | - | --------- |  |  | - | ------- |  |  | - | -------- | - |  | - | --------- | 
|                           |  |                             
|                           |  | Three Months Ended March 31,
|                           |  |                             
|                           |  |                              |           |         
|                           |  | 2004                         |           | 2003    
|                           |  |                              |           |         
|                           |  | Bank                         |           | Mortgage |  | Eliminations |         | Consolidated |  | Bank |          | Mortgage |  | Eliminations |           | Consolidated
|                           |  |                              |           |          |  |              |         |              |  |      |          |          |  |              |           |             
|                           |  |                             
|                           |  | (Dollars in thousands)      
|Interest income            |  | $                            | 62,091    |          |  | $            | 3,545   |              |  | $    | (1,266   | )        |  | $            | 64,370    |              |  | $ | 54,839    |  |  | $ | 3,898   |  |  | $ | (1,424   | ) |  | $ | 57,313    | 
|Interest expense           |  |                              | 11,002    |          |  |              | 1,266   |              |  |      | (1,266   | )        |  |              | 11,002    |              |  |   | 12,232    |  |  |   | 1,424   |  |  |   | (1,424   | ) |  |   | 12,232    | 
|                           |  |                              |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|Net interest income        |  |                              | 51,089    |          |  |              | 2,279   |              |  |      |         |          |  |              | 53,368    |              |  |   | 42,607    |  |  |   | 2,474   |  |  |   |         |   |  |   | 45,081    | 
|Provision for loan losses  |  |                              | 1,934     |          |  |              | 66      |              |  |      |         |          |  |              | 2,000     |              |  |   | 2,918     |  |  |   | 82      |  |  |   |         |   |  |   | 3,000     | 
|Noninterest income         |  |                              | 20,997    |          |  |              | 1,457   |              |  |      |         |          |  |              | 22,454    |              |  |   | 17,504    |  |  |   | 1,749   |  |  |   |         |   |  |   | 19,253    | 
|Noninterest expense        |  |                              | 49,011    |          |  |              | 2,335   |              |  |      |         |          |  |              | 51,346    |              |  |   | 36,922    |  |  |   | 2,589   |  |  |   |         |   |  |   | 39,511    | 
|                           |  |                              |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|Income before income taxes |  | $                            | 21,141    |          |  | $            | 1,335   |              |  | $    |         |          |  | $            | 22,476    |              |  | $ | 20,271    |  |  | $ | 1,552   |  |  | $ |         |   |  | $ | 21,823    | 
|                           |  |                              |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|Total assets               |  | $                            | 6,082,980 |          |  | $            | 292,342 |              |  | $    | (261,104 | )        |  | $            | 6,114,218 |              |  | $ | 5,083,405 |  |  | $ | 279,918 |  |  | $ | (253,454 | ) |  | $ | 5,109,869 | 
|                           |  |                              |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 

Intersegment interest was paid to the bank by the
mortgage company in the amount of $1.3 million and
$1.4 million for the three months ended March 31, 2004
and 2003, respectively. Advances from the bank to the mortgage
company of $261.1 million and $253.5 million were
eliminated in consolidation at March 31, 2004 and 2003,
respectively.



|   |                                     
|-- | ------------------------------------
|7. | Off-Balance Sheet Credit Commitments

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

The Company enters into contractual commitments
to extend credit, normally with fixed expiration dates or
termination clauses, at specified rates and for specific
purposes. Customers use credit commitments to ensure that funds
will be available for working capital purposes, for capital
expenditures and to ensure access to funds at specified terms
and conditions. Substantially all of the Companys
commitments to extend credit are contingent upon customers
maintaining specific credit standards at the time of loan
funding. Management assesses the credit risk associated with
certain commitments to extend credit. Commitments to extend
credit were $2.45 billion at March 31, 2004 and
$2.14 billion at December 31, 2003.

Standby letters of credit are written conditional
commitments issued by the Company to guarantee the performance
of a customer to a third party. The Companys policies
generally require that standby letters of

12



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


credit arrangements contain collateral and debt
covenants similar to those contained in loan agreements. In the
event the customer does not perform in accordance with the terms
of the agreement with the third party, the Company would be
required to fund the commitment. The maximum potential amount of
future payments the Company could be required to make is
represented by the contractual amount of the commitment. If the
commitment is funded, the Company would be entitled to seek
recovery from the customer. Standby letters of credit were
$256.9 million at March 31, 2004 and
$227.0 million at December 31, 2003. As of
March 31, 2004 and December 31, 2003, $212,000 and
$248,000, respectively, has been recorded as a liability for the
fair value of the Companys potential obligations under
these guarantees.



|   |                                          
|-- | -----------------------------------------
|8. | Goodwill and Core Deposit
    Intangibles

Changes in the carrying amount of the
Companys goodwill and core deposit intangibles for the
three months ended March 31, 2004 were as follows:

|                           |                                    |                        |        |              |  |   |        |       |  
|-------------------------- | ---------------------------------- | ---------------------- | ------ | ------------ |  | - | ------ | ----- | -
|                           |                                    |                        |        | Core Deposit
|                           |                                    | Goodwill               |        | Intangibles 
|                           |                                    |                        |        |             
|                           |                                    |                       
|                           |                                    | (Dollars in thousands)
|Balance, December 31, 2003 |                                    | $                      | 25,647 |              |  | $ | 6,185  |      
|                           | Acquisition of Lone Star           |                        |        | 29,111       |  |   |        | 6,379 |  
|                           | Adjustment to acquisition of Maxim |                        |        | 336          |  |   |        |      |  
|                           | Amortization                       |                        |        |             |  |   |        | (903  | )
|                           |                                    |                        |        |              |  |   |        |      
|Balance, March 31, 2004    |                                    | $                      | 55,094 |              |  | $ | 11,661 |      
|                           |                                    |                        |        |              |  |   |        |      



|   |                           
|-- | --------------------------
|9. | Common Stock Cash Dividend

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

13



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##### Table of Contents






ITEM 2.  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 condensed 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 in the
Companys Annual Report.

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 read this entire
document carefully. These have an impact on the Companys
financial condition and results of operations.

Net income was $15.3 million and
$15.1 million and diluted earnings per common share was
$0.44 for each of the quarters ended March 31, 2004 and
2003, 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
1.02% and 1.22% and returns on average common shareholders
equity were 12.04% and 13.48% for the three months ended
March 31, 2004 and 2003, respectively. Return on average
assets and return on average common shareholders equity in
2004 were negatively impacted by the decline in the net interest
margin discussed below. Return on average assets is calculated
by dividing annualized net income by the daily average of total
assets. Return on average common shareholders equity is
calculated by dividing annualized net income by the daily
average of common shareholders equity.

14



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##### Table of Contents



Total assets at March 31, 2004 and
December 31, 2003 were $6.11 billion and
$5.95 billion, respectively. This growth was a result of a
favorable local economy, the addition of new loan officers, the
merger with Lone Star, aggressive marketing, and the
Companys overall growth strategy. Loans were
$3.82 billion at March 31, 2004, an increase of
$234.3 million, or 7%, from $3.59 billion at
December 31, 2003. Deposits increased to $4.70 billion
at March 31, 2004 from $4.40 billion at
December 31, 2003. As of March 31, 2004, approximately
$160.6 million of loans and $215.9 million of deposits
relate to the former Lone Star 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 and the merger with
Maxim was completed in July 2003, adding eight branches in
Galveston County. The merger with Lone Star, 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 annualized net
interest income divided by average interest-earning assets, for
the three months ended March 31, 2004 was 4.03% down from
4.11% for the three months ended March 31, 2003. The
decline in the net interest margin is attributable to declines
in the level of interest rates as managed by the Federal Reserve
Board. Declines in yields on interest-earning assets were
partially offset by reductions in the cost of interest-bearing
liabilities. Demand deposits are a significant funding source
and averaged 33% of total deposits for the period ended
March 31, 2004 as compared to 30% at March 31, 2003.

Noninterest income increased $3.2 million,
or 17%, to $22.5 million for the three months ended
March 31, 2004 compared to $19.3 million for the same
period in 2003. Noninterest income has become an important
component of the Companys net income and comprises 30% of
total revenue, defined as net interest income plus noninterest
income, at March 31, 2004. The primary drivers of the
increase were continued growth in service charge income arising
from the sale of treasury management products to commercial
customers, the increase in net non-sufficient funds charges on
retail deposit accounts, and improved results from mortgage
servicing, letter of credit activity, and sale of investment
products and services.

Noninterest expenses increased
$11.8 million, or 30%, to $51.3 million for the three
months ended March 31, 2004 compared to $39.5 million
for the same period in 2003. The Company continues to invest in
its technology infrastructure to accommodate 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 recent mergers affected the overall level of
expenses for the quarter.

Credit quality is an area of importance to the
Company and asset quality indicators remain positive in the
first quarter of 2004. Net recoveries were 0.11% of average
loans compared to 0.15% of net charge-offs for the same period
in the prior year. Nonperforming assets to total loans and other
real estate was 0.68% at March 31, 2004, an increase from
0.25% at March 31, 2003. The allowance for loan losses to
nonperforming loans was 232.06% at March 31, 2004 compared
to 171.94% at March 31, 2003. Although loans grew by 17% at
March 31, 2004 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 9.81% and Total Capital
ratio of 10.76% 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 the
Companys Annual Report on Form 10-K,
 Financial Condition 
Liquidity.

Results of Operations

Interest Income

Interest income for the three months ended
March 31, 2004 was $64.4 million, an increase of
$7.1 million, or 12%, from the three months ended
March 31, 2003. This increase in interest income is due to a

15



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##### Table of Contents



$876.1 million increase in average
interest-earning assets to $5.33 billion for the three
months ended March 31, 2004, a 20% increase from the same
period last year. This increase is partially offset by a
decrease in the average yield on interest-earning assets to
4.86% for the three months ended March 31, 2004, a decrease
of 36 basis points when compared to the same period in 2003.


Interest income on securities increased
$2.6 million to $14.5 million for the three months
ended March 31, 2004. This increase was due to a
$398.0 million increase in average securities outstanding
to $1.56 billion for the three months ended March 31,
2004, a 34% increase from the same period a year ago. This
increase is partially offset by a 43 basis point decrease
in the average yield on securities to 3.76% for the three months
ended March 31, 2004, compared to 4.19% for the same period
last year.

Interest income on loans increased
$4.5 million to $49.6 million for the three months
ended March 31, 2004. This increase was due to a
$474.9 million increase in average loans outstanding to
$3.70 billion for the three months ended March 31,
2004, a 15% increase from the same period a year ago. This
increase is partially offset by a 28 basis point decrease
in the average yield on loans to 5.40% for the three months
ended March 31, 2004, compared to 5.68% for the same period
last year.

The yield on the loan portfolio has been impacted
by the Federal Reserves continued reduction in interest
rates. The Companys prime rate declined by 25 basis
points to 4.00% in July 2003. The impact of the reduction in the
prime rate has been partially mitigated by interest rate floors
and base rate provisions in the Companys loan documents.

Interest
Expense

Interest expense on deposits and borrowings for
the three months ended March 31, 2004 was
$11.0 million, a decrease of $1.2 million, or 10%,
from the three months ended March 31, 2003. This decrease
in interest expense was attributable to a decrease in the
average rate on interest-bearing liabilities to 1.11% for the
three months ended March 31, 2004, a decrease of
38 basis points when compared to the same period in 2003.
This decrease is partially offset by a $648.4 million
increase in average interest-bearing liabilities to
$3.99 billion for the three months ended March 31,
2004, an increase of 19% from the same period last year.

Net
Interest Income

Net interest income for the three months ended
March 31, 2004 was $53.4 million compared to
$45.1 million for the three months ended March 31,
2003, an increase of $8.3 million, or 18%. The increase is
primarily attributable to growth in average interest-earning
assets and to a decrease in rates paid on interest-bearing
liabilities. Average interest-earning assets, primarily loans
and securities, increased $876.1 million, or 20%, for the
quarter ended March 31, 2004 when compared to the same
period last year. This increase in interest-earning assets
contributed $10.9 million to net interest income. The
average rate on interest-bearing liabilities was 1.11% for the
quarter ended March 31, 2004, a decrease of 38 basis
points from 1.49% for the same period last year.

For the three months ended March 31, 2004,
the net interest margin, defined as annualized net interest
income divided by average interest-earning assets, declined to
4.03%, compared to 4.11% for the three months ended
March 31, 2003. This decrease resulted from a decrease in
the yield on interest-earning assets of 36 basis points,
from 5.22% for the three months ended March 31, 2003 to
4.86% for the three months ended March 31, 2004. This
decrease in yield was partially offset by a decrease in the cost
of funds of 38 basis points from 1.49% for the three months
ended March 31, 2003 to 1.11% for the three months ended
March 31, 2004.

16



---



##### Table of Contents



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.

|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |      |      |  
|-------------------------------- | ---------------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | ------- | ------ | ----------- | ------ | -------- | ---- | ------- | ---- | - | --------- | --------- | --------- | - | ------ | ------ | ------ |  | ---- | ---- | ---- | -
|                                 |                                                |                                           
|                                 |                                                | Three Months Ended March 31,              
|                                 |                                                |                                           
|                                 |                                                |                                            |           |          
|                                 |                                                | 2004                                       |           | 2003     
|                                 |                                                |                                            |           |          
|                                 |                                                | Average                                    |           | Interest  |           | Average |        | Average     |        | Interest |      | Average
|                                 |                                                | Outstanding                                |           | Earned/   |           | Yield/  |        | Outstanding |        | Earned/  |      | Yield/ 
|                                 |                                                | Balance                                    |           | Paid      |           | Rate    |        | Balance     |        | Paid     |      | Rate   
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |        
|                                 |                                                |                                           
|                                 |                                                | (Dollars in thousands)                    
|Interest-earning assets:         |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                 | Loans                                          |                                            | $         | 3,697,254 |           |         | $      | 49,632      |        |          |      | 5.40    | %    |   | $         | 3,222,366 |           |   | $      | 45,156 |        |  |      | 5.68 | %   
|                                 | Securities                                     |                                            |           | 1,555,791 |           |         |        | 14,549      |        |          |      | 3.76    |      |   |           | 1,157,825 |           |   |        | 11,951 |        |  |      | 4.19 |     
|                                 | Federal funds sold and other                   |                                            |           | 74,589    |           |         |        | 189         |        |          |      | 1.02    |      |   |           | 71,316    |           |   |        | 206    |        |  |      | 1.17 |     
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                 |                                                | Total interest-earning assets              |           |           | 5,327,634 |         |        |             | 64,370 |          |      |         | 4.86 | % |           |           | 4,451,507 |   |        |        | 57,313 |  |      |      | 5.22 | %
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Less allowance for loan losses   |                                                |                                            | (45,770   | )         |           |         |        |             |        |          |      |         |      |   | (38,216   | )         |           |   |        |        |        |  |      |     
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                 |                                                |                                            | 5,281,864 |           |           |         |        |             |        |          |      |         |      |   | 4,413,291 |           |           |   |        |        |        |  |      |     
|Noninterest-earning assets       |                                                |                                            | 731,933   |           |           |         |        |             |        |          |      |         |      |   | 591,037   |           |           |   |        |        |        |  |      |     
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                 |                                                | Total assets                               |           | $         | 6,013,797 |         |        |             |        |          |      |         |      |   |           | $         | 5,004,328 |   |        |        |        |  |      |      |      |  
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Interest-bearing liabilities:    |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                 | Money market and savings deposits              |                                            | $         | 1,973,198 |           |         |        | 3,208       |        |          |      | 0.65    | %    |   | $         | 1,733,563 |           |   |        | 4,292  |        |  |      | 1.00 | %   
|                                 | Time deposits                                  |                                            |           | 1,005,189 |           |         |        | 4,862       |        |          |      | 1.95    |      |   |           | 965,267   |           |   |        | 5,814  |        |  |      | 2.44 |     
|                                 | Repurchase agreements and other borrowed funds |                                            |           | 1,008,229 |           |         |        | 2,932       |        |          |      | 1.17    |      |   |           | 639,359   |           |   |        | 2,126  |        |  |      | 1.35 |     
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                 |                                                | Total interest-bearing liabilities         |           |           | 3,986,616 |         |        |             | 11,002 |          |      |         | 1.11 | % |           |           | 3,338,189 |   |        |        | 12,232 |  |      |      | 1.49 | %
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Noninterest-bearing liabilities: |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                 | Noninterest-bearing demand deposits            |                                            |           | 1,491,064 |           |         |        |             |        |          |      |         |      |   |           | 1,172,389 |           |   |        |        |        |  |      |      |     
|                                 | Other liabilities                              |                                            |           | 25,425    |           |         |        |             |        |          |      |         |      |   |           | 40,323    |           |   |        |        |        |  |      |      |     
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                 |                                                | Total liabilities                          |           |           | 5,503,105 |         |        |             |        |          |      |         |      |   |           |           | 4,550,901 |   |        |        |        |  |      |      |      |  
|Shareholders equity             |                                                |                                            | 510,692   |           |           |         |        |             |        |          |      |         |      |   | 453,427   |           |           |   |        |        |        |  |      |     
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                 |                                                | Total liabilities and shareholders equity |           | $         | 6,013,797 |         |        |             |        |          |      |         |      |   |           | $         | 5,004,328 |   |        |        |        |  |      |      |      |  
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Net interest income              |                                                |                                            |           |           |           | $       | 53,368 |             |        |          |      |         |      |   |           |           |           | $ | 45,081 |        |        |  |      |     
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Net interest spread              |                                                |                                            |           |           |           |         |        |             |        |          | 3.75 | %       |      |   |           |           |           |   |        |        |        |  | 3.73 | %   
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Net interest margin              |                                                |                                            |           |           |           |         |        |             |        |          | 4.03 | %       |      |   |           |           |           |   |        |        |        |  | 4.11 | %   
|                                 |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     

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The following table presents the dollar amount of
changes in interest income and interest expense for the major
components of interest-earning assets and interest-bearing
liabilities and distinguishes between the increase (decrease)
related to outstanding balances, the volatility of interest
rates, and the change in number of days due to leap year. For
purposes of this table, changes attributable to both rate and
volume which cannot be segregated have been allocated
proportionately to the change due to volume and the change due
to rate.

|                                           |                                               |                              |       |        |  |      |        |        |   |   |     |     |  |   |        |        |  
|------------------------------------------ | --------------------------------------------- | ---------------------------- | ----- | ------ |  | ---- | ------ | ------ | - | - | --- | --- |  | - | ------ | ------ | -
|                                           |                                               |                             
|                                           |                                               | Three Months Ended March 31,
|                                           |                                               |                             
|                                           |                                               |                             
|                                           |                                               | 2004 vs. 2003               
|                                           |                                               |                             
|                                           |                                               |                             
|                                           |                                               | Increase (Decrease) Due to  
|                                           |                                               |                             
|                                           |                                               | Volume                       |       | Rate   |  | Days |        | Total 
|                                           |                                               |                              |       |        |  |      |        |       
|                                           |                                               |                             
|                                           |                                               | (Dollars in thousands)      
|Interest-earning assets:                   |                                               |                              |       |        |  |      |        |        |   |   |     |     |  |   |        |       
|Loans                                      |                                               | $                            | 6,710 |        |  | $    | (2,611 | )      |   | $ | 377 |     |  | $ | 4,476  |       
|Securities                                 |                                               |                              | 4,142 |        |  |      | (1,644 | )      |   |   | 100 |     |  |   | 2,598  |       
|Federal funds sold and other               |                                               |                              | 10    |        |  |      | (28    | )      |   |   | 1   |     |  |   | (17    | )     
|                                           |                                               |                              |       |        |  |      |        |        |   |   |     |     |  |   |        |       
|                                           | Total increase (decrease) in interest income  |                              |       | 10,862 |  |      |        | (4,283 | ) |   |     | 478 |  |   |        | 7,057  |  
|                                           |                                               |                              |       |        |  |      |        |        |   |   |     |     |  |   |        |       
|Interest-bearing liabilities:              |                                               |                              |       |        |  |      |        |        |   |   |     |     |  |   |        |       
|Money market and savings deposits          |                                               |                              | 598   |        |  |      | (1,718 | )      |   |   | 36  |     |  |   | (1,084 | )     
|Time deposits                              |                                               |                              | 242   |        |  |      | (1,243 | )      |   |   | 49  |     |  |   | (952   | )     
|Repurchase agreements and borrowed funds   |                                               |                              | 1,237 |        |  |      | (449   | )      |   |   | 18  |     |  |   | 806    |       
|                                           |                                               |                              |       |        |  |      |        |        |   |   |     |     |  |   |        |       
|                                           | Total increase (decrease) in interest expense |                              |       | 2,077  |  |      |        | (3,410 | ) |   |     | 103 |  |   |        | (1,230 | )
|                                           |                                               |                              |       |        |  |      |        |        |   |   |     |     |  |   |        |       
|Increase (decrease) in net interest income |                                               | $                            | 8,785 |        |  | $    | (873   | )      |   | $ | 375 |     |  | $ | 8,287  |       
|                                           |                                               |                              |       |        |  |      |        |        |   |   |     |     |  |   |        |       

Provision
for Loan Losses

The provision for loan losses was
$2.0 million for the three months ended March 31, 2004
as compared to $3.0 million for the three months ended
March 31, 2003. Factors that impact the provision for loan
losses are net charge-offs or recoveries, 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  Credit Management.)

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Noninterest
Income

Noninterest income for the three months ended
March 31, 2004 was $22.5 million, an increase of
$3.2 million, or 17%, from $19.3 million during the
comparable period in 2003. The following table shows the
breakout of noninterest income between the bank and the mortgage
company for the periods indicated.

|                                             |                          |                              |        |          |  |          |     |       |  |          |        |          |  |   |       |        |  |   |       |       |  |   |       |        | 
|-------------------------------------------- | ------------------------ | ---------------------------- | ------ | -------- |  | -------- | --- | ----- |  | -------- | ------ | -------- |  | - | ----- | ------ |  | - | ----- | ----- |  | - | ----- | ------ | 
|                                             |                          |                             
|                                             |                          | Three Months Ended March 31,
|                                             |                          |                             
|                                             |                          |                              |        |         
|                                             |                          | 2004                         |        | 2003    
|                                             |                          |                              |        |         
|                                             |                          | Bank                         |        | Mortgage |  | Combined |     | Bank  |  | Mortgage |        | Combined
|                                             |                          |                              |        |          |  |          |     |       |  |          |        |         
|                                             |                          |                             
|                                             |                          | (Dollars in thousands)      
|Service charges on deposit accounts          |                          | $                            | 11,040 |          |  | $        |    |       |  | $        | 11,040 |          |  | $ | 9,617 |        |  | $ |      |       |  | $ | 9,617 |       
|Investment services                          |                          |                              | 2,970  |          |  |          |    |       |  |          | 2,970  |          |  |   | 2,295 |        |  |   |      |       |  |   | 2,295 |       
|Factoring fee income                         |                          |                              | 954    |          |  |          |    |       |  |          | 954    |          |  |   | 1,007 |        |  |   |      |       |  |   | 1,007 |       
|Loan fee income                              |                          |                              | 653    |          |  |          | 622 |       |  |          | 1,275  |          |  |   | 412   |        |  |   | 731   |       |  |   | 1,143 |       
|Bank-owned life insurance income             |                          |                              | 1,491  |          |  |          |    |       |  |          | 1,491  |          |  |   | 1,190 |        |  |   |      |       |  |   | 1,190 |       
|Letters of credit fee income                 |                          |                              | 862    |          |  |          |    |       |  |          | 862    |          |  |   | 522   |        |  |   |      |       |  |   | 522   |       
|Mortgage servicing fees, net of amortization |                          |                              |       |          |  |          | 190 |       |  |          | 190    |          |  |   |      |        |  |   | (318  | )     |  |   | (318  | )     
|Gain on sale of loans, net                   |                          |                              | 65     |          |  |          | 512 |       |  |          | 577    |          |  |   |      |        |  |   | 1,099 |       |  |   | 1,099 |       
|Gain on sale of securities, net              |                          |                              | 26     |          |  |          |    |       |  |          | 26     |          |  |   | 35    |        |  |   |      |       |  |   | 35    |       
|Other income                                 |                          |                              | 2,936  |          |  |          | 133 |       |  |          | 3,069  |          |  |   | 2,426 |        |  |   | 237   |       |  |   | 2,663 |       
|                                             |                          |                              |        |          |  |          |     |       |  |          |        |          |  |   |       |        |  |   |       |       |  |   |       |       
|                                             | Total noninterest income |                              | $      | 20,997   |  |          | $   | 1,457 |  |          | $      | 22,454   |  |   | $     | 17,504 |  |   | $     | 1,749 |  |   | $     | 19,253 | 
|                                             |                          |                              |        |          |  |          |     |       |  |          |        |          |  |   |       |        |  |   |       |       |  |   |       |       

Banking Segment.The
largest component of noninterest income is service charges on
deposit accounts, which were $11.0 million for the three months
ended March 31, 2004, an increase of $1.4 million, or
15%, from $9.6 million for the same period last year.
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
$283,000, or 6%, for the three months ended March 31, 2004
when compared to the same period last year. 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
$5.1 million for the three months ended March 31,
2004, an increase of $961,000, or 23%, from $4.1 million
for the same period last year. Additionally, the total number of
deposit accounts grew from 162,953 at March 31, 2003 to
195,839 at March 31, 2004.

Investment services income was $3.0 million
for the three months ended March 31, 2004, an increase of
$675,000, or 29%, from $2.3 million for the same period
last year. This increase is mainly due to increases in trust
services fees and commissions on insurance products.

Other income was $2.9 million for the three
months ended March 31, 2004, an increase of $510,000, or
21%, from the same period last year. This increase is primarily
attributable to an increase in retail services fee income,
primarily from debit card and ATM fees.

Mortgage Segment.Gain on sale of loans, net, was $512,000 for the three months
ended March 31, 2004, a decrease of $587,000, or 53%, from
the same period last year. This decrease is attributable to a
decrease in principal balances sold in the current year. The
principal balances of mortgage loans sold were
$31.9 million and $51.6 million during the three
months ended March 31, 2004 and 2003, respectively. The
market value of loans held for sale is impacted by changes in
current interest rates. An increase in interest rates results in
a decrease in the market value of these loans while a decrease
in interest rates results in an increase in the market value of
these loans.

Mortgage servicing fees, net of amortization and
impairment, were $190,000 for the three months ended
March 31, 2004, an increase of $508,000 when compared to
($318,000) for the same period last year. This increase is
attributable to a decrease in amortization recorded in the
current year. The mortgage industry

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experienced high levels of prepayment activity in
2003 as a result of lower interest rates. Capitalized mortgage
servicing costs are expensed against the related fee income as
the underlying loans are paid off.


Amortization of capitalized mortgage servicing
costs for the three months ended March 31, 2004 was
$587,000, a decrease of $542,000, or 48%, from $1.1 million
for the three months ended March 31, 2003. See
Note 4  Mortgage Servicing Rights
for further discussion on the accounting for these assets.

Noninterest Expenses

For the three months ended March 31, 2004,
noninterest expenses were $51.3 million, an increase of
$11.8 million, or 30%, from $39.5 million for the
three months ended March 31, 2003. The increase in
noninterest expenses was primarily due to salaries and employee
benefits, occupancy expenses and merger-related costs.

Salaries and employee benefits for the three
months ended March 31, 2004 were $29.2 million, an
increase of $5.4 million, or 23%, from the three months
ended March 31, 2003. This increase was due primarily to
hiring of additional personnel required to accommodate the
Companys growth and the mergers with Maxim and Lone Star.
Total full-time employees were 1,839 and 1,528 at March 31,
2004 and 2003, respectively.

Occupancy expense for the three months ended
March 31, 2004 was $8.3 million, an increase of
$1.8 million, or 27%, from $6.5 million for the three
months ended March 31, 2003. Major categories within
occupancy expense are depreciation expense and maintenance
contract expense. Depreciation expense increased $827,000, or
32%, to $3.4 million for the three months ended
March 31, 2004. This increase was due primarily to
additional depreciation resulting from the addition of new
branches, including the eight Maxim branches and five Lone Star
branches, and capitalized leasehold improvements associated with
renovations 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 three months ended
March 31, 2004 was $1.4 million, an increase of
$322,000, or 29%, compared to $1.1 million for the same
period last year. The Company has purchased maintenance
contracts for major operating systems throughout the
organization.

On January 31, 2004, the Company completed
its merger with Lone Star. In connection with this merger, the
Company recorded $1.5 million of merger-related expenses
including contract termination fees and professional fees. No
such charges were recorded in the same period of the prior year.

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. For the three months ended
March 31, 2004, the provision for income taxes was
$7.2 million, an increase of $441,000, or 7%, from the
$6.7 million provided for in the same period in 2003. The
Companys effective tax rate was 31% for each of the three
months ended March 31, 2004 and 2003.

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Financial Condition

Loans Held for
Investment

Loans held for investment were $3.72 billion
at March 31, 2004, an increase of $229.3 million, or
7%, from $3.49 billion at December 31, 2003.

The following table summarizes the loan portfolio
of the Company by type of loan as of March 31, 2004 and
December 31, 2003:

|                          |                                 |                                   |           |                   |         |        |       |         |       |   |           |           |         |  |       |        |       | 
|------------------------- | ------------------------------- | --------------------------------- | --------- | ----------------- | ------- | ------ | ----- | ------- | ----- | - | --------- | --------- | ------- |  | ----- | ------ | ----- | 
|                          |                                 |                                   |           |                  
|                          |                                 | March 31, 2004                    |           | December 31, 2003
|                          |                                 |                                   |           |                  
|                          |                                 | Amount                            |           | Percent           |         | Amount |       | Percent
|                          |                                 |                                   |           |                   |         |        |       |        
|                          |                                 |                                  
|                          |                                 | (Dollars in thousands)           
|Commercial and industrial |                                 | $                                 | 1,569,244 |                   |         |        | 42.17 | %       |       | $ | 1,500,304 |           |         |  | 42.96 | %     
|Real estate :             |                                 |                                   |           |                   |         |        |       |         |       |   |           |           |         |  |       |       
|                          |                                 | Construction and land development |           |                   | 785,589 |        |       |         | 21.11 |   |           |           | 706,546 |  |       |        | 20.24 | 
|                          |                                 | 1-4 family residential            |           |                   | 579,372 |        |       |         | 15.57 |   |           |           | 567,009 |  |       |        | 16.24 | 
|                          |                                 | Commercial                        |           |                   | 594,440 |        |       |         | 15.98 |   |           |           | 521,254 |  |       |        | 14.93 | 
|                          |                                 | Farmland                          |           |                   | 10,773  |        |       |         | 0.29  |   |           |           | 11,140  |  |       |        | 0.32  | 
|                          |                                 | Other                             |           |                   | 57,329  |        |       |         | 1.54  |   |           |           | 41,854  |  |       |        | 1.20  | 
|Consumer                  |                                 |                                   | 124,203   |                   |         |        | 3.34  |         |       |   | 143,566   |           |         |  | 4.11  |       
|                          |                                 |                                   |           |                   |         |        |       |         |       |   |           |           |         |  |       |       
|                          | Total loans held for investment |                                   | $         | 3,720,950         |         |        |       | 100.00  | %     |   | $         | 3,491,673 |         |  |       | 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 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 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.

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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 construction
loans are generally for a six to twelve month period.

Consumer loans made by the Company include
automobile loans, recreational vehicle loans, boat loans,
personal loans (collateralized and uncollateralized), and
deposit account collateralized loans. The terms 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 March 31, 2004 are summarized in the
following table:

|                                              |       |                        |         |            |  |            |         |           |  |   |         |         |  |   |           |           | 
|--------------------------------------------- | ----- | ---------------------- | ------- | ---------- |  | ---------- | ------- | --------- |  | - | ------- | ------- |  | - | --------- | --------- | 
|                                              |       |                       
|                                              |       | March 31, 2004        
|                                              |       |                       
|                                              |       |                        |         | After One  |  |           
|                                              |       | One Year Or            |         | Through    |  | After Five |         |          
|                                              |       | Less                   |         | Five Years |  | Years      |         | Total    
|                                              |       |                        |         |            |  |            |         |          
|                                              |       |                       
|                                              |       | (Dollars in thousands)
|Commercial and industrial                     |       | $                      | 650,775 |            |  | $          | 790,932 |           |  | $ | 127,537 |         |  | $ | 1,569,244 |          
|Real estate construction and land development |       |                        | 418,454 |            |  |            | 346,575 |           |  |   | 20,560  |         |  |   | 785,589   |          
|                                              |       |                        |         |            |  |            |         |           |  |   |         |         |  |   |           |          
|                                              | Total |                        | $       | 1,069,229  |  |            | $       | 1,137,507 |  |   | $       | 148,097 |  |   | $         | 2,354,833 | 
|                                              |       |                        |         |            |  |            |         |           |  |   |         |         |  |   |           |          
|Loans with a fixed interest rate              |       | $                      | 145,923 |            |  | $          | 232,111 |           |  | $ | 65,715  |         |  | $ | 443,749   |          
|Loans with a floating interest rate           |       |                        | 923,306 |            |  |            | 905,396 |           |  |   | 82,382  |         |  |   | 1,911,084 |          
|                                              |       |                        |         |            |  |            |         |           |  |   |         |         |  |   |           |          
|                                              | Total |                        | $       | 1,069,229  |  |            | $       | 1,137,507 |  |   | $       | 148,097 |  |   | $         | 2,354,833 | 
|                                              |       |                        |         |            |  |            |         |           |  |   |         |         |  |   |           |          

Loans
Held for Sale

Loans held for sale of $101.9 million at
March 31, 2004 increased from $96.9 million at
December 31, 2003. 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.

Off-Balance
Sheet Credit Commitments

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

The Company enters into contractual commitments
to extend credit, normally with fixed expiration dates or
termination clauses, at specified rates and for specific
purposes. Customers use credit commitments to ensure that funds
will be available for working capital purposes, for capital
expenditures and to ensure access to funds at specified terms
and conditions. Substantially all of the Companys
commitments to extend credit are contingent upon customers
maintaining specific credit standards at the time of loan
funding. Management assesses the credit risk associated with
commitments to extend credit. Commitments to extend credit
totaled $2.45 billion at March 31, 2004 and
$2.14 billion at December 31, 2003.

Standby letters of credit are written conditional
commitments issued by the Company to guarantee the performance
of a customer to a third party. The Companys policies
generally require that standby letters of credit arrangements
contain collateral and debt covenants similar to those contained
in loan agreements. In

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the event the customer does not perform in
accordance with the terms of the agreement with the third party,
the Company would be required to fund the commitment. The
maximum potential amount of future payments the Company could be
required to make is represented by the contractual amount of the
commitment. If the commitment is funded, the Company would be
entitled to seek recovery from the customer. Standby letters of
credit were $256.9 million at March 31, 2004 and
$227.0 million at December 31, 2003. As of
March 31, 2004 and December 31, 2003, $212,000 and
$248,000, respectively, has been recorded as a liability for the
fair value of the Companys potential obligations under
these guarantees.


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.

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. For the three month period ended March 31, 2004,
annualized net recoveries to average loans was 0.11%. The net
charge-offs average for all FDIC insured commercial banks was
0.89% for the year ended December 31, 2003. There can be no
assurance, however, that 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 under the provisions of
SFAS No. 114, Accounting by Creditors for

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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 that are 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
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 categories 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 March 31, 2004 is adequate to cover probable
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 March 31, 2004.

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

|                                              |                           |                                   |        |      |       |   |        |      |      |  
|--------------------------------------------- | ------------------------- | --------------------------------- | ------ | ---- | ----- | - | ------ | ---- | ---- | -
|                                              |                           |                                  
|                                              |                           | Three Months Ended               
|                                              |                           | March 31,                        
|                                              |                           |                                  
|                                              |                           | 2004                              |        | 2003
|                                              |                           |                                   |        |     
|                                              |                           |                                  
|                                              |                           | (Dollars in thousands)           
|Allowance for loan losses, beginning balance  |                           | $                                 | 43,008 |      |       | $ | 36,696 |     
|Provision charged against operations          |                           |                                   | 2,000  |      |       |   | 3,000  |     
|Charge-offs:                                  |                           |                                   |        |      |       |   |        |     
|                                              | Commercial and industrial |                                   |        | (711 | )     |   |        | (480 | )   
|                                              | Real estate:              |                                   |        |      |       |   |        |      |     
|                                              |                           | Construction and land development |        |      |      |   |        |      |     |  
|                                              |                           | 1-4 family residential            |        |      | (93   | ) |        |      |     |  
|                                              |                           | Commercial                        |        |      |      |   |        |      |     |  
|                                              |                           | Farmland                          |        |      |      |   |        |      |     |  
|                                              |                           | Other                             |        |      |      |   |        |      | (594 | )
|                                              | Consumer                  |                                   |        | (578 | )     |   |        | (245 | )   
|                                              |                           |                                   |        |      |       |   |        |     
|Total charge-offs                             |                           |                                   | (1,382 | )    |       |   | (1,319 | )   
|                                              |                           |                                   |        |      |       |   |        |     
|Recoveries:                                   |                           |                                   |        |      |       |   |        |     
|                                              | Commercial and industrial |                                   |        | 443  |       |   |        | 58   |     
|                                              | Real estate :             |                                   |        |      |       |   |        |      |     
|                                              |                           | Construction and land development |        |      |      |   |        |      |     |  
|                                              |                           | 1-4 family residential            |        |      |      |   |        |      | 27   |  
|                                              |                           | Commercial                        |        |      |      |   |        |      |     |  
|                                              |                           | Farmland                          |        |      |      |   |        |      |     |  
|                                              |                           | Other                             |        |      | 1,700 |   |        |      |     |  
|                                              | Consumer                  |                                   |        | 186  |       |   |        | 46   |     
|                                              |                           |                                   |        |      |       |   |        |     
|Total recoveries                              |                           |                                   | 2,329  |      |       |   | 131    |     
|                                              |                           |                                   |        |      |       |   |        |     
|Net (charge-offs) recoveries                  |                           |                                   | 947    |      |       |   | (1,188 | )   
|Allowance acquired through Lone Star merger   |                           |                                   | 2,116  |      |       |   |       |     
|                                              |                           |                                   |        |      |       |   |        |     
|Allowance for loan losses, ending balance     |                           | $                                 | 48,071 |      |       | $ | 38,508 |     
|                                              |                           |                                   |        |      |       |   |        |     
|Allowance to period-end loans                 |                           |                                   | 1.29   | %    |       |   | 1.21   | %   
|Net charge-offs (recoveries) to average loans |                           |                                   | (0.11  | )%   |       |   | 0.15   | %   
|Allowance to period-end nonperforming loans   |                           |                                   | 232.06 | %    |       |   | 171.94 | %   

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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 allowance for loan losses to cover
the estimated losses inherent in particular risk categories of
loans. This allocation is made for analytical purposes only 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.

|                                                        |                           |                                   |   |                   |        |        |  |             |        |   |   |        |        |  |  |       |        |  
|------------------------------------------------------- | ------------------------- | --------------------------------- | - | ----------------- | ------ | ------ |  | ----------- | ------ | - | - | ------ | ------ |  |  | ----- | ------ | -
|                                                        |                           |                                   |   |                  
|                                                        |                           | March 31, 2004                    |   | December 31, 2003
|                                                        |                           |                                   |   |                  
|                                                        |                           |                                   |   | 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 |                                   | $ | 28,062            |        |        |  | 42.17       | %      |   | $ | 25,388 |        |  |  | 42.96 | %     
|                                                        | Real estate:              |                                   |   |                   |        |        |  |             |        |   |   |        |        |  |  |       |       
|                                                        |                           | Construction and land development |   |                   | 6,532  |        |  |             | 21.11  |   |   |        | 5,503  |  |  |       | 20.24  |  
|                                                        |                           | 1-4 family residential            |   |                   | 3,971  |        |  |             | 15.57  |   |   |        | 2,478  |  |  |       | 16.24  |  
|                                                        |                           | Commercial                        |   |                   | 4,712  |        |  |             | 15.98  |   |   |        | 5,179  |  |  |       | 14.93  |  
|                                                        |                           | Farmland                          |   |                   | 40     |        |  |             | 0.29   |   |   |        | 39     |  |  |       | 0.32   |  
|                                                        |                           | Other                             |   |                   | 2,335  |        |  |             | 1.54   |   |   |        | 2,465  |  |  |       | 1.20   |  
|                                                        | Consumer                  |                                   |   | 2,419             |        |        |  | 3.34        |        |   |   | 1,956  |        |  |  | 4.11  |       
|                                                        |                           |                                   |   |                   |        |        |  |             |        |   |   |        |        |  |  |      
|                                                        |                           | Total allowance for loan losses   |   | $                 | 48,071 |        |  |             | 100.00 | % |   | $      | 43,008 |  |  |       | 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
$25.4 million at March 31, 2004, compared to
$17.0 million at December 31, 2003. This resulted in a
ratio of nonperforming assets to loans and other real estate of
0.68% at March 31, 2004 and 0.49% at December 31,
2003. The increase in nonperforming assets is primarily due to
the addition of one commercial real estate credit to nonaccrual
status. Nonaccrual loans, the largest component of nonperforming
assets, were $17.7 million at March 31, 2004, an
increase of $6.2 million from $11.4 million at
December 31, 2003.

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

|                                                              |                            |                        |        |              |  |   |        |        | 
|------------------------------------------------------------- | -------------------------- | ---------------------- | ------ | ------------ |  | - | ------ | ------ | 
|                                                              |                            | March 31,              |        | December 31,
|                                                              |                            | 2004                   |        | 2003        
|                                                              |                            |                        |        |             
|                                                              |                            |                       
|                                                              |                            | (Dollars in thousands)
|Nonaccrual loans                                              |                            | $                      | 17,671 |              |  | $ | 11,443 |       
|Accruing loans 90 or more days past due                       |                            |                        | 3,044  |              |  |   | 1,299  |       
|Restructured loans                                            |                            |                        |       |              |  |   |       |       
|Other real estate and foreclosed property                     |                            |                        | 4,722  |              |  |   | 4,248  |       
|                                                              |                            |                        |        |              |  |   |        |       
|                                                              | Total nonperforming assets |                        | $      | 25,437       |  |   | $      | 16,990 | 
|                                                              |                            |                        |        |              |  |   |        |       
|Nonperforming assets to total loans and other
    real estate |                            |                        | 0.68   | %            |  |   | 0.49   | %     

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. Gross interest income on nonaccrual
loans that would have been recorded had these loans been
performing as agreed was $170,000 and $295,000 for the three
months ended March 31, 2004 and 2003, respectively.

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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 in 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 March 31, 2004 and December 31,
2003.

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

|                                                          |                                             |                        |        |              |  |   |        |        | 
|--------------------------------------------------------- | ------------------------------------------- | ---------------------- | ------ | ------------ |  | - | ------ | ------ | 
|                                                          |                                             | March 31,              |        | December 31,
|                                                          |                                             | 2004                   |        | 2003        
|                                                          |                                             |                        |        |             
|                                                          |                                             |                       
|                                                          |                                             | (Dollars in thousands)
|Impaired loans with no SFAS No. 114
    valuation reserve |                                             | $                      | 12,107 |              |  | $ | 12,568 |       
|Impaired loans with a SFAS No. 114 valuation
    reserve  |                                             |                        | 14,004 |              |  |   | 4,240  |       
|                                                          |                                             |                        |        |              |  |   |        |       
|                                                          | Total recorded investment in impaired loans |                        | $      | 26,111       |  |   | $      | 16,808 | 
|                                                          |                                             |                        |        |              |  |   |        |       
|Valuation allowance related to impaired loans             |                                             | $                      | 4,550  |              |  | $ | 2,768  |       
|                                                          |                                             |                        |        |              |  |   |        |       

The average recorded investment in impaired loans
during the three months ended March 31, 2004 and the year
ended December 31, 2003 was $21.5 million and
$19.9 million, respectively. Interest income on impaired
loans of $314,000 and $79,000 was recognized for cash payments
received during the three months ended March 31, 2004
and 2003, respectively.

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 March 31, 2004 and
December 31, 2003.

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

|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |        |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |           |           | 
|------------------- | ------------------------------------- | ----------------------------------- | - | ----------------- | --------- | ---- | - | ---------- | ------ | ---------------- | - | ------ | ------ | ---- | - | ---------- | --------- |  | - | --------- | --------- |  | - | ----- | ------ |  | - | ------ | ------ | - | - | --------- | --------- | 
|                    |                                       |                                     |   |                  
|                    |                                       | March 31, 2004                      |   | December 31, 2003
|                    |                                       |                                     |   |                  
|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |       
|                    |                                       |                                     |   | Gross Unrealized  |           |      |   |            |        | Gross Unrealized |   |       
|                    |                                       | Amortized                           |   |                   |           |      |   | Amortized  |        |                  |   |       
|                    |                                       | Cost                                |   | Gain              |           | Loss |   | Fair Value |        | Cost             |   | Gain   |        | Loss |   | Fair Value
|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |        |      |   |           
|                    |                                       |                                    
|                    |                                       | (Dollars in thousands)             
|Available for sale: |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |        |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |          
|                    | U.S. Government and agency securities |                                     | $ | 291,245           |           |      | $ | 2,127      |        |                  | $ | (1     | )      |      | $ | 293,371    |           |  | $ | 250,359   |           |  | $ | 841   |        |  | $ | (102   | )      |   | $ | 251,098   |          
|                    | Mortgage-backed securities            |                                     |   | 1,040,458         |           |      |   | 9,186      |        |                  |   | (1,938 | )      |      |   | 1,047,706  |           |  |   | 1,101,988 |           |  |   | 7,078 |        |  |   | (8,320 | )      |   |   | 1,100,746 |          
|                    | Municipal securities                  |                                     |   | 180,356           |           |      |   | 9,608      |        |                  |   | (177   | )      |      |   | 189,787    |           |  |   | 152,927   |           |  |   | 5,905 |        |  |   | (754   | )      |   |   | 158,078   |          
|                    | Federal Reserve Bank stock            |                                     |   | 6,378             |           |      |   |           |        |                  |   |       |        |      |   | 6,378      |           |  |   | 4,459     |           |  |   |      |        |  |   |       |        |   |   | 4,459     |          
|                    | Federal Home Loan Bank stock          |                                     |   | 36,770            |           |      |   |           |        |                  |   |       |        |      |   | 36,770     |           |  |   | 25,469    |           |  |   |      |        |  |   |       |        |   |   | 25,469    |          
|                    | Other securities                      |                                     |   | 2,943             |           |      |   | 22         |        |                  |   |       |        |      |   | 2,965      |           |  |   | 9,455     |           |  |   | 93    |        |  |   |        |        |   |   | 9,548     |          
|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |        |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |          
|                    |                                       | Total securities available for sale |   | $                 | 1,558,150 |      |   | $          | 20,943 |                  |   | $      | (2,116 | )    |   | $          | 1,576,977 |  |   | $         | 1,544,657 |  |   | $     | 13,917 |  |   | $      | (9,176 | ) |   | $         | 1,549,398 | 
|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |        |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |          

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. Management believes that based
upon the credit quality of the debt securities, none of the
unrealized loss on securities should be considered
other-than-temporary.

Securities were $1.58 billion at
March 31, 2004, an increase of $27.6 million from
$1.55 billion at December 31, 2003. The yield on the
securities portfolio for the three months ended March 31,
2004 was 3.76% compared to 4.19% for the three months ended
March 31, 2003.

Included in the Companys mortgage-backed
securities at March 31, 2004 were agency issued collateral
mortgage obligations with a book value of $183.3 million
and a fair value of $184.9 million and non-agency issued
collateral mortgage obligations with a book value of
$53.6 million and a fair value of $53.9 million.

At March 31, 2004, $739.1 million of
the mortgage-backed securities held by the Company had final
maturities of more than 10 years. At March 31, 2004,
approximately $20.8 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.

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The following table summarizes the contractual
maturity of investments and their weighted average yields at
March 31, 2004. 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.

|                             |                   |                        |        |                |  |                  |      |                 |   |           |         |         |  |           |      |       |   |       |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |           |           |  |  |      |      |  
|---------------------------- | ----------------- | ---------------------- | ------ | -------------- |  | ---------------- | ---- | --------------- | - | --------- | ------- | ------- |  | --------- | ---- | ----- | - | ----- | ------- | ------- |  |  | ---- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | - | - | --------- | --------- |  |  | ---- | ---- | -
|                             |                   |                       
|                             |                   | March 31, 2004        
|                             |                   |                       
|                             |                   |                        |        |                |  |                  |      |                
|                             |                   |                        |        | After One Year |  | After Five Years |      |                
|                             |                   |                        |        | But Within     |  | But Within       |      |                 |   |          
|                             |                   | Within One Year        |        | 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 securities   |                   | $                      | 25,104 |                |  |                  | 2.28 | %               |   | $         | 261,136 |         |  |           | 3.09 | %     |   | $     | 5,005   |         |  |  | 3.87 | %    |   | $ |        |         |  |  |     | %    |   | $ | 291,245   |           |  |  | 3.04 | %   
|Mortgage-backed securities   |                   |                        | 199    |                |  |                  | 5.84 |                 |   |           | 16,612  |         |  |           | 4.92 |       |   |       | 284,512 |         |  |  | 3.98 |      |   |   | 739,135 |         |  |  | 4.00 |      |   |   | 1,040,458 |           |  |  | 4.01 |     
|Municipal securities         |                   |                        | 1,018  |                |  |                  | 4.70 |                 |   |           | 4,323   |         |  |           | 4.53 |       |   |       | 25,983  |         |  |  | 4.07 |      |   |   | 149,032 |         |  |  | 4.40 |      |   |   | 180,356   |           |  |  | 4.00 |     
|Federal Reserve Bank stock   |                   |                        | 6,378  |                |  |                  | 6.00 |                 |   |           |        |         |  |           |     |       |   |       |        |         |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 6,378     |           |  |  | 6.00 |     
|Federal Home Loan Bank stock |                   |                        | 36,770 |                |  |                  | 1.50 |                 |   |           |        |         |  |           |     |       |   |       |        |         |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 36,770    |           |  |  | 1.50 |     
|Other securities             |                   |                        | 1,044  |                |  |                  | 0.95 |                 |   |           | 152     |         |  |           | 3.28 |       |   |       | 1,697   |         |  |  | 2.80 |      |   |   | 50      |         |  |  | 3.19 |      |   |   | 2,943     |           |  |  | 2.17 |     
|Federal funds sold           |                   |                        | 45,380 |                |  |                  | 1.02 |                 |   |           |        |         |  |           |     |       |   |       |        |         |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 45,380    |           |  |  | 1.02 |     
|Interest-bearing deposits    |                   |                        | 7,298  |                |  |                  | 1.14 |                 |   |           |        |         |  |           |     |       |   |       |        |         |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 7,298     |           |  |  | 1.14 |     
|                             |                   |                        |        |                |  |                  |      |                 |   |           |         |         |  |           |      |       |   |       |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |           |           |  |  |      |     
|                             | Total investments |                        | $      | 123,191        |  |                  |      | 1.72            | % |           | $       | 282,223 |  |           |      | 3.22  | % |       | $       | 317,197 |  |  |      | 3.98 | % |   | $       | 888,217 |  |  |      | 4.07 | % |   | $         | 1,610,828 |  |  |      | 3.72 | %
|                             |                   |                        |        |                |  |                  |      |                 |   |           |         |         |  |           |      |       |   |       |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |           |           |  |  |      |     

Other
Assets

Other assets were $199.5 million at
March 31, 2004, an increase of $5.9 million from
$193.6 million at December 31, 2003. This increase is
primarily attributable to increases in factored receivables.
Factored receivables were $37.5 million at March 31,
2004, an increase of $5.5 million, or 17%, from
$32.0 million at December 31, 2003. Factored
receivables result from providing operating funds to businesses
by converting their accounts receivable to cash.

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. 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 $181.2 million and
$156.4 million of its deposits classified as brokered funds
at March 31, 2004 and December 31, 2003, 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
noninterest-bearing demand deposits to average total deposits
for the periods ended March 31, 2004 and December 31,
2003 was 33% and 31%, respectively.

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The average daily balances and weighted average
rates paid on deposits for the three months ended March 31,
2004 and the year ended December 31, 2003 are presented
below:

|                                 |                |                        |           |                   |  |        |      |      |  |   |           |           |  |  |      |   | 
|-------------------------------- | -------------- | ---------------------- | --------- | ----------------- |  | ------ | ---- | ---- |  | - | --------- | --------- |  |  | ---- | - | 
|                                 |                |                        |           |                  
|                                 |                | March 31, 2004         |           | December 31, 2003
|                                 |                |                        |           |                  
|                                 |                | Amount                 |           | Rate              |  | Amount |      | Rate
|                                 |                |                        |           |                   |  |        |      |     
|                                 |                |                       
|                                 |                | (Dollars in thousands)
|Interest-bearing demand          |                | $                      | 60,359    |                   |  |        | 0.36 | %    |  | $ | 45,493    |           |  |  | 0.22 | %
|Regular savings                  |                |                        | 136,373   |                   |  |        | 0.26 |      |  |   | 115,211   |           |  |  | 0.33 |  
|Premium yield                    |                |                        | 945,497   |                   |  |        | 0.77 |      |  |   | 847,045   |           |  |  | 0.96 |  
|Money market savings             |                |                        | 830,969   |                   |  |        | 0.61 |      |  |   | 827,816   |           |  |  | 0.80 |  
|Time deposits less than $100,000 |                |                        | 283,020   |                   |  |        | 2.36 |      |  |   | 283,670   |           |  |  | 2.67 |  
|Time deposits $100,000 and over  |                |                        | 624,178   |                   |  |        | 1.67 |      |  |   | 629,749   |           |  |  | 1.85 |  
|IRAs, QRPs and other           |                |                        | 97,991    |                   |  |        | 2.47 |      |  |   | 91,509    |           |  |  | 2.74 |  
|                                 |                |                        |           |                   |  |        |      |      |  |   |           |           |  |  |      |  
|Total interest-bearing deposits  |                |                        | 2,978,387 |                   |  |        | 1.09 | %    |  |   | 2,840,493 |           |  |  | 1.30 | %
|                                 |                |                        |           |                   |  |        |      |      |  |   |           |           |  |  |      |  
|Noninterest-bearing deposits     |                |                        | 1,491,064 |                   |  |        |      |      |  |   | 1,281,546 |           |  |  |      |  
|                                 |                |                        |           |                   |  |        |      |      |  |   |           |           |  |  |      |  
|                                 | Total deposits |                        | $         | 4,469,451         |  |        |      |      |  |   | $         | 4,122,039 |  |  |      |   | 
|                                 |                |                        |           |                   |  |        |      |      |  |   |           |           |  |  |      |  

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

|                              |                                       |                        |         |              |  |   |         |         | 
|----------------------------- | ------------------------------------- | ---------------------- | ------- | ------------ |  | - | ------- | ------- | 
|                              |                                       | March 31,              |         | December 31,
|                              |                                       | 2004                   |         | 2003        
|                              |                                       |                        |         |             
|                              |                                       |                       
|                              |                                       | (Dollars in thousands)
|3 months or less              |                                       | $                      | 402,572 |              |  | $ | 417,384 |        
|Between 3 months and 6 months |                                       |                        | 86,920  |              |  |   | 60,101  |        
|Between 6 months and 1 year   |                                       |                        | 76,377  |              |  |   | 78,948  |        
|Over 1 year                   |                                       |                        | 92,806  |              |  |   | 86,157  |        
|                              |                                       |                        |         |              |  |   |         |        
|                              | Total time deposits $100,000 and over |                        | $       | 658,675      |  |   | $       | 642,590 | 
|                              |                                       |                        |         |              |  |   |         |        

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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 at
March 31, 2004 and December 31, 2003 is summarized as
follows:

|                                             |                                         |                        |   |              |   |  |   |         |  
|-------------------------------------------- | --------------------------------------- | ---------------------- | - | ------------ | - |  | - | ------- | -
|                                             |                                         | March 31,              |   | December 31,
|                                             |                                         | 2004                   |   | 2003        
|                                             |                                         |                        |   |             
|                                             |                                         |                       
|                                             |                                         | (Dollars in thousands)
|Securities sold under repurchase agreements: |                                         |                        |   |              |   |  |   |        
|                                             | Average                                 |                        | $ | 288,316      |   |  | $ | 261,320 |  
|                                             | Period-end                              |                        |   | 305,750      |   |  |   | 285,571 |  
|                                             | Maximum month-end balance during period |                        |   | 305,750      |   |  |   | 303,764 |  
|Interest rate:                               |                                         |                        |   |              |   |  |   |        
|                                             | Weighted average for the period         |                        |   | 0.72         | % |  |   | 0.88    | %
|                                             | Weighted average at period-end          |                        |   | 0.73         | % |  |   | 0.72    | %
|Short-term borrowings:                       |                                         |                        |   |              |   |  |   |        
|                                             | Average                                 |                        | $ | 458,258      |   |  | $ | 276,193 |  
|                                             | Period-end                              |                        |   | 285,958      |   |  |   | 473,154 |  
|                                             | Maximum month-end balance during period |                        |   | 578,698      |   |  |   | 473,154 |  
|Interest rate:                               |                                         |                        |   |              |   |  |   |        
|                                             | Weighted average for the period         |                        |   | 1.01         | % |  |   | 1.11    | %
|                                             | Weighted average at period-end          |                        |   | 1.02         | % |  |   | 0.98    | %

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. The ALCO 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 ALCO also establishes pricing
and funding decisions with respect to the Banks overall
asset and liability composition. The ALCO 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 March 31, 2004, which may not be
representative of average balances at any other time period.
This analysis is reviewed by management on a monthly basis. The
results are impacted by changes in the composition of the
balance sheet. Management

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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 March 31, 2004 and
December 31, 2003 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 period end will remain constant over the twelve
month measurement periods, 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:  |                          |  |     |       |    |  |      |       |      |  |  |      |   |  |  |       |    |  |  |      
|                                            |                  | March 31, 2004           |  |     | (2.27 | )% |  |      | (0.53 | )%   |  |  | 0.00 | % |  |  | 2.68  | %  |  |  | 5.43  | % 
|                                            |                  | December 31, 2003        |  |     | (1.20 | )% |  |      | 0.25  | %    |  |  | 0.00 | % |  |  | 1.23  | %  |  |  | 3.33  | % 
|                                            | Months 13 to 24: |                          |  |     |       |    |  |      |       |      |  |  |      |   |  |  |       |    |  |  |      
|                                            |                  | March 31, 2004           |  |     | (5.49 | )% |  |      | (2.20 | )%   |  |  | 0.00 | % |  |  | 5.53  | %  |  |  | 9.95  | % 
|                                            |                  | December 31, 2003        |  |     | (4.37 | )% |  |      | (1.43 | )%   |  |  | 0.00 | % |  |  | 3.37  | %  |  |  | 6.65  | % 
|Impact on market value of portfolio equity: |                  |                          |  |     |       |    |  |      |       |      |  |  |      |   |  |  |       |    |  | 
|                                            |                  | March 31, 2004           |  |     | (3.23 | )% |  |      | (0.92 | )%   |  |  | 0.00 | % |  |  | 0.28  | %  |  |  | 0.29  | % 
|                                            |                  | December 31, 2003        |  |     | (2.49 | )% |  |      | (0.49 | )%   |  |  | 0.00 | % |  |  | (0.32 | )% |  |  | (0.39 | )%

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 March 31, 2004 was a positive
$795.0 million or 13% 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,
management believes that a GAP analysis alone does not
accurately measure the magnitude of changes in net interest
income because changes in interest rates do not impact all
categories of assets, liabilities, and off-balance sheet
instruments equally or simultaneously.

32



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The following table sets forth an interest rate
sensitivity analysis for the Company as of March 31, 2004
and December 31, 2003.

|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |           |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |           | 
|-------------------------------------------------------------------- | ------------------------------------------ | ---------------------- | --------- | ----------- |  | ----------- | -------- | ----------- |  | ---------- | --------- | -------------- |  | ----- | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                                                     |                                            |                        |           |             |  | One Year to |          | More than   |  | Total rate |           | Total non-     |  |      
|                                                                     |                                            | 0-90 Days              |           | 91-365 Days |  | Three Years |          | Three Years |  | sensitive  |           | rate sensitive |  | Total
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |           |                |  |      
|                                                                     |                                            |                       
|                                                                     |                                            | (Dollars in thousands)
|As of March 31, 2004                                                 |                                            |                        |           |             |  |             |          |             |  |            |           |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Cash and due from banks                                              |                                            | $                      |          |             |  | $           |         |             |  | $          |          |                |  | $     |          |           |  | $ |          |           |  | $ | 290,796   |           |  | $ | 290,796   |          
|Federal funds sold and other cash equivalents                        |                                            |                        | 52,678    |             |  |             |         |             |  |            |          |                |  |       |          |           |  |   | 52,678    |           |  |   |          |           |  |   | 52,678    |          
|Securities                                                           |                                            |                        | 134,922   |             |  |             | 292,449  |             |  |            | 369,121   |                |  |       | 780,485   |           |  |   | 1,576,977 |           |  |   |          |           |  |   | 1,576,977 |          
|Loans                                                                |                                            |                        | 2,138,679 |             |  |             | 607,329  |             |  |            | 663,051   |                |  |       | 396,164   |           |  |   | 3,805,223 |           |  |   | 17,671    |           |  |   | 3,822,894 |          
|Allowance for loan losses                                            |                                            |                        |          |             |  |             |         |             |  |            |          |                |  |       |          |           |  |   |          |           |  |   | (48,071   | )         |  |   | (48,071   | )        
|Other assets                                                         |                                            |                        |          |             |  |             |         |             |  |            |          |                |  |       |          |           |  |   |          |           |  |   | 418,944   |           |  |   | 418,944   |          
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |           |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                                                     | Total assets                               |                        | $         | 2,326,279   |  |             | $        | 899,778     |  |            | $         | 1,032,172      |  |       | $         | 1,176,649 |  |   | $         | 5,434,878 |  |   | $         | 679,340   |  |   | $         | 6,114,218 | 
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |           |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Deposits                                                             |                                            | $                      | 878,385   |             |  | $           | 708,991  |             |  | $          | 615,189   |                |  | $     | 874,732   |           |  | $ | 3,077,297 |           |  | $ | 1,625,647 |           |  | $ | 4,702,944 |          
|Securities sold under repurchase agreements and
    other borrowings |                                            |                        | 691,820   |             |  |             | 100,348  |             |  |            | 3,033     |                |  |       | 7,257     |           |  |   | 802,458   |           |  |   |          |           |  |   | 802,458   |          
|Junior subordinated deferrable interest debentures                   |                                            |                        | 51,547    |             |  |             |         |             |  |            |          |                |  |       |          |           |  |   | 51,547    |           |  |   |          |           |  |   | 51,547    |          
|Other liabilities                                                    |                                            |                        |          |             |  |             |         |             |  |            |          |                |  |       |          |           |  |   |          |           |  |   | 34,038    |           |  |   | 34,038    |          
|Shareholders equity                                                 |                                            |                        |          |             |  |             |         |             |  |            |          |                |  |       |          |           |  |   |          |           |  |   | 523,231   |           |  |   | 523,231   |          
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |           |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                                                     | Total liabilities and shareholders equity |                        | $         | 1,621,752   |  |             | $        | 809,339     |  |            | $         | 618,222        |  |       | $         | 881,989   |  |   | $         | 3,931,302 |  |   | $         | 2,182,916 |  |   | $         | 6,114,218 | 
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |           |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Period GAP                                                           |                                            | $                      | 704,527   |             |  | $           | 90,439   |             |  | $          | 413,950   |                |  | $     | 294,660   |           |  | $ | 1,503,576 |           |  |   |           |           |  |   |           |          
|Cumulative GAP                                                       |                                            | $                      | 704,527   |             |  | $           | 794,966  |             |  | $          | 1,208,916 |                |  | $     | 1,503,576 |           |  | $ | 1,503,576 |           |  |   |           |           |  |   |           |          
|Period GAP to total assets                                           |                                            |                        | 11.52     | %           |  |             | 1.48     | %           |  |            | 6.77      | %              |  |       | 4.82      | %         |  |   | 24.59     | %         |  |   |           |           |  |   |           |          
|Cumulative GAP to total assets                                       |                                            |                        | 11.52     | %           |  |             | 13.00    | %           |  |            | 19.77     | %              |  |       | 24.59     | %         |  |   | 24.59     | %         |  |   |           |           |  |   |           |          
|As of December 31, 2003                                              |                                            |                        |           |             |  |             |          |             |  |            |           |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|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     | %         |  |   |           |           |  |   |           |          

Liquidity and Capital
Resources

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.

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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. 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 three months ended March 31, 2004 and 73%
for the same period in 2003.

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.

The following table compares the Companys
and the Banks reported leverage and risk-weighted capital
ratios as of March 31, 2004 and December 31, 2003 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 March 31, 2004    |                                           |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  | 
|                        | Total Capital (to Risk Weighted Assets):  |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  | $               | 545,704 |                   |  |              | 10.76 | %                |  | $     | 405,675 |  |  |  | 8.00 | % |  | $ | N/A     |  |  |  | N/A   | %
|                        |                                           | The Bank               |  |                 | 542,042 |                   |  |              | 10.71 |                  |  |       | 404,998 |  |  |  | 8.00 |   |  |   | 506,247 |  |  |  | 10.00 |  
|                        | Tier 1 Capital (to Risk Weighted Assets): |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 497,633 |                   |  |              | 9.81  |                  |  |       | 202,837 |  |  |  | 4.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 493,428 |                   |  |              | 9.75  |                  |  |       | 202,499 |  |  |  | 4.00 |   |  |   | 404,998 |  |  |  | 8.00  |  
|                        | Tier 1 Capital (to Average Assets):       |                        |  |                 |         |                   |  |              |       |                  |  |       |         |  |  |  |      |   |  |   |         |  |  |  |      
|                        |                                           | The Company            |  |                 | 497,633 |                   |  |              | 8.35  |                  |  |       | 179,276 |  |  |  | 3.00 |   |  |   | N/A     |  |  |  | N/A   |  
|                        |                                           | The Bank               |  |                 | 493,428 |                   |  |              | 8.29  |                  |  |       | 178,554 |  |  |  | 3.00 |   |  |   | 297,590 |  |  |  | 5.00  |  
|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 1 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 1 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  |  

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Critical Accounting
Policies

The Company has established various accounting
policies which 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 condensed consolidated financial statements.
Certain accounting policies involve significant judgments and
assumptions by management that have a material impact on the
carrying value of 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 that 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 condensed 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 the Companys
Annual Report on Form 10-K,  Financial
Condition  Credit Management for a detailed
description of the Companys estimation process and
methodology related to the allowance for loan losses.

Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets. Under this standard, goodwill is not
amortized, but instead is tested for impairment at least
annually. Other acquired intangible assets determined to have
finite lives, such as core deposit intangibles, are amortized
over their estimated useful lives in a manner that best reflects
the economic benefits of the intangible asset. In addition,
impairment testing is performed periodically on these amortizing
intangible assets.

Mortgage servicing rights assets are established
and accounted for based on discounted cash flow modeling
techniques which require management to make estimates regarding
the amount and timing of expected future cash flows, including
assumptions about loan repayment rates, credit loss experience,
and costs to service, as well discount rates that consider the
risk involved. Because the values of these assets are sensitive
to changes in assumptions, the valuation of mortgage servicing
rights is considered a critical accounting estimate. See the
Companys Annual Report on Form 10-K,
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.

Other Matters

On May 15, 2003, the Financial Accounting
Standards Board (the FASB) approved 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

35



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##### Table of Contents



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.


On March 9, 2004, the Securities and
Exchange Commission staff issued Staff Accounting Bulletin
No. 105, Application of Accounting Principles to Loan
Commitments. SAB No. 105 summarizes the view of the
staff regarding the application of generally accepted accounting
principles to loan commitments accounted for as derivative
instruments including recognition of the loan commitment and
financial statement disclosures. The Company does not expect the
requirements of SAB No. 105 to have a material impact on
its financial condition or results of operations.



ITEM 3.  Quantitative and
Qualitative Disclosures About Market Risk

There have been no material changes since
December 31, 2003. See the Companys Annual Report on
Form 10-K, Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Financial Condition  Interest
Rate Sensitivity and Liquidity.



ITEM 4.  Controls and
Procedures

Management has 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 11 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 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 has been
implemented and 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 March 31, 2004 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 disclosure controls subsequent
to their evaluation, nor any corrective actions with regard to
significant deficiencies and material weaknesses.

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




With respect to the unaudited financial
information of Southwest Bancorporation of Texas, Inc. for the
three month periods ended March 31, 2004 and 2003 included
in this Form 10-Q, PricewaterhouseCoopers LLP reported that
they have applied limited procedures in accordance with
professional standards for a review of such information.
However, their separate report dated April 29, 2004
appearing herein states that they did not audit and they do not
express an opinion on that unaudited financial information.
Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature
of the review procedures applied. PricewaterhouseCoopers LLP is
not subject to the liability provisions of Section 11 of
the Securities Act of 1933 for their report on the unaudited
financial information because that report is not a
report or a part of the registration
statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of Sections 7 and 11 of the Act.

36



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##### Table of Contents






PART II  OTHER
INFORMATION




ITEM 1.  Legal
Proceedings

None.




ITEM 2.  Changes in
Securities and Use of Proceeds and Issuer Purchases of Equity
Securities

|               |  |              |        |            |  |                  |       |                    |  |  |   |  |  |  |   | 
|-------------- |  | ------------ | ------ | ---------- |  | ---------------- | ----- | ------------------ |  |  | - |  |  |  | - | 
|               |  |              |        |            |  | (c)              |       |                   
|               |  |              |        |            |  | Total Number     |       | (d)               
|               |  | (a)          |        |            |  | of Shares        |       | Maximum Number    
|               |  | Total        |        | (b)        |  | Purchased as     |       | of Shares that May
|               |  | Number of    |        | Average    |  | Part of Publicly |       | Yet Be Purchased  
|               |  | Shares       |        | Price Paid |  | Announced Plans  |       | Under the Plans   
|Period         |  | Purchased(1) |        | per Share  |  | or Programs      |       | or Programs       
|               |  |              |        |            |  |                  |       |                   
|January, 2004  |  |              | 24,870 |            |  | $                | 37.09 |                    |  |  |  |  |  |  |  | 
|February, 2004 |  |              |       |            |  |                  |      |                    |  |  |  |  |  |  |  | 
|March, 2004    |  |              |       |            |  |                  |      |                    |  |  |  |  |  |  |  | 
|               |  |              |        |            |  |                  |       |                    |  |  |   |  |  |  |   | 
|Total          |  |              | 24,870 |            |  | $                | 37.09 |                    |  |  |  |  |  |  |  | 
|               |  |              |        |            |  |                  |       |                    |  |  |   |  |  |  |   | 



---



| |                                                                               
| | ------------------------------------------------------------------------------
| | (1)Shares
    were received in payment of the exercise price of stock options.




ITEM 3.  Defaults upon
Senior Securities

None.




ITEM 4.  Submission of
Matters to a Vote of Securities Holders

None.




ITEM 5.  Other
Information

None.




ITEM 6.  Exhibits and
Reports on Form 8-K

a.) Exhibits:

| |     |    |  |                                                                                                                                                            
| | --- | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | *15 | .1 |  | Awareness Letter 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.

b.) Reports on Form 8-K:

Three reports on Form 8-K were filed or
furnished by the Company during the three months ended
March 31, 2004:



| |       |                                                                                                                                                                                           
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i.)   | A Current Report on Form 8-K dated
    January 19, 2004 was furnished on January 20, 2004;
    Item 7(c) and Item 12, reporting earnings results for
    the fiscal year 2003.            
|
| | ii.)  | A Current Report on Form 8-K dated
    January 27, 2004 was furnished on January 29, 2004;
    Item 7(c), Item 9, regarding presentation of certain
    data to investors.                
|
| | iii.) | A Current Report on Form 8-K dated
    February 2, 2004 was filed on February 2, 2004;
    Item 5 and Item 7(c), announcing the completion of its
    merger with Reunion Bancshares, Inc.



---

* Filed herewith

37



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##### Table of Contents






SIGNATURES

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/ PAUL B. MURPHY, JR.Paul B. Murphy, Jr.       |  | Director and Chief
    Executive Officer
    (Principal Executive Officer)                 |  | May 3, 2004
|                                                
|/s/ RANDALL E. MEYERRandall E. Meyer             |  | Executive Vice President
    and Chief Financial Officer
    (Principal Financial Officer) |  | May 3, 2004
|                                                
|/s/ SCOTT J. MCLEANScott J. McLean               |  | President                                                                                  |  | May 3, 2004
|                                                
|/s/ LAURENCE L. LEHMAN IIILaurence L. Lehman III |  | Senior Vice President and Controller
    (Principal Accounting Officer)                    |  | May 3, 2004

38



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##### Table of Contents



EXHIBIT INDEX

|        |     |             |  |                                                                                                                                                            
|------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|       
|        | *15 | .1          |  | Awareness Letter 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.



---

* Filed herewith