##### Table of Contents









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 September 30,
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 70,042,590 shares of the
Registrants Common Stock outstanding as of the close of
business on November 3, 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
    Registered Public Accounting Firm                                                                          |      |    | 2 | 
|                                                                                                       | Condensed Consolidated
    Balance Sheet as of September 30, 2004 and
    December 31, 2003 (unaudited)                              |      |    | 3 | 
|                                                                                                       | Condensed Consolidated
    Statement of Income for the Three and Nine Months Ended
    September 30, 2004 and 2003 (unaudited)       |      |    | 4 | 
|                                                                                                       | Condensed Consolidated
    Statement of Changes in Shareholders Equity for the Nine
    Months Ended September 30, 2004 (unaudited) |      |    | 5 | 
|                                                                                                       | Condensed Consolidated
    Statement of Cash Flows for the Nine Months Ended
    September 30, 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 |                                                                                                                                      |      | 18 |  
|Item
    3.  Quantitative and Qualitative Disclosures About
    Market Risk                            |                                                                                                                                      |      | 42 |  
|Item 4.  Controls
    and Procedures                                                                   |                                                                                                                                      |      | 42 |  
|PART II.  OTHER
    INFORMATION                                                                        |                                                                                                                                      |      |    |  
|Item 1.  Legal
    Proceedings                                                                         |                                                                                                                                      |      | 44 |  
|Item 2.  Changes
    in Securities and Use of Proceeds and Issuer Purchases of Equity
    Securities   |                                                                                                                                      |      | 44 |  
|Item 3.  Defaults
    upon Senior Securities                                                           |                                                                                                                                      |      | 44 |  
|Item
    4.  Submission of Matters to a Vote of Securities
    Holders                                 |                                                                                                                                      |      | 44 |  
|Item 5.  Other
    Information                                                                         |                                                                                                                                      |      | 44 |  
|Item
    6.  Exhibits                                                                                  |                                                                                                                                      |      | 44 |  
|Signatures                                                                                             |                                                                                                                                      |      | 45 |  
|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 REGISTERED PUBLIC
ACCOUNTING FIRM

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
September 30, 2004, and the related condensed consolidated
statement of income for the three-month and nine-month periods
ended September 30, 2004 and 2003, the condensed
consolidated statement of changes in shareholders equity
for the nine-month period ended September 30, 2004, and the
condensed consolidated statement of cash flows for the
nine-month periods ended September 30, 2004 and 2003. These
interim financial statements are the responsibility of the
Companys management.

We conducted our review in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). 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 the standards of the Public
Company Accounting Oversight Board, 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 the
Standards of the Public Company Accounting Oversight Board
(United States), 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 condensed
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

November 4, 2004


2



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEET

(unaudited)


|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |           |           | 
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------ | --------- | - | --------- | --------- | --------- | 
|                                                                                         |                                                                                                                                                                                                               | September 30,                              |           | December 31,
|                                                                                         |                                                                                                                                                                                                               | 2004                                       |           | 2003        
|                                                                                         |                                                                                                                                                                                                               |                                            |           |             
|                                                                                         |                                                                                                                                                                                                               |                                           
|                                                                                         |                                                                                                                                                                                                               | (Dollars in thousands, except             
|                                                                                         |                                                                                                                                                                                                               | per share amounts)                        
|ASSETS                                                                                  
|Cash and due from banks                                                                  |                                                                                                                                                                                                               | $                                          | 246,002   |              |           | $ | 390,890   |          
|Federal funds sold and other cash equivalents                                            |                                                                                                                                                                                                               |                                            | 75,848    |              |           |   | 94,908    |          
|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|                                                                                         | Total cash and cash equivalents                                                                                                                                                                               |                                            |           | 321,850      |           |   |           | 485,798   |          
|Securities available for sale (including $409,573
    and $254,235 pledged to creditors) |                                                                                                                                                                                                               |                                            | 1,702,393 |              |           |   | 1,549,398 |          
|Loans held for sale                                                                      |                                                                                                                                                                                                               |                                            | 96,022    |              |           |   | 96,899    |          
|Loans held for investment, net of allowance for
    loan losses of $49,203 and $43,008   |                                                                                                                                                                                                               |                                            | 4,084,922 |              |           |   | 3,448,665 |          
|Premises and equipment, net                                                              |                                                                                                                                                                                                               |                                            | 140,815   |              |           |   | 117,951   |          
|Accrued interest receivable                                                              |                                                                                                                                                                                                               |                                            | 25,521    |              |           |   | 21,630    |          
|Goodwill                                                                                 |                                                                                                                                                                                                               |                                            | 54,998    |              |           |   | 25,647    |          
|Core deposit intangibles                                                                 |                                                                                                                                                                                                               |                                            | 9,854     |              |           |   | 6,185     |          
|Other assets                                                                             |                                                                                                                                                                                                               |                                            | 196,995   |              |           |   | 193,563   |          
|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|                                                                                         |                                                                                                                                                                                                               | Total assets                               |           | $            | 6,633,370 |   |           | $         | 5,945,736 | 
|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|                                                                                        
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                
|Deposits:                                                                                |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|                                                                                         | Demand  noninterest-bearing                                                                                                                                                                                  |                                            | $         | 1,593,652    |           |   | $         | 1,513,038 |          
|                                                                                         | Demand  interest-bearing                                                                                                                                                                                     |                                            |           | 69,531       |           |   |           | 43,452    |          
|                                                                                         | Money market accounts                                                                                                                                                                                         |                                            |           | 1,865,381    |           |   |           | 1,709,755 |          
|                                                                                         | Savings                                                                                                                                                                                                       |                                            |           | 144,797      |           |   |           | 131,059   |          
|                                                                                         | Time, $100 and over                                                                                                                                                                                           |                                            |           | 800,944      |           |   |           | 642,590   |          
|                                                                                         | Other time                                                                                                                                                                                                    |                                            |           | 330,157      |           |   |           | 363,345   |          
|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|                                                                                         |                                                                                                                                                                                                               | Total deposits                             |           |              | 4,804,462 |   |           |           | 4,403,239 | 
|Securities sold under repurchase agreements                                              |                                                                                                                                                                                                               |                                            | 367,428   |              |           |   | 285,571   |          
|Other borrowings                                                                         |                                                                                                                                                                                                               |                                            | 723,184   |              |           |   | 679,812   |          
|Senior subordinated debenture                                                            |                                                                                                                                                                                                               |                                            | 75,000    |              |           |   |          |          
|Junior subordinated deferrable interest debentures                                       |                                                                                                                                                                                                               |                                            | 87,630    |              |           |   | 51,547    |          
|Accrued interest payable                                                                 |                                                                                                                                                                                                               |                                            | 2,379     |              |           |   | 1,822     |          
|Other liabilities                                                                        |                                                                                                                                                                                                               |                                            | 23,502    |              |           |   | 24,424    |          
|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|                                                                                         |                                                                                                                                                                                                               | Total liabilities                          |           |              | 6,083,585 |   |           |           | 5,446,415 | 
|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|Commitments and contingencies                                                            |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|Shareholders equity:                                                                    |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|                                                                                         | Preferred stock  $0.01 par value,
    1,000,000 shares authorized; 0 issued and outstanding at
    September 30, 2004 and December 31, 2003                                                                  |                                            |           |             |           |   |           |          |          
|                                                                                         | Common stock  $1 par value,
    150,000,000 shares authorized; 69,234,523 issued and
    69,154,085 outstanding at September 30, 2004; 68,458,286
    issued and 68,427,798 outstanding at December 31, 2003 |                                            |           | 69,235       |           |   |           | 68,458    |          
|                                                                                         | Additional paid-in capital                                                                                                                                                                                    |                                            |           | 74,771       |           |   |           | 65,380    |          
|                                                                                         | Retained earnings                                                                                                                                                                                             |                                            |           | 413,048      |           |   |           | 368,069   |          
|                                                                                         | Deferred compensation                                                                                                                                                                                         |                                            |           | (5,736       | )         |   |           | (4,215    | )        
|                                                                                         | Accumulated other comprehensive income (loss)                                                                                                                                                                 |                                            |           | (185         | )         |   |           | 2,050     |          
|                                                                                         | Treasury stock, at cost 
    80,438 shares and 30,488 shares, respectively                                                                                                                                   |                                            |           | (1,348       | )         |   |           | (421      | )        
|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|                                                                                         |                                                                                                                                                                                                               | Total shareholders equity                 |           |              | 549,785   |   |           |           | 499,321   | 
|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          
|                                                                                         |                                                                                                                                                                                                               | Total liabilities and shareholders equity |           | $            | 6,633,370 |   |           | $         | 5,945,736 | 
|                                                                                         |                                                                                                                                                                                                               |                                            |           |              |           |   |           |          

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

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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENT OF
INCOME


(unaudited)


|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |         |        |         | 
|-------------------------- | -------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------- | ----------------- | ------ | ------ | ----- | ------ | ------ | ------ | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                           |                                              |                                                  |                                                         |                  
|                           |                                              | Three Months Ended                               |                                                         | Nine Months Ended
|                           |                                              | September 30,                                    |                                                         | September 30,    
|                           |                                              |                                                  |                                                         |                  
|                           |                                              | 2004                                             |                                                         | 2003              |        | 2004   |       | 2003  
|                           |                                              |                                                  |                                                         |                   |        |        |       |       
|                           |                                              |                                                 
|                           |                                              | (Dollars in thousands, except per share amounts)
|Interest income:           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           | Loans                                        |                                                  | $                                                       | 56,259            |        |        | $     | 48,359 |        |        | $      | 157,180 |        |         | $      | 140,503 |       
|                           | Securities:                                  |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |         |       
|                           |                                              | Taxable                                          |                                                         |                   | 13,558 |        |       |        | 10,742 |        |        |         | 38,724 |         |        |         | 31,727 |        
|                           |                                              | Tax-exempt                                       |                                                         |                   | 2,585  |        |       |        | 1,572  |        |        |         | 6,646  |         |        |         | 4,027  |        
|                           | Federal funds sold and other                 |                                                  |                                                         | 192               |        |        |       | 303    |        |        |        | 500     |        |         |        | 793     |       
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           |                                              |                                                  | Total interest income                                   |                   |        | 72,594 |       |        |        | 60,976 |        |         |        | 203,050 |        |         |        | 177,050 | 
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|Interest expense:          |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           | Deposits                                     |                                                  |                                                         | 10,028            |        |        |       | 9,106  |        |        |        | 26,506  |        |         |        | 28,747  |       
|                           | Borrowings                                   |                                                  |                                                         | 4,590             |        |        |       | 2,105  |        |        |        | 10,182  |        |         |        | 6,281   |       
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           |                                              |                                                  | Total interest expense                                  |                   |        | 14,618 |       |        |        | 11,211 |        |         |        | 36,688  |        |         |        | 35,028  | 
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           |                                              |                                                  | Net interest income                                     |                   |        | 57,976 |       |        |        | 49,765 |        |         |        | 166,362 |        |         |        | 142,022 | 
|Provision for loan losses  |                                              |                                                  | 3,000                                                   |                   |        |        | 3,000 |        |        |        | 8,000  |         |        |         | 9,000  |        
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           |                                              |                                                  | Net interest income after provision for loan
    losses |                   |        | 54,976 |       |        |        | 46,765 |        |         |        | 158,362 |        |         |        | 133,022 | 
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|Noninterest income:        |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           | Service charges on deposit accounts          |                                                  |                                                         | 11,184            |        |        |       | 10,551 |        |        |        | 33,414  |        |         |        | 29,484  |       
|                           | Investment services                          |                                                  |                                                         | 3,164             |        |        |       | 2,489  |        |        |        | 9,019   |        |         |        | 7,214   |       
|                           | Other fee income                             |                                                  |                                                         | 6,214             |        |        |       | 6,816  |        |        |        | 16,566  |        |         |        | 14,423  |       
|                           | Bank-owned life insurance income             |                                                  |                                                         | 2,154             |        |        |       | 1,209  |        |        |        | 5,551   |        |         |        | 3,594   |       
|                           | Other operating income                       |                                                  |                                                         | 2,594             |        |        |       | 1,767  |        |        |        | 5,189   |        |         |        | 4,052   |       
|                           | Gain on sale of loans, net                   |                                                  |                                                         | 684               |        |        |       | 1,569  |        |        |        | 1,973   |        |         |        | 3,815   |       
|                           | Gain (loss) on sale of securities, net       |                                                  |                                                         | (46               | )      |        |       | 31     |        |        |        | (45     | )      |         |        | 1,181   |       
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           |                                              |                                                  | Total noninterest income                                |                   |        | 25,948 |       |        |        | 24,432 |        |         |        | 71,667  |        |         |        | 63,763  | 
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|Noninterest expenses:      |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           | Salaries and employee benefits               |                                                  |                                                         | 30,429            |        |        |       | 27,878 |        |        |        | 89,756  |        |         |        | 75,781  |       
|                           | Occupancy expense                            |                                                  |                                                         | 9,395             |        |        |       | 8,006  |        |        |        | 26,540  |        |         |        | 21,391  |       
|                           | Professional services                        |                                                  |                                                         | 3,174             |        |        |       | 2,498  |        |        |        | 8,274   |        |         |        | 6,712   |       
|                           | Core deposit intangible amortization expense |                                                  |                                                         | 799               |        |        |       | 695    |        |        |        | 2,710   |        |         |        | 695     |       
|                           | Other operating expenses                     |                                                  |                                                         | 9,965             |        |        |       | 12,281 |        |        |        | 29,532  |        |         |        | 27,454  |       
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           |                                              |                                                  | Total noninterest expenses                              |                   |        | 53,762 |       |        |        | 51,358 |        |         |        | 156,812 |        |         |        | 132,033 | 
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           |                                              |                                                  | Income before income taxes                              |                   |        | 27,162 |       |        |        | 19,839 |        |         |        | 73,217  |        |         |        | 64,752  | 
|Provision for income taxes |                                              |                                                  | 7,496                                                   |                   |        |        | 6,459 |        |        |        | 22,043 |         |        |         | 20,335 |        
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           | Net income                                   |                                                  | $                                                       | 19,666            |        |        | $     | 13,380 |        |        | $      | 51,174  |        |         | $      | 44,417  |       
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|Earnings per common share: |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           | Basic                                        |                                                  | $                                                       | 0.28              |        |        | $     | 0.20   |        |        | $      | 0.74    |        |         | $      | 0.65    |       
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|                           | Diluted                                      |                                                  | $                                                       | 0.28              |        |        | $     | 0.19   |        |        | $      | 0.73    |        |         | $      | 0.64    |       
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        
|Dividends per common share |                                              | $                                                | 0.03                                                    |                   |        | $      | 0.03  |        |        | $      | 0.09   |         |        | $       | 0.03   |        
|                           |                                              |                                                  |                                                         |                   |        |        |       |        |        |        |        |         |        |         |        |        

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         |  |              |        |              
|                            |                                                                                                                                | Preferred Stock                                  |   | Common Stock |  | Additional |   |          |  |          |            | Comprehensive |  |              |        | Total        
|                            |                                                                                                                                |                                                  |   |              |  | Paid-In    |   | Retained |  | Deferred |            | Income        |  | Treasury     |        | Shareholders
|                            |                                                                                                                                | Shares                                           |   | Dollars      |  | Shares     |   | Dollars  |  | Capital  |            | Earnings      |  | Compensation |        | (Loss)        |  | Stock |        | Equity
|                            |                                                                                                                                |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |       
|                            |                                                                                                                                |                                                 
|                            |                                                                                                                                | (Dollars in thousands, except per share amounts)
|BALANCE, DECEMBER 31, 2003  |                                                                                                                                |                                                  |  |              |  | $          |  |          |  |          | 68,458,286 |               |  | $            | 68,458 |               |  | $     | 65,380 |        |  | $ | 368,069 |        |   | $ | (4,215 | )      |   | $ | 2,050 |        |   | $ | (421   | )    |   | $ | 499,321 |       
|                            | Exercise of stock options                                                                                                      |                                                  |   |              |  |            |   |          |  |          |            | 635,484       |  |              |        | 636           |  |       |        | 6,631  |  |   |         |        |   |   |        |        |   |   |       |        |   |   |        |      |   |   |         | 7,267  |  
|                            | Issuance of restricted common stock, net of
    shares forfeited into Treasury                                                 |                                                  |   |              |  |            |   |          |  |          |            | 133,125       |  |              |        | 133           |  |       |        | 2,636  |  |   |         |        |   |   |        | (2,769 | ) |   |       |        |   |   |        |      |   |   |         |       |  
|                            | Issuance of non-employee director stock                                                                                        |                                                  |   |              |  |            |   |          |  |          |            | 7,628         |  |              |        | 8             |  |       |        | 124    |  |   |         |        |   |   |        |        |   |   |       |        |   |   |        |      |   |   |         | 132    |  
|                            | Purchase of treasury stock                                                                                                     |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         |        |   |   |        |        |   |   |       |        |   |   |        | (927 | ) |   |         | (927   | )
|                            | Deferred compensation amortization                                                                                             |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         |        |   |   |        | 1,248  |   |   |       |        |   |   |        |      |   |   |         | 1,248  |  
|                            | Cash dividends, $0.09 per common share                                                                                         |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         | (6,195 | ) |   |        |        |   |   |       |        |   |   |        |      |   |   |         | (6,195 | )
|                            | Comprehensive income:                                                                                                          |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         |        |   |   |        |        |   |   |       |        |   |   |        |      |   |   |         |        |  
|                            | Net income for the nine months ended
    September 30, 2004                                                                    |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         | 51,174 |   |   |        |        |   |   |       |        |   |   |        |      |   |   |         | 51,174 |  
|                            | Net change in unrealized appreciation
    (depreciation) on securities available for sale, net of
    deferred taxes of $1,143 |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         |        |   |   |        |        |   |   |       | (1,864 | ) |   |        |      |   |   |         | (1,864 | )
|                            | Reclassification adjustment for losses included
    in net income, net of deferred taxes of $228                               |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         |        |   |   |        |        |   |   |       | (371   | ) |   |        |      |   |   |         | (371   | )
|                            |                                                                                                                                |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         |        |   |   |        |        |   |   |       |        |   |   |        |      |   |   |         |       
|                            | Total comprehensive income                                                                                                     |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         |        |   |   |        |        |   |   |       |        |   |   |        |      |   |   |         | 48,939 |  
|                            |                                                                                                                                |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         |        |   |   |        |        |   |   |       |        |   |   |        |      |   |   |         |       
|BALANCE, SEPTEMBER 30, 2004 |                                                                                                                                |                                                  |  |              |  | $          |  |          |  |          | 69,234,523 |               |  | $            | 69,235 |               |  | $     | 74,771 |        |  | $ | 413,048 |        |   | $ | (5,736 | )      |   | $ | (185  | )      |   | $ | (1,348 | )    |   | $ | 549,785 |       
|                            |                                                                                                                                |                                                  |   |              |  |            |   |          |  |          |            |               |  |              |        |               |  |       |        |        |  |   |         |        |   |   |        |        |   |   |       |        |   |   |        |      |   |   |         |       

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)


|                                                 |                                                                                       |                                                                           |                                   |                                           |        |       |          |            |        |         |          |  
|------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------- | ----------------------------------------- | ------ | ----- | -------- | ---------- | ------ | ------- | -------- | -
|                                                 |                                                                                       |                                                                          
|                                                 |                                                                                       | Nine Months Ended                                                        
|                                                 |                                                                                       | September 30,                                                            
|                                                 |                                                                                       |                                                                          
|                                                 |                                                                                       | 2004                                                                      |                                   | 2003                                     
|                                                 |                                                                                       |                                                                           |                                   |                                          
|                                                 |                                                                                       |                                                                          
|                                                 |                                                                                       | (Dollars in thousands)                                                   
|Cash flows from operating activities:            |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|                                                 | Net income                                                                            |                                                                           | $                                 | 51,174                                    |        |       | $        | 44,417     |       
|                                                 | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                           |                                   |                                           |        |       |          |            |       
|                                                 |                                                                                       | Provision for loan losses                                                 |                                   |                                           | 8,000  |       |          |            | 9,000  |        
|                                                 |                                                                                       | Depreciation                                                              |                                   |                                           | 10,707 |       |          |            | 8,684  |        
|                                                 |                                                                                       | Recovery of valuation allowance on mortgage
    servicing rights, net     |                                   |                                           |       |       |          |            | (2,371 | )      
|                                                 |                                                                                       | Realized (gain) loss on securities available
    for sale, net            |                                   |                                           | 45     |       |          |            | (1,181 | )      
|                                                 |                                                                                       | (Gain) loss on sale of premises and equipment, net                        |                                   |                                           | (2     | )     |          |            | 1      |        
|                                                 |                                                                                       | Amortization and accretion of securities
    premiums and discounts, net |                                   |                                           | 4,346  |       |          |            | 8,911  |        
|                                                 |                                                                                       | Amortization of mortgage servicing rights                                 |                                   |                                           | 1,677  |       |          |            | 4,164  |        
|                                                 |                                                                                       | Amortization of computer software                                         |                                   |                                           | 4,873  |       |          |            | 3,532  |        
|                                                 |                                                                                       | Amortization of core deposit intangibles                                  |                                   |                                           | 2,710  |       |          |            | 695    |        
|                                                 |                                                                                       | Other amortization                                                        |                                   |                                           | 1,248  |       |          |            | 1,041  |        
|                                                 |                                                                                       | Income tax benefit from exercise of stock options                         |                                   |                                           | 2,135  |       |          |            | 1,593  |        
|                                                 |                                                                                       | Net change in:                                                            |                                   |                                           |        |       |          |            |        |        
|                                                 |                                                                                       |                                                                           | Loans held for sale               |                                           |        | 877   |          |            |        | 1,023   |         
|                                                 |                                                                                       |                                                                           | Other assets and liabilities, net |                                           |        | 2,494 |          |            |        | (18,882 | )       
|                                                 |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|                                                 | Net cash provided by operating activities                                             |                                                                           |                                   | 90,284                                    |        |       |          | 60,627     |       
|                                                 |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|Cash flows from investing activities:            |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|                                                 | Proceeds from maturity and call of securities
    available for sale                  |                                                                           |                                   | 36,615                                    |        |       |          | 45,709     |       
|                                                 | Proceeds from sale of securities available for
    sale                               |                                                                           |                                   | 794,031                                   |        |       |          | 510,486    |       
|                                                 | Principal paydowns of mortgage-backed securities
    available for sale               |                                                                           |                                   | 228,351                                   |        |       |          | 459,508    |       
|                                                 | Purchase of securities available for sale                                             |                                                                           |                                   | (1,176,021                                | )      |       |          | (1,289,000 | )     
|                                                 | Purchase of Federal Reserve Bank stock                                                |                                                                           |                                   | (3,444                                    | )      |       |          | (28        | )     
|                                                 | Purchase of Federal Home Loan Bank stock                                              |                                                                           |                                   | (24,512                                   | )      |       |          | (2,331     | )     
|                                                 | Proceeds from redemption of Federal Home
    Loan Bank stock                          |                                                                           |                                   | 15,102                                    |        |       |          |           |       
|                                                 | Net increase in loans held for investment                                             |                                                                           |                                   | (492,923                                  | )      |       |          | (115,495   | )     
|                                                 | Proceeds from sale of premises and equipment                                          |                                                                           |                                   | 733                                       |        |       |          | 64         |       
|                                                 | Purchase of premises and equipment                                                    |                                                                           |                                   | (36,809                                   | )      |       |          | (20,326    | )     
|                                                 | Purchase of mortgage servicing rights                                                 |                                                                           |                                   |                                          |        |       |          | (264       | )     
|                                                 | Purchase of Bank-owned life insurance policies                                        |                                                                           |                                   |                                          |        |       |          | (30,000    | )     
|                                                 | Acquisition of Maxim Financial Holdings, Inc.,
    net of cash acquired of $142,658   |                                                                           |                                   |                                          |        |       |          | 79,618     |       
|                                                 | Acquisition of Reunion Bancshares, Inc., net of
    cash acquired of $30,596          |                                                                           |                                   | (19,404                                   | )      |       |          |           |       
|                                                 | Investment in unconsolidated equity investees                                         |                                                                           |                                   | (2,431                                    | )      |       |          | (1,076     | )     
|                                                 |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|                                                 |                                                                                       |                                                                           |                                   | Net cash used in investing activities     |        |       | (680,712 | )          |        |         | (363,135 | )
|                                                 |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|Cash flows from financing activities:            |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|                                                 | Net increase (decrease) in noninterest-bearing
    demand deposits                    |                                                                           |                                   | 22,327                                    |        |       |          | (18,316    | )     
|                                                 | Net increase in time deposits                                                         |                                                                           |                                   | 104,986                                   |        |       |          | 107,276    |       
|                                                 | Net increase in other interest-bearing deposits                                       |                                                                           |                                   | 66,845                                    |        |       |          | 66,708     |       
|                                                 | Net increase (decrease) in securities sold under
    repurchase agreements            |                                                                           |                                   | 81,857                                    |        |       |          | (194       | )     
|                                                 | Issuance of junior subordinated deferrable
    interest debentures, net of cost       |                                                                           |                                   | 36,083                                    |        |       |          |           |       
|                                                 | Issuance of senior subordinated debentures                                            |                                                                           |                                   | 75,000                                    |        |       |          |           |       
|                                                 | Net increase (decrease) in other short-term
    borrowings                            |                                                                           |                                   | 239,504                                   |        |       |          | (85,276    | )     
|                                                 | Proceeds from long-term borrowings                                                    |                                                                           |                                   | 2,200                                     |        |       |          | 200,000    |       
|                                                 | Payments on long-term borrowings                                                      |                                                                           |                                   | (200,332                                  | )      |       |          | (100,290   | )     
|                                                 | Payments of cash dividends                                                            |                                                                           |                                   | (6,195                                    | )      |       |          | (1,707     | )     
|                                                 | Net proceeds from exercise of stock options                                           |                                                                           |                                   | 5,132                                     |        |       |          | 3,952      |       
|                                                 | Purchase of treasury stock                                                            |                                                                           |                                   | (927                                      | )      |       |          |           |       
|                                                 |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|                                                 |                                                                                       |                                                                           |                                   | Net cash provided by financing activities |        |       | 426,480  |            |        |         | 172,153  |  
|                                                 |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|Net decrease in cash and cash equivalents        |                                                                                       |                                                                           | (163,948                          | )                                         |        |       | (130,355 | )         
|Cash and cash equivalents at beginning of period |                                                                                       |                                                                           | 485,798                           |                                           |        |       | 535,364  |           
|                                                 |                                                                                       |                                                                           |                                   |                                           |        |       |          |           
|Cash and cash equivalents at end of period       |                                                                                       | $                                                                         | 321,850                           |                                           |        | $     | 405,009  |           
|                                                 |                                                                                       |                                                                           |                                   |                                           |        |       |          |           

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
September 30, 2004 and December 31, 2003, consolidated
net income for the three and nine months ended
September 30, 2004 and 2003, consolidated cash flows for
the nine months ended September 30, 2004 and 2003, and
consolidated changes in shareholders equity for the nine
months ended September 30, 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 December 16, 2003, the American Institute
of Certified Public Accountants (AICPA) issued
Statement of Position 03-3 (SOP 03-3), Accounting
for Certain Loans or Debt Securities Acquired in a Transfer.
SOP 03-3 provides guidance on the accounting for differences
between contractual and expected cash flows from the
purchasers initial investment in loans or debt securities
acquired in a transfer, if those differences are attributable,
at least in part, to credit quality. Among other things, SOP
03-3: (1) prohibits the recognition of the excess of
contractual cash flows over expected cash flows as an adjustment
of yield, loss accrual, or valuation allowance at the time of
purchase; (2) requires that subsequent increases in
expected cash flows be recognized prospectively through an
adjustment of yield; and (3) requires the subsequent
decreases in expected cash flows be recognized as an impairment.
In addition, SOP 03-3 prohibits the creation or carrying over of
a valuation allowance in the initial accounting of all loans
within its scope that are acquired in a transfer. SOP 03-3
becomes effective for loans or debt securities acquired in
fiscal years beginning after December 15, 2004. The Company
does not expect the requirements of SOP 03-3 to have a material
impact on its financial condition or results of operations.

On March 9, 2004, the Securities and
Exchange Commission staff issued Staff Accounting Bulletin
No. 105 (SAB 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 requirements of SAB No. 105 did not have a
material impact on the financial condition or results of
operations of the Company.

7



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


On March 31, 2004, the Financial Accounting
Standards Board (FASB) issued an exposure draft
entitled Share Based Paymentwhich would amend Statement
of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation,(SFAS No. 123), and Statement of
Financial Accounting Standards No. 95, Statement of Cash
Flows. Among other items, the new standard would require the
expensing of stock options issued by the Company. The new
standard, as proposed, would be effective January 1, 2005.
Throughout 2004, the FASB has continued to deliberate on
different aspects of a new standard and currently expects to
issue a final standard in the fourth quarter of 2004. Although
the Company has not yet completed an analysis to quantify the
exact impact the new standard will have on its future financial
performance, the Stock-Based Compensationdisclosures
provide detail as to the Companys financial performance as
if the Company had applied the fair value based method and
recognition provision of SFAS No. 123 to stock-based
compensation in the current reporting periods.

On June 4, 2004, the Emerging Issues Task
Force (EITF) issued EITF Issue 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments. EITF 03-1 provides guidance for
determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an
impairment loss. An investment is considered impaired if the
fair value of the investment is less than its cost. Generally,
an impairment is considered other-than-temporary unless:
(i) the investor has the ability and intent to hold an
investment for a reasonable period of time sufficient for an
anticipated recovery of fair value up to or beyond the cost of
the investment; and (ii) evidence indicating that the cost
of the investment is recoverable within a reasonable period of
time outweighs evidence to the contrary. If impairment is
determined to be other-than-temporary, an impairment loss should
be recognized equal to the difference between the
investments cost and its fair value. Certain disclosure
requirements of EITF 03-1 were adopted in 2003. The
recognition and measurement provisions were initially effective
for other-than-temporary impairment evaluations in reporting
periods beginning after June 15, 2004. In September 2004,
the effective date of these provisions was delayed until the
finalization of a FASB Staff Position (FSP) to
provide additional implementation guidance. Currently, the FASB
expects to issue the FSP no later than December 2004.



| |                  
| | -----------------
| | 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 FASB issued 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.

8



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


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                               |   | Nine Months Ended
|                                                   |             | September 30,                                    |   | September 30,    
|                                                   |             |                                                  |   |                  
|                                                   |             | 2004                                             |   | 2003              |  | 2004 |   | 2003  
|                                                   |             |                                                  |   |                   |  |      |   |       
|                                                   |             |                                                 
|                                                   |             | (Dollars in thousands, except per share amounts)
|Net income                                         |             |                                                  |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|                                                   | As reported |                                                  | $ | 19,666            |  |      | $ | 13,380 |  |  | $ | 51,174 |  |  | $ | 44,417 | 
|                                                   | Pro forma   |                                                  | $ | 18,910            |  |      | $ | 12,662 |  |  | $ | 49,263 |  |  | $ | 42,428 | 
|Stock-based compensation cost, net of income taxes |             |                                                  |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|                                                   | As reported |                                                  | $ | 338               |  |      | $ | 258    |  |  | $ | 811    |  |  | $ | 677    | 
|                                                   | Pro forma   |                                                  | $ | 1,094             |  |      | $ | 976    |  |  | $ | 2,723  |  |  | $ | 2,666  | 
|Basic earnings per common share                    |             |                                                  |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|                                                   | As reported |                                                  | $ | 0.28              |  |      | $ | 0.20   |  |  | $ | 0.74   |  |  | $ | 0.65   | 
|                                                   | Pro forma   |                                                  | $ | 0.27              |  |      | $ | 0.19   |  |  | $ | 0.72   |  |  | $ | 0.62   | 
|Diluted earnings per common share                  |             |                                                  |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|                                                   | As reported |                                                  | $ | 0.28              |  |      | $ | 0.19   |  |  | $ | 0.73   |  |  | $ | 0.64   | 
|                                                   | Pro forma   |                                                  | $ | 0.27              |  |      | $ | 0.18   |  |  | $ | 0.70   |  |  | $ | 0.61   | 

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
$51.5 million of junior subordinated deferrable interest
debentures issued in October 2003.

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 $29.2 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.

9



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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 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                  |  |                        | 29,155   |  
|Core deposit intangibles  |  |                        | 6,379    |  
|Other assets              |  |                        | 3,779    |  
|Deposits                  |  |                        | (207,026 | )
|Deposit premium           |  |                        | (39      | )
|Borrowings                |  |                        | (2,000   | )
|Other liabilities         |  |                        | (2,458   | )
|                          |  |                        |          |  
|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. The Lone Star CDI is being amortized over a
weighted average period of thirteen and one-third years with no
residual value.

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                                        |        | Pro forma        
|                                                                               |  | Three Months Ended                               |        | Nine Months Ended
|                                                                               |  | September 30,                                    |        | September 30,    
|                                                                               |  |                                                  |        |                  
|                                                                               |  | 2004                                             |        | 2003              |  | 2004 |        | 2003
|                                                                               |  |                                                  |        |                   |  |      |        |     
|                                                                               |  |                                                 
|                                                                               |  | (Dollars in thousands, except per share amounts)
|Net interest income after provision for loan
    losses and noninterest income |  | $                                                | 80,924 |                   |  | $    | 73,655 |      |  | $ | 230,723 |  |  | $ | 216,660 | 
|Income before income taxes                                                     |  |                                                  | 27,162 |                   |  |      | 20,237 |      |  |   | 73,284  |  |  |   | 70,908  | 
|Net income                                                                     |  |                                                  | 19,666 |                   |  |      | 13,643 |      |  |   | 51,221  |  |  |   | 48,708  | 
|Earnings per common share, basic                                               |  | $                                                | 0.28   |                   |  | $    | 0.20   |      |  | $ | 0.74    |  |  | $ | 0.72    | 
|Earnings per common share, diluted                                             |  | $                                                | 0.28   |                   |  | $    | 0.19   |      |  | $ | 0.73    |  |  | $ | 0.70    | 

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

On May 20, 2004, the Company and the Bank
entered into an Agreement and Plan of Merger with Klein
Bancshares, Inc. (Klein), whereby Klein would merge
into the Company. The merger transaction was completed on
October 1, 2004. Klein was the parent company of Klein Bank
located in northwest Harris County and Montgomery County, Texas.
The merger was a cash and common stock transaction valued at
$165.0 million. At September 30, 2004, Klein had total
assets of $590.8 million, total loans of
$162.0 million, and total deposits of $535.6 million.

10



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)




|   |           
|-- | ----------
|3. | Securities

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

|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |         |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |           |           | 
|------------------- | ------------------------------------- | ----------------------------------- | - | ----------------- | --------- | ---- | - | ---------- | ------ | ---------------- | - | ------ | ------- | ---- | - | ---------- | --------- |  | - | --------- | --------- |  | - | ----- | ------ |  | - | ------ | ------ | - | - | --------- | --------- | 
|                    |                                       |                                     |   |                  
|                    |                                       | September 30, 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 |                                     | $ | 315,633           |           |      | $ | 727        |        |                  | $ | (1,891 | )       |      | $ | 314,469    |           |  | $ | 250,359   |           |  | $ | 841   |        |  | $ | (102   | )      |   | $ | 251,098   |          
|                    | Mortgage-backed securities            |                                     |   | 1,096,789         |           |      |   | 4,758      |        |                  |   | (8,729 | )       |      |   | 1,092,818  |           |  |   | 1,101,988 |           |  |   | 7,078 |        |  |   | (8,320 | )      |   |   | 1,100,746 |          
|                    | Municipal securities                  |                                     |   | 242,060           |           |      |   | 7,882      |        |                  |   | (1,618 | )       |      |   | 248,324    |           |  |   | 152,927   |           |  |   | 5,905 |        |  |   | (754   | )      |   |   | 158,078   |          
|                    | Federal Reserve Bank stock            |                                     |   | 7,903             |           |      |   |           |        |                  |   |       |         |      |   | 7,903      |           |  |   | 4,459     |           |  |   |      |        |  |   |       |        |   |   | 4,459     |          
|                    | Federal Home Loan Bank stock          |                                     |   | 34,879            |           |      |   |           |        |                  |   |       |         |      |   | 34,879     |           |  |   | 25,469    |           |  |   |      |        |  |   |       |        |   |   | 25,469    |          
|                    | Other securities                      |                                     |   | 3,994             |           |      |   | 7          |        |                  |   | (1     | )       |      |   | 4,000      |           |  |   | 9,455     |           |  |   | 93    |        |  |   |       |        |   |   | 9,548     |          
|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |         |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |          
|                    |                                       | Total securities available for sale |   | $                 | 1,701,258 |      |   | $          | 13,374 |                  |   | $      | (12,239 | )    |   | $          | 1,702,393 |  |   | $         | 1,544,657 |  |   | $     | 13,917 |  |   | $      | (9,176 | ) |   | $         | 1,549,398 | 
|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |         |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |          

The following table displays the gross unrealized
losses and fair value of investments as of September 30,
2004 that were in a continuous unrealized loss position for the
periods indicated:

|                    |                                       |                                     |   |                        |         |       |   |            |        |       |   |            |         |  |   |        |        |   |   |         |         |  |   |        |         |  
|------------------- | ------------------------------------- | ----------------------------------- | - | ---------------------- | ------- | ----- | - | ---------- | ------ | ----- | - | ---------- | ------- |  | - | ------ | ------ | - | - | ------- | ------- |  | - | ------ | ------- | -
|                    |                                       |                                     |   |                        |         |      
|                    |                                       | Less Than 12 Months                 |   | Greater Than 12 Months |         | Total
|                    |                                       |                                     |   |                        |         |      
|                    |                                       | Fair                                |   | Unrealized             |         | Fair  |   | Unrealized |        | Fair  |   | Unrealized
|                    |                                       | Value                               |   | Loss                   |         | Value |   | Loss       |        | Value |   | Loss      
|                    |                                       |                                     |   |                        |         |       |   |            |        |       |   |           
|                    |                                       |                                    
|                    |                                       | (Dollars in thousands)             
|Available for sale: |                                       |                                     |   |                        |         |       |   |            |        |       |   |            |         |  |   |        |        |   |   |         |         |  |   |       
|                    | U.S. Government and agency securities |                                     | $ | 183,439                |         |       | $ | (1,891     | )      |       | $ |           |         |  | $ |       |        |   | $ | 183,439 |         |  | $ | (1,891 | )      
|                    | Mortgage-backed securities            |                                     |   | 483,861                |         |       |   | (4,583     | )      |       |   | 212,574    |         |  |   | (4,146 | )      |   |   | 696,435 |         |  |   | (8,729 | )      
|                    | Municipal securities                  |                                     |   | 59,261                 |         |       |   | (1,251     | )      |       |   | 12,672     |         |  |   | (367   | )      |   |   | 71,933  |         |  |   | (1,618 | )      
|                    | Federal Reserve Bank stock            |                                     |   |                       |         |       |   |           |        |       |   |           |         |  |   |       |        |   |   |        |         |  |   |       |        
|                    | Federal Home Loan Bank stock          |                                     |   |                       |         |       |   |           |        |       |   |           |         |  |   |       |        |   |   |        |         |  |   |       |        
|                    | Other securities                      |                                     |   | 66                     |         |       |   | (1         | )      |       |   |           |         |  |   |       |        |   |   | 66      |         |  |   | (1     | )      
|                    |                                       |                                     |   |                        |         |       |   |            |        |       |   |            |         |  |   |        |        |   |   |         |         |  |   |       
|                    |                                       | Total securities available for sale |   | $                      | 726,627 |       |   | $          | (7,726 | )     |   | $          | 225,246 |  |   | $      | (4,513 | ) |   | $       | 951,873 |  |   | $      | (12,239 | )
|                    |                                       |                                     |   |                        |         |       |   |            |        |       |   |            |         |  |   |        |        |   |   |         |         |  |   |       

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 and the
Companys intent and ability to hold the securities until
their recovery, none of the unrealized loss on securities should
be considered other than temporary.

11



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)




|   |                     
|-- | --------------------
|4. | Comprehensive Income

Comprehensive income consists of the following:

|                                                                                                                   |  |                        |        |                   |  |      |         |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ------ | ----------------- |  | ---- | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                   |  |                        |        |                  
|                                                                                                                   |  | Three Months Ended     |        | Nine Months Ended
|                                                                                                                   |  | September 30,          |        | September 30,    
|                                                                                                                   |  |                        |        |                  
|                                                                                                                   |  | 2004                   |        | 2003              |  | 2004 |         | 2003
|                                                                                                                   |  |                        |        |                   |  |      |         |     
|                                                                                                                   |  |                       
|                                                                                                                   |  | (Dollars in thousands)
|Net income                                                                                                         |  | $                      | 19,666 |                   |  | $    | 13,380  |      |  | $ | 51,174 |   |  | $ | 44,417  |  
|Net change in unrealized appreciation
    (depreciation) on securities available for sale, net of deferred
    tax |  |                        | 20,929 |                   |  |      | (14,207 | )    |  |   | (1,864 | ) |  |   | (12,361 | )
|Reclassification adjustment for (gains) losses
    included in net income, net of deferred tax                     |  |                        | (538   | )                 |  |      | 190     |      |  |   | (371   | ) |  |   | (1,554  | )
|                                                                                                                   |  |                        |        |                   |  |      |         |      |  |   |        |   |  |   |         |  
|Total comprehensive income (loss)                                                                                  |  | $                      | 40,057 |                   |  | $    | (637    | )    |  | $ | 48,939 |   |  | $ | 30,502  |  
|                                                                                                                   |  |                        |        |                   |  |      |         |      |  |   |        |   |  |   |         |  



|   |                          
|-- | -------------------------
|5. | 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 loan
type, interest rates and original loan terms (primarily 15 and
30 years). Fair value is estimated based on the objective
characteristics of the servicing portfolio and is derived
through discounted cash flow analysis. These analyses also take
into consideration existing conditions in the secondary
servicing markets as well as recently executed servicing
transactions. 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.

12



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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     |       | Nine Months Ended
|                               |              | September 30,          |       | September 30,    
|                               |              |                        |       |                  
|                               |              | 2004                   |       | 2003              |   | 2004 |       | 2003  
|                               |              |                        |       |                   |   |      |       |       
|                               |              |                       
|                               |              | (Dollars in thousands)
|Mortgage servicing rights:     |              |                        |       |                   |   |      |       |        |   |   |       |        |   |   |        |       
|Balance, beginning of period   |              | $                      | 7,593 |                   |   | $    | 9,310 |        |   | $ | 8,299 |        |   | $ | 10,628 |       
|                               | Originations |                        |       | 257               |   |      |       | 827    |   |   |       | 757    |   |   |        | 1,854  |  
|                               | Purchases    |                        |       |                  |   |      |       | 15     |   |   |       |       |   |   |        | 264    |  
|                               | Amortization |                        |       | (471              | ) |      |       | (1,570 | ) |   |       | (1,677 | ) |   |        | (4,164 | )
|                               |              |                        |       |                   |   |      |       |        |   |   |       |        |   |   |        |       
|Balance, end of period         |              |                        | 7,379 |                   |   |      | 8,582 |        |   |   | 7,379 |        |   |   | 8,582  |       
|                               |              |                        |       |                   |   |      |       |        |   |   |       |        |   |   |        |       
|Valuation allowance:           |              |                        |       |                   |   |      |       |        |   |   |       |        |   |   |        |       
|Balance, beginning of period   |              |                        |      |                   |   |      | 2,605 |        |   |   |      |        |   |   | 2,371  |       
|                               | Provision    |                        |       |                  |   |      |       |       |   |   |       |       |   |   |        | 234    |  
|                               | Recovery     |                        |       |                  |   |      |       | (2,605 | ) |   |       |       |   |   |        | (2,605 | )
|                               |              |                        |       |                   |   |      |       |        |   |   |       |        |   |   |        |       
|Balance, end of period         |              |                        |      |                   |   |      |      |        |   |   |      |        |   |   |       |       
|                               |              |                        |       |                   |   |      |       |        |   |   |       |        |   |   |        |       
|Mortgage servicing rights, net |              | $                      | 7,379 |                   |   | $    | 8,582 |        |   | $ | 7,379 |        |   | $ | 8,582  |       
|                               |              |                        |       |                   |   |      |       |        |   |   |       |        |   |   |        |       

Loans serviced for others totaled
$868.8 million at September 30, 2004 and
$945.3 million at September 30, 2003. Capitalized
mortgage servicing rights represent 85 basis points and
91 basis points of the portfolio serviced at
September 30, 2004 and 2003, respectively.



|   |                          
|-- | -------------------------
|6. | Earnings Per Common Share

Earnings per common share is computed as follows:

|                                                                   |                                                                |                                          |        |                   |  |      |        |        |  |   |        |        |  |   |        |        | 
|------------------------------------------------------------------ | -------------------------------------------------------------- | ---------------------------------------- | ------ | ----------------- |  | ---- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                   |                                                                |                                          |        |                  
|                                                                   |                                                                | Three Months Ended                       |        | Nine Months Ended
|                                                                   |                                                                | September 30,                            |        | September 30,    
|                                                                   |                                                                |                                          |        |                  
|                                                                   |                                                                | 2004                                     |        | 2003              |  | 2004 |        | 2003  
|                                                                   |                                                                |                                          |        |                   |  |      |        |       
|                                                                   |                                                                |                                         
|                                                                   |                                                                | (In thousands, except per share amounts)
|Net income                                                         |                                                                | $                                        | 19,666 |                   |  | $    | 13,380 |        |  | $ | 51,174 |        |  | $ | 44,417 |       
|                                                                   |                                                                |                                          |        |                   |  |      |        |        |  |   |        |        |  |   |        |       
|Divided by average common shares and common share
    equivalents: |                                                                |                                          |        |                   |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                   | Average common shares outstanding                              |                                          |        | 69,100            |  |      |        | 68,268 |  |   |        | 68,798 |  |   |        | 67,986 | 
|                                                                   | Average common shares issuable under the stock
    option plan |                                          |        | 1,730             |  |      |        | 1,740  |  |   |        | 1,746  |  |   |        | 1,580  | 
|                                                                   |                                                                |                                          |        |                   |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                   | Total average common shares and common share
    equivalents   |                                          |        | 70,830            |  |      |        | 70,008 |  |   |        | 70,544 |  |   |        | 69,566 | 
|                                                                   |                                                                |                                          |        |                   |  |      |        |        |  |   |        |        |  |   |        |       
|Basic earnings per common share                                    |                                                                | $                                        | 0.28   |                   |  | $    | 0.20   |        |  | $ | 0.74   |        |  | $ | 0.65   |       
|                                                                   |                                                                |                                          |        |                   |  |      |        |        |  |   |        |        |  |   |        |       
|Diluted earnings per common share                                  |                                                                | $                                        | 0.28   |                   |  | $    | 0.19   |        |  | $ | 0.73   |        |  | $ | 0.64   |       
|                                                                   |                                                                |                                          |        |                   |  |      |        |        |  |   |        |        |  |   |        |       

Stock options outstanding of 647 and 226 for the
three months ended September 30, 2004 and 2003,
respectively, and 241 and 394 for the nine months ended
September 30, 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.

13



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)




|   |                    
|-- | -------------------
|7. | 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 and nine months ended September 30,
2004 and 2003 follows:

|                           |  |                                  |        |          |  |              |       |              |  |      |        |          |  |              |        |              |  |   |        |  |  |   |       |  |  |   |        |   |  |   |        | 
|-------------------------- |  | -------------------------------- | ------ | -------- |  | ------------ | ----- | ------------ |  | ---- | ------ | -------- |  | ------------ | ------ | ------------ |  | - | ------ |  |  | - | ----- |  |  | - | ------ | - |  | - | ------ | 
|                           |  |                                 
|                           |  | Three Months Ended September 30,
|                           |  |                                 
|                           |  |                                  |        |         
|                           |  | 2004                             |        | 2003    
|                           |  |                                  |        |         
|                           |  | Bank                             |        | Mortgage |  | Eliminations |       | Consolidated |  | Bank |        | Mortgage |  | Eliminations |        | Consolidated
|                           |  |                                  |        |          |  |              |       |              |  |      |        |          |  |              |        |             
|                           |  |                                 
|                           |  | (Dollars in thousands)          
|Interest income            |  | $                                | 70,264 |          |  | $            | 3,939 |              |  | $    | (1,609 | )        |  | $            | 72,594 |              |  | $ | 58,382 |  |  | $ | 4,042 |  |  | $ | (1,448 | ) |  | $ | 60,976 | 
|Interest expense           |  |                                  | 14,618 |          |  |              | 1,609 |              |  |      | (1,609 | )        |  |              | 14,618 |              |  |   | 11,211 |  |  |   | 1,448 |  |  |   | (1,448 | ) |  |   | 11,211 | 
|                           |  |                                  |        |          |  |              |       |              |  |      |        |          |  |              |        |              |  |   |        |  |  |   |       |  |  |   |        |   |  |   |        | 
|Net interest income        |  |                                  | 55,646 |          |  |              | 2,330 |              |  |      |       |          |  |              | 57,976 |              |  |   | 47,171 |  |  |   | 2,594 |  |  |   |       |   |  |   | 49,765 | 
|Provision for loan losses  |  |                                  | 1,970  |          |  |              | 1,030 |              |  |      |       |          |  |              | 3,000  |              |  |   | 2,686  |  |  |   | 314   |  |  |   |       |   |  |   | 3,000  | 
|Noninterest income         |  |                                  | 24,058 |          |  |              | 1,890 |              |  |      |       |          |  |              | 25,948 |              |  |   | 19,552 |  |  |   | 4,880 |  |  |   |       |   |  |   | 24,432 | 
|Noninterest expense        |  |                                  | 51,355 |          |  |              | 2,407 |              |  |      |       |          |  |              | 53,762 |              |  |   | 48,033 |  |  |   | 3,325 |  |  |   |       |   |  |   | 51,358 | 
|                           |  |                                  |        |          |  |              |       |              |  |      |        |          |  |              |        |              |  |   |        |  |  |   |       |  |  |   |        |   |  |   |        | 
|Income before income taxes |  | $                                | 26,379 |          |  | $            | 783   |              |  | $    |       |          |  | $            | 27,162 |              |  | $ | 16,004 |  |  | $ | 3,835 |  |  | $ |       |   |  | $ | 19,839 | 
|                           |  |                                  |        |          |  |              |       |              |  |      |        |          |  |              |        |              |  |   |        |  |  |   |       |  |  |   |        |   |  |   |        | 

|                           |  |                                 |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|-------------------------- |  | ------------------------------- | --------- | -------- |  | ------------ | ------- | ------------ |  | ---- | -------- | -------- |  | ------------ | --------- | ------------ |  | - | --------- |  |  | - | ------- |  |  | - | -------- | - |  | - | --------- | 
|                           |  |                                
|                           |  | Nine Months Ended September 30,
|                           |  |                                
|                           |  |                                 |           |         
|                           |  | 2004                            |           | 2003    
|                           |  |                                 |           |         
|                           |  | Bank                            |           | Mortgage |  | Eliminations |         | Consolidated |  | Bank |          | Mortgage |  | Eliminations |           | Consolidated
|                           |  |                                 |           |          |  |              |         |              |  |      |          |          |  |              |           |             
|                           |  |                                
|                           |  | (Dollars in thousands)         
|Interest income            |  | $                               | 196,320   |          |  | $            | 10,988  |              |  | $    | (4,258   | )        |  | $            | 203,050   |              |  | $ | 169,481   |  |  | $ | 11,845  |  |  | $ | (4,276   | ) |  | $ | 177,050   | 
|Interest expense           |  |                                 | 36,688    |          |  |              | 4,258   |              |  |      | (4,258   | )        |  |              | 36,688    |              |  |   | 35,028    |  |  |   | 4,276   |  |  |   | (4,276   | ) |  |   | 35,028    | 
|                           |  |                                 |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|Net interest income        |  |                                 | 159,632   |          |  |              | 6,730   |              |  |      |         |          |  |              | 166,362   |              |  |   | 134,453   |  |  |   | 7,569   |  |  |   |         |   |  |   | 142,022   | 
|Provision for loan losses  |  |                                 | 5,872     |          |  |              | 2,128   |              |  |      |         |          |  |              | 8,000     |              |  |   | 8,290     |  |  |   | 710     |  |  |   |         |   |  |   | 9,000     | 
|Noninterest income         |  |                                 | 66,398    |          |  |              | 5,269   |              |  |      |         |          |  |              | 71,667    |              |  |   | 55,558    |  |  |   | 8,205   |  |  |   |         |   |  |   | 63,763    | 
|Noninterest expense        |  |                                 | 149,506   |          |  |              | 7,306   |              |  |      |         |          |  |              | 156,812   |              |  |   | 123,450   |  |  |   | 8,583   |  |  |   |         |   |  |   | 132,033   | 
|                           |  |                                 |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|Income before income taxes |  | $                               | 70,652    |          |  | $            | 2,565   |              |  | $    |         |          |  | $            | 73,217    |              |  | $ | 58,271    |  |  | $ | 6,481   |  |  | $ |         |   |  | $ | 64,752    | 
|                           |  |                                 |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 
|Total assets               |  | $                               | 6,601,850 |          |  | $            | 322,221 |              |  | $    | (290,701 | )        |  | $            | 6,633,370 |              |  | $ | 5,630,322 |  |  | $ | 299,292 |  |  | $ | (266,104 | ) |  | $ | 5,663,510 | 
|                           |  |                                 |           |          |  |              |         |              |  |      |          |          |  |              |           |              |  |   |           |  |  |   |         |  |  |   |          |   |  |   |           | 

Intersegment interest was paid to the bank by the
mortgage company in the amount of $1.6 million and
$1.4 million for the three months ended September 30,
2004 and 2003, respectively. For the nine months ended
September 30, 2004 and 2003, intersegment interest was
$4.3 million. Advances from the bank to the mortgage
company of $290.7 million and $266.1 million were
eliminated in consolidation at September 30, 2004 and 2003,
respectively.



|   |                                     
|-- | ------------------------------------
|8. | 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.

14



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


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 $2.80 billion at September 30, 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 certain 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 $293.1 million at
September 30, 2004 and $227.0 million at
December 31, 2003. As of September 30, 2004 and
December 31, 2003, $401,000 and $248,000, respectively, has
been recorded as a liability for the fair value of the
Companys potential obligations under these agreements.



|   |                                          
|-- | -----------------------------------------
|9. | Goodwill and Core Deposit
    Intangibles

Changes in the carrying amount of the
Companys goodwill and core deposit intangibles for the
nine months ended September 30, 2004 were as follows:

|                            |                                    |                        |        |              |  |   |       |        |  
|--------------------------- | ---------------------------------- | ---------------------- | ------ | ------------ |  | - | ----- | ------ | -
|                            |                                    |                        |        | Core Deposit
|                            |                                    | Goodwill               |        | Intangibles 
|                            |                                    |                        |        |             
|                            |                                    |                       
|                            |                                    | (Dollars in thousands)
|Balance, December 31, 2003  |                                    | $                      | 25,647 |              |  | $ | 6,185 |       
|                            | Acquisition of Lone Star           |                        |        | 29,155       |  |   |       | 6,379  |  
|                            | Adjustment to acquisition of Maxim |                        |        | 196          |  |   |       |       |  
|                            | Amortization                       |                        |        |             |  |   |       | (2,710 | )
|                            |                                    |                        |        |              |  |   |       |       
|Balance, September 30, 2004 |                                    | $                      | 54,998 |              |  | $ | 9,854 |       
|                            |                                    |                        |        |              |  |   |       |       

The following table shows the estimated future
amortization expense for core deposit intangibles:

|               |  |                        |       | 
|-------------- |  | ---------------------- | ----- | 
|               |  | Core Deposit          
|               |  | Intangibles           
|               |  |                       
|               |  | (Dollars in thousands)
|Remaining 2004 |  | $                      | 785   | 
|2005           |  |                        | 2,499 | 
|2006           |  |                        | 1,774 | 
|2007           |  |                        | 1,356 | 
|2008           |  |                        | 1,043 | 
|Thereafter     |  |                        | 2,397 | 



|    |                        
|--- | -----------------------
|10. | Subordinated Debentures

In October 2003, the Company formed the Statutory
Trust I (Trust I) to issue trust preferred
securities. On October 7, 2003, Trust I issued in a
private placement $50.0 million in trust preferred
securities in the form of its floating rate capital securities
and issued to the Company $1.5 million of trust common
securities. Trust I used the proceeds to

15



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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)


purchase $51.5 million of the Companys
floating rate junior subordinated deferrable interest debentures
due December 17, 2033 (the Debentures). The
Debentures bear interest at LIBOR plus 285 basis points.
The interest rate on the Debentures was 4.74% at
September 30, 2004. The Debentures are the sole assets of
Trust I and are subordinate to all of the Companys
existing and future obligations for borrowed or purchased money,
obligations under letters of credit and certain derivative
contracts, and any guarantees by the Company of any such
obligations. The $51.0 million in proceeds, net of issuance
costs, from this offering were used to fund the cash purchase
price for Lone Star. See Note 2  Merger
Related Activity for further discussion of the merger.

On September 24, 2004, the Company formed
the Statutory Trust II (Trust II) to issue
additional trust preferred securities. On that date,
Trust II issued in a private placement $35.0 million
in trust preferred securities in the form of its floating rate
capital securities and issued to the Company $1.1 million
of trust common securities. Trust II used the proceeds to
purchase $36.1 million of the Companys floating rate
junior subordinated deferrable interest debentures due
October 7, 2034 (the Debentures). The
Debentures bear interest at LIBOR plus 190 basis points.
The interest rate on the Debentures was 3.84% at
September 30, 2004. The Debentures are the sole assets of
the Statutory Trust II and are subordinate to all of the
Companys existing and future obligations for borrowed or
purchased money, obligations under letters of credit and certain
derivative contracts, and any guarantees by the Company of any
such obligations. The $36.1 million in proceeds, net of
issuance costs, from this offering were used to fund the cash
purchase price for Klein and to augment the Companys
capital ratios to support its loan growth. See
Note 2  Merger Related Activity for
further discussion of the merger.

On September 22, 2004, the Company entered
into a Subordinated Debenture Purchase Agreement. Under the
terms of this agreement, the Company issued an aggregate
principal amount of $75.0 million in floating rate
subordinated debt. All amounts due and owed under the
Subordinated Debenture are to be repaid in full on
September 22, 2014. The Subordinated Debenture bears
interest at LIBOR plus 125 basis points. The interest rate
on the Subordinated Debenture was 3.17% at September 30,
2004. This agreement includes a financial covenant that the
Company shall maintain such capital as may be necessary to cause
the Company to be classified as adequately
capitalized and the Bank shall maintain such capital as
may be necessary to cause it to be classified as well
capitalized as of the end of each calendar quarter. Upon
declaration of or a continuing event of default, the Company
will be restricted from declaring or paying or causing or
permitting any subsidiary to pay a cash dividend or other
distribution to parties that are ranked junior to the holders of
the subordinated debt. The Company has agreed to certain
restrictions on its ability to incur additional indebtedness
that is senior to the Subordinated Debenture. If the
subordinated debt ceases to qualify as Tier 2 capital under
the applicable rules and regulations promulgated by the Board of
Governor of the Federal Reserve System, the Company and the
lender may restructure the debt as a senior unsecured obligation
of the Company or the Company may repay the debt. The Company
used the proceeds of the debenture to fund the cash purchase
price for Klein and to augment the Companys capital ratios
to support its loan growth. See Note 2 
Merger Related Activity for further discussion of the
merger.



|    |                           
|--- | --------------------------
|11. | Common Stock Cash Dividend

On August 4, 2004, the Companys Board
of Directors declared a cash dividend of $0.03 cents per common
share paid on September 15, 2004 to shareholders of record
as of September 1, 2004.



|    |                   
|--- | ------------------
|12. | Common Stock Split

On June 17, 2004, the Company declared a
stock split effected by a stock dividend payable at the rate of
one share of the Companys common stock for each share of
the Companys common stock issued and outstanding as of
July 1, 2004, payable on July 15, 2004, to the holders
of record as of the close of business on July 1, 2004. This
stock split has been given retroactive effect in the
accompanying financial statements and related notes. In
addition, earnings per share data has been restated for all
periods presented.

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##### Table of Contents



SOUTHWEST BANCORPORATION OF TEXAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(Unaudited)




|    |                                   
|--- | ----------------------------------
|13. | Supplemental Cash Flow Information

Supplemental cash flow information for the nine
months ended September 30, 2004 and 2003 is as follows:

|                                             |                                             |                        |   |       |  |  |   |       | 
|-------------------------------------------- | ------------------------------------------- | ---------------------- | - | ----- |  |  | - | ----- | 
|                                             |                                             |                       
|                                             |                                             | Nine Months Ended     
|                                             |                                             | September 30,         
|                                             |                                             |                       
|                                             |                                             | 2004                   |   | 2003 
|                                             |                                             |                        |   |      
|                                             |                                             |                       
|                                             |                                             | (Dollars in thousands)
|Non-cash investing and financing activities: |                                             |                        |   |       |  |  |   |      
|                                             | Loans transferred to foreclosed real estate |                        | $ | 9,334 |  |  | $ | 3,670 | 

The Company acquired Lone Star on
January 31, 2004 and Maxim on July 1, 2003. In
conjunction with the acquisitions, liabilities were assumed as
follows:

|                                |                     |                        |         |              |  |   |         |         | 
|------------------------------- | ------------------- | ---------------------- | ------- | ------------ |  | - | ------- | ------- | 
|                                |                     | January 31, 2004       |         | July 1, 2003
|                                |                     |                        |         |             
|                                |                     |                       
|                                |                     | (Dollars in thousands)
|Fair value of assets acquired   |                     | $                      | 261,523 |              |  | $ | 348,788 |        
|Cash paid for the capital stock |                     |                        | (50,000 | )            |  |   | (63,040 | )      
|                                |                     |                        |         |              |  |   |         |        
|                                | Liabilities assumed |                        | $       | 211,523      |  |   | $       | 285,748 | 
|                                |                     |                        |         |              |  |   |         |        

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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.

Total assets at September 30, 2004 and
December 31, 2003 were $6.63 billion and
$5.95 billion, respectively. This growth was the result of
a favorable economy, the addition of new loan officers, the
merger with Lone Star, and the Companys overall growth
strategy. In addition, the Company successfully completed during
the period ended September 30, 2004 an aggressive marketing
campaign designed to attract new loan customers. Gross loans
were $4.23 billion at September 30, 2004, an increase
of $641.6 million, or 18%, from $3.59 billion at
December 31, 2003. Deposits increased to $4.80 billion
at September 30, 2004 from $4.40 billion at
December 31, 2003. Shareholders equity was
$549.8 million and $499.3 million at
September 30, 2004 and December 31, 2003, respectively.

For the three months ended September 30,
2004, net income was $19.7 million ($0.28 per diluted
common share) compared to $13.4 million ($0.19 per
diluted common share) for the same period in 2003, an increase
of 47%. For the nine months ended September 30, 2004, net
income was $51.2 million ($0.73 per diluted common
share) compared to $44.4 million ($0.64 per diluted
common share) for the same period in 2003, an increase of 15%.
Return on average assets and return on average common
shareholders equity for the three months ended
September 30, 2004 was 1.21% and

18



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##### Table of Contents



14.79%, respectively, as compared to 0.95% and
11.14% for the three months ended September 30, 2003. For
the nine months ended September 30, 2004, return on average
assets and return on average common shareholders equity
was 1.10% and 13.19%, respectively, as compared to 1.13% and
12.72% for the nine months ended September 30, 2003. 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.


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
added five branches in Dallas and initiated the Companys
entry into the important Dallas/ Metroplex market. Additionally,
on October 1, 2004, the Company completed its merger with
Klein Bank. This transaction added 27 branches in Northwest
Harris County and Montgomery County. One new branch was opened
in the Houston metropolitan area in February 2004 and two
branches were under construction at September 30, 2004. In
addition, the Company opened 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.

The taxable-equivalent net interest margin,
defined as annualized taxable-equivalent net interest income
divided by average interest-earning assets, for the three months
ended September 30, 2004 was 4.04%, up from 3.97% for the
three months ended September 30, 2003. The increase in the
taxable-equivalent net interest margin was due to higher yields
on interest-earning assets, primarily due to an increase in the
yield of securities to 4.11% for the three months ended
September 30, 2004 from 3.48% for the three months ended
September 30, 2003. This increase in the yield on the
securities portfolio is the result of lower premium amortization
recorded in 2004. The increase in the yields on interest-earning
assets were partially offset by an increase in the cost of
interest-bearing liabilities from to 1.34% for the three months
ended September 30, 2004 from 1.18% for the three months
ended September 30, 2003. This increase reflects increases
in market rates and a greater reliance on wholesale funding to
support the Companys loan growth.

For the nine months ended September 30,
2004, taxable-equivalent net interest margin was 4.08%, a
decrease from 4.10% for the nine months ended September 30,
2003. The decline in the taxable-equivalent net interest margin
was due to lower yields on the loan portfolio reflecting the
effects of declines in the level of interest rates as managed by
the Federal Reserve Board. Declines in the yields on
interest-earning assets were partially offset by reductions in
the cost of interest-bearing liabilities to 1.19% for the nine
months ended September 30, 2004 from 1.34% for the nine
months ended September 30, 2003. Demand deposits are a
significant funding source and averaged 33% of total deposits
for the three and nine months ended September 30, 2004, as
compared to 31% for the same periods last year.

Noninterest income is an important component of
the Companys net income and comprises 31% and 30% of total
revenue, defined as net interest income plus noninterest income,
for the three and nine months ended September 30, 2004,
respectively. Noninterest income increased $1.5 million, or
6%, to $25.9 million for the three months ended
September 30, 2004, compared to $24.4 million for the
same period in 2003. For the nine months ended
September 30, 2004, noninterest income increased
$7.9 million, or 12%, to $71.7 million, as compared to
$63.8 million for the same period last year. The primary
drivers of the increase were continued growth in service charge
income arising from the sale of treasury management products to
commercial customers and the mergers with Maxim and Lone Star,
the increase in net non-sufficient funds charges on retail
deposit accounts, letter of credit activity, sale of investment
products and services, increased Bank-owned life insurance
proceeds and gains recognized from private equity investments.

The growth in noninterest expenses was affected
by the mergers with Maxim and Lone Star as well as the hiring of
additional personnel and additional expenditures to support the
Companys growth. Noninterest expenses increased
$2.4 million, or 5%, to $53.8 million for the three
months ended September 30, 2004, compared to
$51.4 million for the same period in 2003. For the nine
months ended September 30, 2004, noninterest expenses
increased $24.8 million, or 19%, to $156.8 million,
compared to $132.0 million for the same period last year.
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 as well as
expenditures to support activities for regulatory compliance and
the Sarbanes-Oxley Act.

19



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##### Table of Contents



Credit quality is an area of importance to the
Company and asset quality indicators remained positive in the
third quarter of 2004. Net charge-offs were 0.13% of average
loans compared to 0.24% for the same period in the prior year.
For the nine months ended September 30, 2004, net
charge-offs were 0.14% of average loans compared to 0.25% for
the same period in 2003. Nonperforming assets to total loans and
other real estate was 0.49% at September 30, 2004, a
decrease from 0.57% at September 30, 2003. The allowance
for loan losses to nonperforming loans was 402.81% at
September 30, 2004, compared to 271.41% at
September 30, 2003. Although loans grew by 23% at
September 30, 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 I Capital Ratio of 9.90% and Total Capital
ratio of 12.05% were augmented by the issuance of
$50.0 million in trust preferred securities by SWBT
Statutory Trust I in October 2003 and $35.0 million in
trust preferred securities by SWBT Statutory Trust II (both
of which are not consolidated for reporting purposes) in
September 2004. In addition, the Company has issued
$75.0 million in senior subordinated debentures that
qualify as Tier II Capital. The proceeds of these issuances
were used to fund the mergers with Reunion and Klein.

Results of Operations



| |                
| | ---------------
| | Interest Income

Taxable-equivalent interest income for the three
months ended September 30, 2004 was $74.1 million, an
increase of $12.2 million, or 20%, from the three months
ended September 30, 2003. This increase in interest income
is due to a $792.6 million increase in average
interest-earning assets to $5.87 billion for the three
months ended September 30, 2004, a 16% increase from the
same period last year. This increase is partially offset by an
increase in the average rate on interest-bearing liabilities to
1.34% for the three months ended September 30, 2004, an
increase of 16 basis points when compared to the same
period in 2003. For the nine months ended September 30,
2004, taxable-equivalent interest income was
$207.0 million, an increase of $27.3 million, or 15%,
from the same period in 2003. This increase in interest income
is due to a $861.8 million increase in average
interest-earning assets to $5.58 billion for the nine
months ended September 30, 2004, an 18% increase from the
same period last year. This increase is partially offset by a
decrease in the average yield on interest-earning assets to
4.96% for the nine months ended September 30, 2004, a
decrease of 13 basis points when compared to the same
period in 2003.

Taxable-equivalent interest income on loans
increased $7.9 million to $56.5 million for the three
months ended September 30, 2004. This increase resulted
from a $666.8 million increase in average loans outstanding
to $4.12 billion for the three months ended
September 30, 2004, a 19% increase from the same period a
year ago. This increase is partially offset by a 12 basis
point decrease in the average yield on loans to 5.45% for the
three months ended September 30, 2004, compared to 5.57%
for the same period last year.

For the nine months ended September 30,
2004, taxable-equivalent interest income on loans was
$157.7 million, an increase of $16.6 million, or 12%,
from the same period a year ago. This increase was due to a
$570.0 million increase in average loans outstanding to
$3.90 billion for the nine months ended September 30,
2004, a 17% increase from the same period a year ago. This
increase is partially offset by a 27 basis point decrease
in the average yield on loans to 5.40% for the nine months ended
September 30, 2004, compared to 5.67% for the same period
last year.

Taxable-equivalent interest income on securities
increased $4.3 million to $17.5 million for the three
months ended September 30, 2004. This increase was due to a
63 basis point increase in the taxable-equivalent average
yield on securities to 4.11% for the three months ended
September 30, 2004, compared to 3.48% for the same period
last year. In addition, the average balance of securities
outstanding increased $193.7 million to $1.69 billion
for the three months ended September 30, 2004, a 13%
increase from the same period a year ago.

For the nine months ended September 30,
2004, taxable-equivalent interest income on securities was
$48.8 million, an increase of $11.0 million, or 29%,
from the same period a year ago. This increase was due to a
$331.6 million increase in average securities outstanding
to $1.63 billion for the nine months ended
September 30, 2004, a 26% increase from the same period a
year ago. In addition, the average taxable-equivalent yield on
securities increased 10 basis points to 4.01% for the nine
months ended September 30, 2004, compared to 3.91% for the
same period last year.

20



---



##### Table of Contents





| |                 
| | ----------------
| | Interest Expense

Interest expense on deposits and borrowings for
the three months ended September 30, 2004 was
$14.6 million, an increase of $3.4 million, or 30%,
from the three months ended September 30, 2003. This
increase in interest expense was attributable to an increase in
the average rate on interest-bearing liabilities to 1.34% for
the three months ended September 30, 2004, an increase of
16 basis points when compared to the same period in 2003.
In addition, the average balance of interest-bearing liabilities
increased $583.5 million to $4.35 billion for the
three months ended September 30, 2004, an increase of 16%
from the same period last year.

Interest expense on deposits and borrowings for
the nine months ended September 30, 2004 was
$36.7 million, an increase of $1.7 million, or 5%,
from the nine months ended September 30, 2003. This
increase is due to a $628.1 million increase in average
interest-bearing liabilities to $4.13 billion for the nine
months ended September 30, 2004, an increase of 18% from
the same period last year. Partially offsetting this increase
was a decrease in the average rate on interest-bearing
liabilities to 1.19% for the nine months ended
September 30, 2004, a decrease of 15 basis points when
compared to the same period in 2003.



| |                    
| | -------------------
| | Net Interest Income

Taxable-equivalent net interest income for the
three months ended September 30, 2004 was
$59.5 million compared to $50.7 million for the three
months ended September 30, 2003, an increase of
$8.8 million, or 17%. The increase is primarily
attributable to growth in average interest-earning assets and to
an increase in the yields on interest-earning assets. Average
interest-earnings assets, primarily loans and securities,
increased $792.6 million, or 16%, for the quarter ended
September 30, 2004 when compared to the same period last
year. This increase in interest-earning assets contributed
$10.7 million to net interest income. The average yield on
interest-earning assets was 5.03% for the quarter ended
September 30, 2004, an increase of 19 basis points
from 4.84% for the same period last year.

For the three months ended September 30,
2004, the taxable-equivalent net interest margin, defined as
annualized taxable-equivalent net interest income divided by
average interest-earning assets, increased to 4.04%, compared to
3.97% for the three months ended September 30, 2003. This
increase resulted from an increase in the yield on
interest-earning assets of 19 basis points, from 4.84% for
the three months ended September 30, 2003 to 5.03% for the
three months ended September 30, 2004. This increase in
yield was partially offset by an increase in the cost of funds
of 16 basis points from 1.18% for the three months ended
September 30, 2003 to 1.34% for the three months ended
September 30, 2004.

For the nine months ended September 30,
2004, taxable-equivalent net interest income was
$170.3 million, compared to $144.7 million for the
same period last year, an increase of $25.6 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-earnings assets,
primarily loans and securities, increased $861.8 million,
or 18%, for the nine months ended September 30, 2004 when
compared to the same period last year. This increase in
interest-earning assets contributed $33.2 million to net
interest income. The average rate on interest-bearing
liabilities was 1.19% for the nine months ended
September 30, 2004, a decrease of 15 basis points from
1.34% for the same period last year.

For the nine months ended September 30,
2004, the taxable-equivalent net interest margin declined to
4.08%, compared to 4.10% for the nine months ended
September 30, 2003. This decrease resulted from a decrease
in the yield on interest-earning assets of 13 basis points,
from 5.09% for the nine months ended September 30, 2003 to
4.96% for the nine months ended September 30, 2004. This
decrease in yield was partially offset by a decrease in the cost
of funds of 15 basis points from 1.34% for the nine months
ended September 30, 2003 to 1.19% for the nine months ended
September 30, 2004.

21



---



##### Table of Contents



The following table presents for the period
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-earning
liabilities, expressed both in dollars and rates. Income and
yield on interest-earning assets include amounts to convert
tax-exempt income to a taxable-equivalent basis, assuming a 35%
tax rate. 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 September 30,          
|                                       |                                                |                                           
|                                       |                                                |                                            |           |          
|                                       |                                                | 2004                                       |           | 2003     
|                                       |                                                |                                            |           |          
|                                       |                                                | Average                                    |           | Interest  |           | Average |        | Average     |        | Interest |      | Average
|                                       |                                                | Outstanding                                |           | Earned/   |           | Yield/  |        | Outstanding |        | Earned/  |      | Yield/ 
|                                       |                                                | Balance                                    |           | Paid(1)   |           | Rate    |        | Balance     |        | Paid(1)  |      | Rate   
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |        
|                                       |                                                |                                           
|                                       |                                                | (Dollars in thousands)                    
|Interest-earning assets:               |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                       | Loans                                          |                                            | $         | 4,123,462 |           |         | $      | 56,463      |        |          |      | 5.45    | %    |   | $         | 3,456,711 |           |   | $      | 48,526 |        |  |      | 5.57 | %   
|                                       | Securities                                     |                                            |           | 1,691,472 |           |         |        | 17,477      |        |          |      | 4.11    |      |   |           | 1,497,754 |           |   |        | 13,130 |        |  |      | 3.48 |     
|                                       | Federal funds sold and other                   |                                            |           | 52,573    |           |         |        | 192         |        |          |      | 1.45    |      |   |           | 120,474   |           |   |        | 303    |        |  |      | 1.00 |     
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                       |                                                | Total interest-earning assets              |           |           | 5,867,507 |         |        |             | 74,132 |          |      |         | 5.03 | % |           |           | 5,074,939 |   |        |        | 61,959 |  |      |      | 4.84 | %
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Less allowance for loan losses         |                                                |                                            | (49,422   | )         |           |         |        |             |        |          |      |         |      |   | (41,469   | )         |           |   |        |        |        |  |      |     
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                       |                                                |                                            | 5,818,085 |           |           |         |        |             |        |          |      |         |      |   | 5,033,470 |           |           |   |        |        |        |  |      |     
|Noninterest-earning assets             |                                                |                                            | 672,530   |           |           |         |        |             |        |          |      |         |      |   | 576,097   |           |           |   |        |        |        |  |      |     
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                       |                                                | Total assets                               |           | $         | 6,490,615 |         |        |             |        |          |      |         |      |   |           | $         | 5,609,567 |   |        |        |        |  |      |      |      |  
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Interest-bearing liabilities:          |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                       | Money market and savings deposits              |                                            | $         | 2,084,393 |           |         |        | 4,445       |        |          |      | 0.85    | %    |   | $         | 1,927,282 |           |   |        | 3,685  |        |  |      | 0.76 | %   
|                                       | Time deposits                                  |                                            |           | 1,088,302 |           |         |        | 5,583       |        |          |      | 2.04    |      |   |           | 1,064,502 |           |   |        | 5,421  |        |  |      | 2.02 |     
|                                       | Repurchase agreements and other borrowed funds |                                            |           | 1,173,762 |           |         |        | 4,590       |        |          |      | 1.56    |      |   |           | 771,132   |           |   |        | 2,105  |        |  |      | 1.08 |     
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                       |                                                | Total interest-bearing liabilities         |           |           | 4,346,457 |         |        |             | 14,618 |          |      |         | 1.34 | % |           |           | 3,762,916 |   |        |        | 11,211 |  |      |      | 1.18 | %
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Noninterest-bearing liabilities:       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                       | Noninterest-bearing demand deposits            |                                            |           | 1,587,990 |           |         |        |             |        |          |      |         |      |   |           | 1,342,560 |           |   |        |        |        |  |      |      |     
|                                       | Other liabilities                              |                                            |           | 27,246    |           |         |        |             |        |          |      |         |      |   |           | 27,493    |           |   |        |        |        |  |      |      |     
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                       |                                                | Total liabilities                          |           |           | 5,961,693 |         |        |             |        |          |      |         |      |   |           |           | 5,132,969 |   |        |        |        |  |      |      |      |  
|Shareholders equity                   |                                                |                                            | 528,922   |           |           |         |        |             |        |          |      |         |      |   | 476,598   |           |           |   |        |        |        |  |      |     
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|                                       |                                                | Total liabilities and shareholders equity |           | $         | 6,490,615 |         |        |             |        |          |      |         |      |   |           | $         | 5,609,567 |   |        |        |        |  |      |      |      |  
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Taxable-equivalent net interest income |                                                |                                            |           |           |           | $       | 59,514 |             |        |          |      |         |      |   |           |           |           | $ | 50,748 |        |        |  |      |     
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Taxable-equivalent net interest spread |                                                |                                            |           |           |           |         |        |             |        |          | 3.69 | %       |      |   |           |           |           |   |        |        |        |  | 3.66 | %   
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     
|Taxable-equivalent net interest margin |                                                |                                            |           |           |           |         |        |             |        |          | 4.04 | %       |      |   |           |           |           |   |        |        |        |  | 3.97 | %   
|                                       |                                                |                                            |           |           |           |         |        |             |        |          |      |         |      |   |           |           |           |   |        |        |        |  |      |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For analytical purposes, income from tax-exempt
    assets, primarily securities issued by state and local
    governments or authorities, is adjusted by an increment that
    equates tax-exempt income to income from taxable assets assuming
    a 35% federal income tax rate. The following is a reconciliation
    of taxable-equivalent net interest income to net interest
    income, as reported:

22



---



##### Table of Contents



|                                       |                                  |                        |        |        |  |   |        |        | 
|-------------------------------------- | -------------------------------- | ---------------------- | ------ | ------ |  | - | ------ | ------ | 
|                                       |                                  |                       
|                                       |                                  | Three Months Ended    
|                                       |                                  | September 30,         
|                                       |                                  |                       
|                                       |                                  | 2004                   |        | 2003  
|                                       |                                  |                        |        |       
|                                       |                                  |                       
|                                       |                                  | (Dollars in thousands)
|Taxable-equivalent net interest income |                                  | $                      | 59,514 |        |  | $ | 50,748 |       
|Taxable-equivalent adjustment          |                                  |                        | (1,538 | )      |  |   | (983   | )     
|                                       |                                  |                        |        |        |  |   |        |       
|                                       | Net interest income, as reported |                        | $      | 57,976 |  |   | $      | 49,765 | 
|                                       |                                  |                        |        |        |  |   |        |       

|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |      |      |  
|-------------------------------------- | ---------------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | ------- | ------- | ----------- | ------- | -------- | ---- | ------- | ---- | - | --------- | --------- | --------- | - | ------- | ------- | ------- |  | ---- | ---- | ---- | -
|                                       |                                                |                                           
|                                       |                                                | Nine Months Ended September 30,           
|                                       |                                                |                                           
|                                       |                                                |                                            |           |          
|                                       |                                                | 2004                                       |           | 2003     
|                                       |                                                |                                            |           |          
|                                       |                                                | Average                                    |           | Interest  |           | Average |         | Average     |         | Interest |      | Average
|                                       |                                                | Outstanding                                |           | Earned/   |           | Yield/  |         | Outstanding |         | Earned/  |      | Yield/ 
|                                       |                                                | Balance                                    |           | Paid(1)   |           | Rate    |         | Balance     |         | Paid(1)  |      | Rate   
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |        
|                                       |                                                |                                           
|                                       |                                                | (Dollars in thousands)                    
|Interest-earning assets:               |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                       | Loans                                          |                                            | $         | 3,898,787 |           |         | $       | 157,712     |         |          |      | 5.40    | %    |   | $         | 3,328,824 |           |   | $       | 141,127 |         |  |      | 5.67 | %   
|                                       | Securities                                     |                                            |           | 1,625,592 |           |         |         | 48,820      |         |          |      | 4.01    |      |   |           | 1,294,037 |           |   |         | 37,838  |         |  |      | 3.91 |     
|                                       | Federal funds sold and other                   |                                            |           | 56,498    |           |         |         | 500         |         |          |      | 1.18    |      |   |           | 96,178    |           |   |         | 793     |         |  |      | 1.10 |     
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                       |                                                | Total interest-earning assets              |           |           | 5,580,877 |         |         |             | 207,032 |          |      |         | 4.96 | % |           |           | 4,719,039 |   |         |         | 179,758 |  |      |      | 5.09 | %
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|Less allowance for loan losses         |                                                |                                            | (48,288   | )         |           |         |         |             |         |          |      |         |      |   | (39,884   | )         |           |   |         |         |         |  |      |     
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                       |                                                |                                            | 5,532,589 |           |           |         |         |             |         |          |      |         |      |   | 4,679,155 |           |           |   |         |         |         |  |      |     
|Noninterest-earning assets             |                                                |                                            | 694,669   |           |           |         |         |             |         |          |      |         |      |   | 564,424   |           |           |   |         |         |         |  |      |     
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                       |                                                | Total assets                               |           | $         | 6,227,258 |         |         |             |         |          |      |         |      |   |           | $         | 5,243,579 |   |         |         |         |  |      |      |      |  
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                      
|Interest-bearing liabilities:          |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                       | Money market and savings deposits              |                                            | $         | 2,036,791 |           |         |         | 11,006      |         |          |      | 0.72    | %    |   | $         | 1,824,654 |           |   |         | 12,012  |         |  |      | 0.88 | %   
|                                       | Time deposits                                  |                                            |           | 1,053,271 |           |         |         | 15,500      |         |          |      | 1.97    |      |   |           | 998,613   |           |   |         | 16,735  |         |  |      | 2.24 |     
|                                       | Repurchase agreements and other borrowed funds |                                            |           | 1,041,204 |           |         |         | 10,182      |         |          |      | 1.31    |      |   |           | 679,889   |           |   |         | 6,281   |         |  |      | 1.24 |     
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                       |                                                | Total interest-bearing liabilities         |           |           | 4,131,266 |         |         |             | 36,688  |          |      |         | 1.19 | % |           |           | 3,503,156 |   |         |         | 35,028  |  |      |      | 1.34 | %
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|Noninterest-bearing liabilities:       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                       | Noninterest-bearing demand deposits            |                                            |           | 1,551,178 |           |         |         |             |         |          |      |         |      |   |           | 1,241,765 |           |   |         |         |         |  |      |      |     
|                                       | Other liabilities                              |                                            |           | 26,463    |           |         |         |             |         |          |      |         |      |   |           | 31,675    |           |   |         |         |         |  |      |      |     
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                       |                                                | Total liabilities                          |           |           | 5,708,907 |         |         |             |         |          |      |         |      |   |           |           | 4,776,596 |   |         |         |         |  |      |      |      |  
|Shareholders equity                   |                                                |                                            | 518,351   |           |           |         |         |             |         |          |      |         |      |   | 466,983   |           |           |   |         |         |         |  |      |     
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|                                       |                                                | Total liabilities and shareholders equity |           | $         | 6,227,258 |         |         |             |         |          |      |         |      |   |           | $         | 5,243,579 |   |         |         |         |  |      |      |      |  
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|Taxable-equivalent net interest income |                                                |                                            |           |           |           | $       | 170,344 |             |         |          |      |         |      |   |           |           |           | $ | 144,730 |         |         |  |      |     
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|Taxable-equivalent net interest spread |                                                |                                            |           |           |           |         |         |             |         |          | 3.77 | %       |      |   |           |           |           |   |         |         |         |  | 3.75 | %   
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     
|Taxable-equivalent net interest margin |                                                |                                            |           |           |           |         |         |             |         |          | 4.08 | %       |      |   |           |           |           |   |         |         |         |  | 4.10 | %   
|                                       |                                                |                                            |           |           |           |         |         |             |         |          |      |         |      |   |           |           |           |   |         |         |         |  |      |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For analytical purposes, income from tax-exempt
    assets, primarily securities issued by state and local
    governments or authorities, is adjusted by an increment that
    equates tax-exempt income to income from taxable assets assuming
    a 35% federal income tax rate. The following is a reconciliation
    of taxable-equivalent net interest income to net interest
    income, as reported:

23



---



##### Table of Contents



|                                       |                                  |                        |         |         |  |   |         |         | 
|-------------------------------------- | -------------------------------- | ---------------------- | ------- | ------- |  | - | ------- | ------- | 
|                                       |                                  |                       
|                                       |                                  | Nine Months Ended     
|                                       |                                  | September 30,         
|                                       |                                  |                       
|                                       |                                  | 2004                   |         | 2003   
|                                       |                                  |                        |         |        
|                                       |                                  |                       
|                                       |                                  | (Dollars in thousands)
|Taxable-equivalent net interest income |                                  | $                      | 170,344 |         |  | $ | 144,730 |        
|Taxable-equivalent adjustment          |                                  |                        | (3,982  | )       |  |   | (2,708  | )      
|                                       |                                  |                        |         |         |  |   |         |        
|                                       | Net interest income, as reported |                        | $       | 166,362 |  |   | $       | 142,022 | 
|                                       |                                  |                        |         |         |  |   |         |        

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 September 30, |       | Nine Months Ended September 30,
|                                           |                                               | 2004 vs. 2003                    |       | 2004 vs. 2003                  
|                                           |                                               | Increase (Decrease) Due to       |       | Increase (Decrease) Due to     
|                                           |                                               |                                  |       |                                
|                                           |                                               | Volume                           |       | Rate                            |  | Total |        | Volume |  | Rate |       | Days   |  | Total
|                                           |                                               |                                  |       |                                 |  |       |        |        |  |      |       |        |  |      
|                                           |                                               |                                 
|                                           |                                               | (Dollars in thousands)          
|Interest-earning assets:                   |                                               |                                  |       |                                 |  |       |        |        |  |      |       |        |  |       |        |        |  |   |        |        |   |   |     |     |  |   |        |       
|Loans                                      |                                               | $                                | 9,218 |                                 |  | $     | (1,281 | )      |  | $    | 7,937 |        |  | $     | 23,892 |        |  | $ | (7,824 | )      |   | $ | 517 |     |  | $ | 16,585 |       
|Securities                                 |                                               |                                  | 1,679 |                                 |  |       | 2,668  |        |  |      | 4,347 |        |  |       | 9,609  |        |  |   | 1,234  |        |   |   | 139 |     |  |   | 10,982 |       
|Federal funds sold and other               |                                               |                                  | (169  | )                               |  |       | 58     |        |  |      | (111  | )      |  |       | (330   | )      |  |   | 34     |        |   |   | 3   |     |  |   | (293   | )     
|                                           |                                               |                                  |       |                                 |  |       |        |        |  |      |       |        |  |       |        |        |  |   |        |        |   |   |     |     |  |   |        |       
|                                           | Total increase (decrease) in interest income  |                                  |       | 10,728                          |  |       |        | 1,445  |  |      |       | 12,173 |  |       |        | 33,171 |  |   |        | (6,556 | ) |   |     | 659 |  |   |        | 27,274 | 
|                                           |                                               |                                  |       |                                 |  |       |        |        |  |      |       |        |  |       |        |        |  |   |        |        |   |   |     |     |  |   |        |       
|Interest-bearing liabilities:              |                                               |                                  |       |                                 |  |       |        |        |  |      |       |        |  |       |        |        |  |   |        |        |   |   |     |     |  |   |        |       
|Money market and savings deposits          |                                               |                                  | 296   |                                 |  |       | 464    |        |  |      | 760   |        |  |       | 1,386  |        |  |   | (2,436 | )      |   |   | 44  |     |  |   | (1,006 | )     
|Time deposits                              |                                               |                                  | 111   |                                 |  |       | 51     |        |  |      | 162   |        |  |       | 903    |        |  |   | (2,199 | )      |   |   | 61  |     |  |   | (1,235 | )     
|Repurchase agreements and borrowed funds   |                                               |                                  | 1,093 |                                 |  |       | 1,392  |        |  |      | 2,485 |        |  |       | 3,326  |        |  |   | 552    |        |   |   | 23  |     |  |   | 3,901  |       
|                                           |                                               |                                  |       |                                 |  |       |        |        |  |      |       |        |  |       |        |        |  |   |        |        |   |   |     |     |  |   |        |       
|                                           | Total increase (decrease) in interest expense |                                  |       | 1,500                           |  |       |        | 1,907  |  |      |       | 3,407  |  |       |        | 5,615  |  |   |        | (4,083 | ) |   |     | 128 |  |   |        | 1,660  | 
|                                           |                                               |                                  |       |                                 |  |       |        |        |  |      |       |        |  |       |        |        |  |   |        |        |   |   |     |     |  |   |        |       
|Increase (decrease) in net interest income |                                               | $                                | 9,228 |                                 |  | $     | (462   | )      |  | $    | 8,766 |        |  | $     | 27,556 |        |  | $ | (2,473 | )      |   | $ | 531 |     |  | $ | 25,614 |       
|                                           |                                               |                                  |       |                                 |  |       |        |        |  |      |       |        |  |       |        |        |  |   |        |        |   |   |     |     |  |   |        |       



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

The provision for loan losses is determined by
management as the amount to be added to the allowance for loan
losses after net charge-offs have been deducted to bring the
allowance to a level which, in managements best estimate,
is necessary to absorb probable losses within the existing loan
portfolio. The provision for loan losses was $3.0 million
and $8.0 million for the three and nine months ended
September 30, 2004. This compares to $3.0 million and
$9.0 million for the three and nine months ended
September 30, 2003. Management regularly reviews the
Companys loan loss allowance in accordance with its
standard procedures. (See  Financial
Condition  Allowance for Loan Losses.)

24



---



##### Table of Contents





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

Noninterest income for the three months ended
September 30, 2004 was $25.9 million, an increase of
$1.5 million, or 6%, from $24.4 million during the
comparable period in 2003. Noninterest income for the nine
months ended September 30, 2004 was $71.7 million, an
increase of $7.9 million, or 12%, from $63.8 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 September 30, |        | Nine Months Ended September 30,
|                                                                |                          |                                  |        |                                
|                                                                |                          |                                  |        |                                 |  |          |     |      
|                                                                |                          | 2004                             |        | 2003                            |  | 2004     |     | 2003 
|                                                                |                          |                                  |        |                                 |  |          |     |      
|                                                                |                          | Bank                             |        | Mortgage                        |  | Combined |     | Bank  |  | Mortgage |        | Combined |  | Bank |        | Mortgage |  | Combined |       | Bank  |  | Mortgage |        | Combined
|                                                                |                          |                                  |        |                                 |  |          |     |       |  |          |        |          |  |      |        |          |  |          |       |       |  |          |        |         
|                                                                |                          |                                 
|                                                                |                          | (Dollars in thousands)          
|Service charges on deposit accounts                             |                          | $                                | 11,184 |                                 |  | $        |    |       |  | $        | 11,184 |          |  | $    | 10,551 |          |  | $        |      |       |  | $        | 10,551 |          |  | $ | 33,414 |        |  | $ |      |       |  | $ | 33,414 |        |  | $ | 29,484 |        |  | $ |      |       |  | $ | 29,484 |       
|Investment services                                             |                          |                                  | 3,164  |                                 |  |          |    |       |  |          | 3,164  |          |  |      | 2,489  |          |  |          |      |       |  |          | 2,489  |          |  |   | 9,019  |        |  |   |      |       |  |   | 9,019  |        |  |   | 7,214  |        |  |   |      |       |  |   | 7,214  |       
|Factoring fee income                                            |                          |                                  | 803    |                                 |  |          |    |       |  |          | 803    |          |  |      | 973    |          |  |          |      |       |  |          | 973    |          |  |   | 2,648  |        |  |   |      |       |  |   | 2,648  |        |  |   | 3,051  |        |  |   |      |       |  |   | 3,051  |       
|Loan fee income                                                 |                          |                                  | 1,402  |                                 |  |          | 766 |       |  |          | 2,168  |          |  |      | 633    |          |  |          | 1,211 |       |  |          | 1,844  |          |  |   | 2,823  |        |  |   | 2,097 |       |  |   | 4,920  |        |  |   | 1,712  |        |  |   | 2,991 |       |  |   | 4,703  |       
|Bank-owned life insurance income                                |                          |                                  | 2,154  |                                 |  |          |    |       |  |          | 2,154  |          |  |      | 1,209  |          |  |          |      |       |  |          | 1,209  |          |  |   | 5,551  |        |  |   |      |       |  |   | 5,551  |        |  |   | 3,594  |        |  |   |      |       |  |   | 3,594  |       
|Letters of credit fee income                                    |                          |                                  | 1,086  |                                 |  |          |    |       |  |          | 1,086  |          |  |      | 675    |          |  |          |      |       |  |          | 675    |          |  |   | 2,954  |        |  |   |      |       |  |   | 2,954  |        |  |   | 1,853  |        |  |   |      |       |  |   | 1,853  |       
|Mortgage servicing fees, net of amortization and
    impairment |                          |                                  |       |                                 |  |          | 311 |       |  |          | 311    |          |  |      |       |          |  |          | 1,788 |       |  |          | 1,788  |          |  |   |       |        |  |   | 670   |       |  |   | 670    |        |  |   |       |        |  |   | 547   |       |  |   | 547    |       
|Gain on sale of loans, net                                      |                          |                                  |       |                                 |  |          | 684 |       |  |          | 684    |          |  |      |       |          |  |          | 1,569 |       |  |          | 1,569  |          |  |   | 65     |        |  |   | 1,908 |       |  |   | 1,973  |        |  |   |       |        |  |   | 3,815 |       |  |   | 3,815  |       
|Gain on sale of securities, net                                 |                          |                                  | (46    | )                               |  |          |    |       |  |          | (46    | )        |  |      | 31     |          |  |          |      |       |  |          | 31     |          |  |   | (45    | )      |  |   |      |       |  |   | (45    | )      |  |   | 1,181  |        |  |   |      |       |  |   | 1,181  |       
|Other income                                                    |                          |                                  | 4,311  |                                 |  |          | 129 |       |  |          | 4,440  |          |  |      | 2,991  |          |  |          | 312   |       |  |          | 3,303  |          |  |   | 9,968  |        |  |   | 595   |       |  |   | 10,563 |        |  |   | 7,469  |        |  |   | 852   |       |  |   | 8,321  |       
|                                                                |                          |                                  |        |                                 |  |          |     |       |  |          |        |          |  |      |        |          |  |          |       |       |  |          |        |          |  |   |        |        |  |   |       |       |  |   |        |        |  |   |        |        |  |   |       |       |  |   |        |       
|                                                                | Total noninterest income |                                  | $      | 24,058                          |  |          | $   | 1,890 |  |          | $      | 25,948   |  |      | $      | 19,552   |  |          | $     | 4,880 |  |          | $      | 24,432   |  |   | $      | 66,397 |  |   | $     | 5,270 |  |   | $      | 71,667 |  |   | $      | 55,558 |  |   | $     | 8,205 |  |   | $      | 63,763 | 
|                                                                |                          |                                  |        |                                 |  |          |     |       |  |          |        |          |  |      |        |          |  |          |       |       |  |          |        |          |  |   |        |        |  |   |       |       |  |   |        |        |  |   |        |        |  |   |       |       |  |   |        |       

Banking Segment.The
largest component of noninterest income is service charges on
deposit accounts, which were $11.2 million for the three
months ended September 30, 2004, an increase of $633,000,
or 6%, from $10.6 million for the same period last year.
Service charges on deposit accounts were $33.4 million for
the nine months ended September 30, 2004, an increase of
$3.9 million, or 13%, from $29.5 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 $314,000, or 7%, for the three months ended
September 30, 2004, when compared to the same period last
year. For the nine months ended September 30, 2004, such
charges were $14.4 million, an increase of
$1.2 million, or 9%, from $13.2 million for the nine
months ended September 30, 2003. This success at winning
new business results from the Companys ability to design
custom cost-effective cash management solutions for middle
market and large corporate customers. Second, net non-sufficient
fund charges on deposit accounts were $5.7 million for the
three months ended September 30, 2004, an increase of
$259,000, or 5%, from $5.4 million for the same period last
year. For the nine months ended September 30, 2004, net
non-sufficient fund charges on deposit accounts were
$16.1 million, an increase of $2.3 million, or 17%,
from $13.8 million for the nine months ended
September 30, 2003. Additionally, the total number of
deposit accounts grew from 196,198 at September 30, 2003 to
203,287 at September 30, 2004.

Investment services income was $3.2 million
for the three months ended September 30, 2004, an increase
of $675,000, or 27%, from $2.5 million for the same period
last year. For the nine months ended September 30, 2004,
investment services income was $9.0 million, an increase of
$1.8 million, or 25%, from $7.2 million for the nine
months ended September 30, 2003. This increase is mainly
due to increases in foreign exchange fees and commissions on
insurance products.

Other income was $4.3 million for the three
months ended September 30, 2004, an increase of
$1.3 million, or 44%, from the same period last year. This
increase is primarily attributable to an increase in equity
investments income. For the nine months ended September 30,
2004, other income was $10.0 million, an increase of
$2.5 million, or 33%, from $7.5 million for the nine
months ended September 30, 2003. 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 $684,000 for the three months
ended September 30, 2004, a decrease of $885,000, or 56%,
from the same period last year. For the nine months ended
September 30, 2004, gain on sale

25



---



##### Table of Contents



of loans, net, was $1.9 million, a decrease
of $1.9 million, or 50%, from $3.8 million for the
nine months ended September 30, 2003. This decrease is
attributable to an increase in interest rates in the current
year. 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. The principal balances of mortgage loans
sold were $37.0 million and $91.2 million during the
three months ended September 30, 2004 and 2003,
respectively. For the nine months ended September 30, 2004,
the principal balances of mortgage loans sold were
$133.4 million compared to $208.0 million for the same
period last year.


Mortgage servicing fees, net of amortization and
impairment, were $311,000 for the three months ended
September 30, 2004, a decrease of $1.5 million when
compared to $1.8 million for the same period last year.
This decrease in mortgage servicing fee income is attributable
to a non-cash, pretax recovery of the carrying value of the
mortgage servicing asset of $2.6 million recognized in the
third quarter of 2003 in accordance with the quarterly
revaluation of the capitalized mortgage servicing rights. For
the nine months ended September 30, 2004, mortgage
servicing fees, net of amortization and impairment, were
$670,000, an increase of $123,000 when compared to the same
period last year. This increase in mortgage servicing fee income
is attributable to a reduction in amortization of capitalized
mortgage servicing costs which is partially offset by a recovery
of the carrying value of the mortgage servicing asset, net, of
$2.4 million recognized in 2003. The mortgage industry
experienced high levels of prepayment activity as a result of
lower interest rates which resulted in increased amortization of
capitalized mortgage servicing costs in 2003. 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 September 30, 2004 was
$471,000, a decrease of $1.1 million, or 70%, from
$1.6 million for the three months ended September 30,
2003. For the nine months ended September 30, 2004,
amortization of capitalized mortgage servicing costs was
$1.7 million, a decrease of $2.5 million, or 60%, when
compared to $4.2 million for the same period last year. See
Note 5  Mortgage Servicing Rights.



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

For the three months ended September 30,
2004, noninterest expenses were $53.8 million, an increase
of $2.4 million, or 5%, from $51.4 million for the
three months ended September 30, 2003. For the nine months
ended September 30, 2004, noninterest expenses totaled
$156.8 million, an increase of $24.8 million, or 19%,
from the same period in 2003. The increase in noninterest
expenses was primarily due to salaries and employee benefits,
occupancy expenses, and core deposit intangible amortization
expense. This increase was primarily due to the mergers with
Maxim and Lone Star and the hiring of additional personnel and
additional investments required to accommodate the
Companys growth.

Salaries and employee benefits for the three
months ended September 30, 2004 were $30.4 million, an
increase of $2.6 million, or 9%, from the three months
ended September 30, 2003. For the nine months ended
September 30, 2004, salaries and employee benefits were
$89.8 million, an increase of $14.0 million, or 18%,
from $75.8 million for the same period last year. Total
full-time equivalent employees were 1,832 and 1,728 at
September 30, 2004 and 2003, respectively.

Occupancy expense for the three months ended
September 30, 2004 was $9.4 million, an increase of
$1.4 million, or 17%, from $8.0 million for the three
months ended September 30, 2003. For the nine months ended
September 30, 2004, occupancy expense was
$26.5 million, an increase of $5.1 million, or 24%,
from $21.4 million for the nine months ended
September 30, 2003. Major categories within occupancy
expense are building lease expense, depreciation expense and
maintenance contract expense. Building lease expense increased
$337,000, or 30%, to $1.5 million for the three months
ended September 30, 2004. For the nine months ended
September 30, 2004, building lease expense was
$4.1 million, an increase of $779,000, or 23%, from
$3.3 million for the same period last year. Depreciation
expense increased $486,000, or 15%, to $3.7 million for the
three months ended September 30, 2004. For the nine months
ended September 30, 2004, depreciation expense was
$10.7 million, an increase of $2.1 million, or 24%,
from $8.7 million for the same period last year.
Maintenance contract expense for the three months ended
September 30, 2004 was $1.7 million, an increase of
$142,000, or 9%, compared to $1.5 million for the same
period last year. For the nine months ended September 30,
2004, maintenance contract expense was $4.8 million, an
increase of $876,000, or 22%, from $3.9 million for the
same period last year. The Company has purchased maintenance
contracts for major operating systems throughout the
organization.

26



---



##### Table of Contents



Core deposit intangible amortization expense for
the three months ended September 30, 2004 was $799,000, an
increase of $104,000, or 15%, from $695,000 for the three months
ended September 30, 2003. For the nine months ended
September 30, 2004, core deposit intangible amortization
expense was $2.7 million, an increase of $2.0 million
from $695,000 for the nine months ended September 30, 2003.
The core deposit intangible asset is associated with the Maxim
merger that was effective July 1, 2003 and the Lone Star
merger that was effective January 31, 2004.



| |             
| | ------------
| | 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
September 30, 2004, the provision for income taxes was
$7.5 million, an increase of $1.0, or 16%, from the
$6.5 million provided for in the same period in 2003. For
the nine months ended September 30, 2004, the provision for
income taxes was $22.0 million, an increase of
$1.7 million, or 8%, from the $20.3 million provided
for in the same period in 2003. The Companys effective tax
rate was 28% for the three months ended September 30, 2004
and 33% for the same period in 2003. For the nine months ended
September 30, 2004, the Companys effective tax rate
was 30% compared to 31% for the same period last year. The
reduction in the effective tax rate was the result of income
from municipal securities and a tax credit for research and
development expenditures.

Financial Condition



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

Loans held for investment were $4.13 billion
at September 30, 2004, an increase of $642.5 million,
or 18%, from $3.49 billion at December 31, 2003.

The following table summarizes the loan portfolio
of the Company by type of loan as of September 30, 2004 and
December 31, 2003.

|                          |                                   |                                 |           |                   |           |        |       |         |        |   |           |         |           |  |       |       |        |  
|------------------------- | --------------------------------- | ------------------------------- | --------- | ----------------- | --------- | ------ | ----- | ------- | ------ | - | --------- | ------- | --------- |  | ----- | ----- | ------ | -
|                          |                                   |                                 |           |                  
|                          |                                   | September 30, 2004              |           | December 31, 2003
|                          |                                   |                                 |           |                  
|                          |                                   | Amount                          |           | Percent           |           | Amount |       | Percent
|                          |                                   |                                 |           |                   |           |        |       |        
|                          |                                   |                                
|                          |                                   | (Dollars in thousands)         
|Commercial and industrial |                                   | $                               | 1,886,957 |                   |           |        | 45.64 | %       |        | $ | 1,500,304 |         |           |  | 42.96 | %    
|Real estate:              |                                   |                                 |           |                   |           |        |       |         |        |   |           |         |           |  |       |      
|                          | Construction and land development |                                 |           | 746,463           |           |        |       | 18.06   |        |   |           | 706,546 |           |  |       | 20.24 |       
|                          | 1-4 family residential            |                                 |           | 641,569           |           |        |       | 15.52   |        |   |           | 567,009 |           |  |       | 16.24 |       
|                          | Commercial                        |                                 |           | 649,098           |           |        |       | 15.70   |        |   |           | 521,254 |           |  |       | 14.93 |       
|                          | Farmland                          |                                 |           | 13,505            |           |        |       | 0.33    |        |   |           | 11,140  |           |  |       | 0.32  |       
|                          | Other                             |                                 |           | 61,675            |           |        |       | 1.49    |        |   |           | 41,854  |           |  |       | 1.20  |       
|Consumer                  |                                   |                                 | 134,858   |                   |           |        | 3.26  |         |        |   | 143,566   |         |           |  | 4.11  |      
|                          |                                   |                                 |           |                   |           |        |       |         |        |   |           |         |           |  |       |      
|                          |                                   | Total loans held for investment |           | $                 | 4,134,125 |        |       |         | 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

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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 in the amount of the loan and hazard insurance equal
to the replacement value of the dwelling. Although the
contractual loan payment period for single-family residential
real estate loans are generally for a 10 to 30 year period,
such loans often remain outstanding for significantly shorter
periods than their contractual terms. The Company also offers
home improvement loans and home equity loans collateralized by
single-family residential real estate. The terms of these loans
typically range from three to 15 years.

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

Residential construction financing to builders
generally has been originated in amounts of no more than 80% of
appraised value. The Company requires a mortgage title binder
and builders risk insurance in the amount of the loan. The
contractual loan payment periods for residential 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 September 30, 2004 are summarized in
the following table:

|                                              |       |                        |           |            |  |            |         |           |  |   |         |         |  |   |           |           | 
|--------------------------------------------- | ----- | ---------------------- | --------- | ---------- |  | ---------- | ------- | --------- |  | - | ------- | ------- |  | - | --------- | --------- | 
|                                              |       |                       
|                                              |       | September 30, 2004    
|                                              |       |                       
|                                              |       |                        |           | After One  |  |           
|                                              |       | One Year               |           | Through    |  | After      |         |          
|                                              |       | or Less                |           | Five Years |  | Five Years |         | Total    
|                                              |       |                        |           |            |  |            |         |          
|                                              |       |                       
|                                              |       | (Dollars in thousands)
|Commercial and industrial                     |       | $                      | 824,843   |            |  | $          | 885,731 |           |  | $ | 176,383 |         |  | $ | 1,886,957 |          
|Real estate construction and land development |       |                        | 368,076   |            |  |            | 354,883 |           |  |   | 23,504  |         |  |   | 746,463   |          
|                                              |       |                        |           |            |  |            |         |           |  |   |         |         |  |   |           |          
|                                              | Total |                        | $         | 1,192,919  |  |            | $       | 1,240,614 |  |   | $       | 199,887 |  |   | $         | 2,633,420 | 
|                                              |       |                        |           |            |  |            |         |           |  |   |         |         |  |   |           |          
|Loans with a fixed interest rate              |       | $                      | 118,565   |            |  | $          | 260,192 |           |  | $ | 58,862  |         |  | $ | 437,619   |          
|Loans with a floating interest rate           |       |                        | 1,074,354 |            |  |            | 980,422 |           |  |   | 141,025 |         |  |   | 2,195,801 |          
|                                              |       |                        |           |            |  |            |         |           |  |   |         |         |  |   |           |          
|                                              | Total |                        | $         | 1,192,919  |  |            | $       | 1,240,614 |  |   | $       | 199,887 |  |   | $         | 2,633,420 | 
|                                              |       |                        |           |            |  |            |         |           |  |   |         |         |  |   |           |          



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

Loans held for sale of $96.0 million at
September 30, 2004 decreased 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.

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| |                                     
| | ------------------------------------
| | 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 $2.80 billion at September 30, 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 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 $293.1 million at September 30, 2004 and
$227.0 million at December 31, 2003. As of
September 30, 2004, and December 31, 2003, $401,000
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
$4.0 million, and a quality control process for loan
documentation. The Company also maintains a problem loan
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. 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.

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| |                          
| | -------------------------
| | 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, a general reserve, 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
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.

The allowance for loan losses increased by
$6.2 million from December 31, 2003 as a result of the
increase in loans held for investment, net charge-offs of
$3.9 million, the allowance for loan losses acquired
through the merger with Lone Star and provision for loan losses
of $8.0 million. At September 30, 2004, the allowance
for loan losses was 1.19% of period-end loans, an decrease from
1.23% at December 31, 2003. For the nine month period ended
September 30, 2004, annualized net charge-offs to average
loans was 0.14%. The net charge-offs average for all FDIC
insured commercial banks was 0.67% for the six months ended
June 30, 2004.

Management believes that the allowance for loan
losses at September 30, 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 the future periods which could be greater than the size of
the allowance as of September 30, 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                |        | Nine Months Ended
|                                             |                           | September 30,                     |        | September 30,    
|                                             |                           |                                   |        |                  
|                                             |                           | 2004                              |        | 2003              |     | 2004 |        | 2003  
|                                             |                           |                                   |        |                   |     |      |        |       
|                                             |                           |                                  
|                                             |                           | (Dollars in thousands)           
|Allowance for loan losses, beginning balance |                           | $                                 | 47,492 |                   |     | $    | 38,723 |        |      | $ | 43,008 |        |        | $ | 36,696 |       
|Provision charged against operations         |                           |                                   | 3,000  |                   |     |      | 3,000  |        |      |   | 8,000  |        |        |   | 9,000  |       
|Charge-offs:                                 |                           |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |       
|                                             | Commercial and industrial |                                   |        | (1,332            | )   |      |        | (1,535 | )    |   |        | (2,778 | )      |   |        | (2,191 | )     
|                                             | Real estate:              |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |        |       
|                                             |                           | Construction and land development |        |                   |    |      |        |        | (14  | ) |        |        |       |   |        |        | (14    | )
|                                             |                           | 1-4 family residential            |        |                   | (87 | )    |        |        | (24  | ) |        |        | (773   | ) |        |        | (47    | )
|                                             |                           | Commercial                        |        |                   |    |      |        |        | (343 | ) |        |        | (2,018 | ) |        |        | (911   | )
|                                             |                           | Farmland                          |        |                   |    |      |        |        |     |   |        |        |       |   |        |        |       |  
|                                             |                           | Other                             |        |                   |    |      |        |        |     |   |        |        |       |   |        |        | (2,741 | )
|                                             | Consumer                  |                                   |        | (247              | )   |      |        | (241   | )    |   |        | (1,227 | )      |   |        | (626   | )     
|                                             |                           |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |       
|Total charge-offs                            |                           |                                   | (1,666 | )                 |     |      | (2,157 | )      |      |   | (6,796 | )      |        |   | (6,530 | )     
|                                             |                           |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |       
|Recoveries:                                  |                           |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |       
|                                             | Commercial and industrial |                                   |        | 51                |     |      |        | 84     |      |   |        | 512    |        |   |        | 169    |       
|                                             | Real estate:              |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |        |       
|                                             |                           | Construction and land development |        |                   |    |      |        |        |     |   |        |        |       |   |        |        |       |  
|                                             |                           | 1-4 family residential            |        |                   | 105 |      |        |        |     |   |        |        | 105    |   |        |        | 48     |  
|                                             |                           | Commercial                        |        |                   |    |      |        |        |     |   |        |        |       |   |        |        |       |  
|                                             |                           | Farmland                          |        |                   |    |      |        |        |     |   |        |        |       |   |        |        |       |  
|                                             |                           | Other                             |        |                   |    |      |        |        |     |   |        |        | 1,700  |   |        |        |       |  
|                                             | Consumer                  |                                   |        | 221               |     |      |        | 59     |      |   |        | 558    |        |   |        | 326    |       
|                                             |                           |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |       
|Total recoveries                             |                           |                                   | 377    |                   |     |      | 143    |        |      |   | 2,875  |        |        |   | 543    |       
|                                             |                           |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |       
|Net charge-offs                              |                           |                                   | (1,289 | )                 |     |      | (2,014 | )      |      |   | (3,921 | )      |        |   | (5,987 | )     
|Allowance acquired through Maxim merger      |                           |                                   |       |                   |     |      | 1,426  |        |      |   |       |        |        |   | 1,426  |       
|Allowance acquired through Lone Star merger  |                           |                                   |       |                   |     |      |       |        |      |   | 2,116  |        |        |   |       |       
|                                             |                           |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |       
|Allowance for loan losses, ending balance    |                           | $                                 | 49,203 |                   |     | $    | 41,135 |        |      | $ | 49,203 |        |        | $ | 41,135 |       
|                                             |                           |                                   |        |                   |     |      |        |        |      |   |        |        |        |   |        |       
|Allowance to period-end loans                |                           |                                   | 1.19   | %                 |     |      | 1.24   | %      |      |   | 1.19   | %      |        |   | 1.24   | %     
|Net charge-offs to average loans             |                           |                                   | 0.13   | %                 |     |      | 0.24   | %      |      |   | 0.14   | %      |        |   | 0.25   | %     
|Allowance to period-end nonperforming loans  |                           |                                   | 402.81 | %                 |     |      | 271.41 | %      |      |   | 402.81 | %      |        |   | 271.41 | %     

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The following table reflects the distribution of
the allowance for loan losses among the 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.

|                                                        |                           |                                 |                                   |                   |        |        |  |             |        |       |   |        |        |       |  |       |        |       | 
|------------------------------------------------------- | ------------------------- | ------------------------------- | --------------------------------- | ----------------- | ------ | ------ |  | ----------- | ------ | ----- | - | ------ | ------ | ----- |  | ----- | ------ | ----- | 
|                                                        |                           |                                 |                                   |                  
|                                                        |                           | September 30, 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 |                                 | $                                 | 27,643            |        |        |  | 45.64       | %      |       | $ | 25,388 |        |       |  | 42.96 | %     
|                                                        | Real estate:              |                                 |                                   |                   |        |        |  |             |        |       |   |        |        |       |  |       |       
|                                                        |                           |                                 | Construction and land development |                   |        | 7,940  |  |             |        | 18.06 |   |        |        | 5,503 |  |       |        | 20.24 | 
|                                                        |                           |                                 | 1-4 family residential            |                   |        | 4,887  |  |             |        | 15.52 |   |        |        | 2,478 |  |       |        | 16.24 | 
|                                                        |                           |                                 | Commercial                        |                   |        | 5,064  |  |             |        | 15.70 |   |        |        | 5,179 |  |       |        | 14.93 | 
|                                                        |                           |                                 | Farmland                          |                   |        | 134    |  |             |        | 0.33  |   |        |        | 39    |  |       |        | 0.32  | 
|                                                        |                           |                                 | Other                             |                   |        | 1,102  |  |             |        | 1.49  |   |        |        | 2,465 |  |       |        | 1.20  | 
|                                                        | Consumer                  |                                 |                                   | 2,433             |        |        |  | 3.26        |        |       |   | 1,956  |        |       |  | 4.11  |       
|                                                        |                           |                                 |                                   |                   |        |        |  |             |        |       |   |        |        |       |  |      
|                                                        |                           | Total allowance for loan losses |                                   | $                 | 49,203 |        |  |             | 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
$20.3 million at September 30, 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
0.49% at September 30, 2004 and at December 31, 2003.
The increase in nonperforming asset is primarily due to the
addition of one foreclosed commercial real estate property.
Nonaccrual loans, the largest component of nonperforming assets,
were $11.4 million at September 30, 2004 and
December 31, 2003.

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

|                                                              |                            |                        |        |              |  |   |        |        | 
|------------------------------------------------------------- | -------------------------- | ---------------------- | ------ | ------------ |  | - | ------ | ------ | 
|                                                              |                            | September 30,          |        | December 31,
|                                                              |                            | 2004                   |        | 2003        
|                                                              |                            |                        |        |             
|                                                              |                            |                       
|                                                              |                            | (Dollars in thousands)
|Nonaccrual loans                                              |                            | $                      | 11,370 |              |  | $ | 11,443 |       
|Accruing loans 90 or more days past due                       |                            |                        | 845    |              |  |   | 1,299  |       
|Restructured loans                                            |                            |                        |       |              |  |   |       |       
|Other real estate and foreclosed property                     |                            |                        | 8,076  |              |  |   | 4,248  |       
|                                                              |                            |                        |        |              |  |   |        |       
|                                                              | Total nonperforming assets |                        | $      | 20,291       |  |   | $      | 16,990 | 
|                                                              |                            |                        |        |              |  |   |        |       
|Nonperforming assets to total loans and other
    real estate |                            |                        | 0.49   | %            |  |   | 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 $931,000 and $1.1 million for the
nine months ended September 30, 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. The Company considers all
nonaccrual loans to be impaired.

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

|                                                          |                                             |                        |        |              |  |   |        |        | 
|--------------------------------------------------------- | ------------------------------------------- | ---------------------- | ------ | ------------ |  | - | ------ | ------ | 
|                                                          |                                             | September 30,          |        | December 31,
|                                                          |                                             | 2004                   |        | 2003        
|                                                          |                                             |                        |        |             
|                                                          |                                             |                       
|                                                          |                                             | (Dollars in thousands)
|Impaired loans with no SFAS No. 114
    valuation reserve |                                             | $                      | 7,330  |              |  | $ | 12,568 |       
|Impaired loans with a SFAS No. 114
    valuation reserve  |                                             |                        | 13,318 |              |  |   | 4,240  |       
|                                                          |                                             |                        |        |              |  |   |        |       
|                                                          | Total recorded investment in impaired loans |                        | $      | 20,648       |  |   | $      | 16,808 | 
|                                                          |                                             |                        |        |              |  |   |        |       
|Valuation allowance related to impaired loans             |                                             | $                      | 4,430  |              |  | $ | 2,768  |       
|                                                          |                                             |                        |        |              |  |   |        |       

The average recorded investment in impaired loans
during the nine months ended September 30, 2004 and the
year ended December 31, 2003 was $18.7 million and
$19.9 million, respectively. Interest income on impaired
loans of $914,000 and $1.0 million was recognized for cash
payments received during the nine months ended
September 30, 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 September 30, 2004 and
December 31, 2003.

33



---



##### Table of Contents



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

|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |         |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |           |           | 
|------------------- | ------------------------------------- | ----------------------------------- | - | ----------------- | --------- | ---- | - | ---------- | ------ | ---------------- | - | ------ | ------- | ---- | - | ---------- | --------- |  | - | --------- | --------- |  | - | ----- | ------ |  | - | ------ | ------ | - | - | --------- | --------- | 
|                    |                                       |                                     |   |                  
|                    |                                       | September 30, 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 |                                     | $ | 315,633           |           |      | $ | 727        |        |                  | $ | (1,891 | )       |      | $ | 314,469    |           |  | $ | 250,359   |           |  | $ | 841   |        |  | $ | (102   | )      |   | $ | 251,098   |          
|                    | Mortgage-backed securities            |                                     |   | 1,096,789         |           |      |   | 4,758      |        |                  |   | (8,729 | )       |      |   | 1,092,818  |           |  |   | 1,101,988 |           |  |   | 7,078 |        |  |   | (8,320 | )      |   |   | 1,100,746 |          
|                    | Municipal securities                  |                                     |   | 242,060           |           |      |   | 7,882      |        |                  |   | (1,618 | )       |      |   | 248,324    |           |  |   | 152,927   |           |  |   | 5,905 |        |  |   | (754   | )      |   |   | 158,078   |          
|                    | Federal Reserve Bank stock            |                                     |   | 7,903             |           |      |   |           |        |                  |   |       |         |      |   | 7,903      |           |  |   | 4,459     |           |  |   |      |        |  |   |       |        |   |   | 4,459     |          
|                    | Federal Home Loan Bank stock          |                                     |   | 34,879            |           |      |   |           |        |                  |   |       |         |      |   | 34,879     |           |  |   | 25,469    |           |  |   |      |        |  |   |       |        |   |   | 25,469    |          
|                    | Other securities                      |                                     |   | 3,994             |           |      |   | 7          |        |                  |   | (1     | )       |      |   | 4,000      |           |  |   | 9,455     |           |  |   | 93    |        |  |   |       |        |   |   | 9,548     |          
|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |         |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |          
|                    |                                       | Total securities available for sale |   | $                 | 1,701,258 |      |   | $          | 13,374 |                  |   | $      | (12,239 | )    |   | $          | 1,702,393 |  |   | $         | 1,544,657 |  |   | $     | 13,917 |  |   | $      | (9,176 | ) |   | $         | 1,549,398 | 
|                    |                                       |                                     |   |                   |           |      |   |            |        |                  |   |        |         |      |   |            |           |  |   |           |           |  |   |       |        |  |   |        |        |   |   |          

The following table displays the gross unrealized
losses and fair value of investments as of September 30,
2004 that were in a continuous unrealized loss position for the
periods indicated:

|                    |                                       |                                     |   |              |         |       |   |            |        |       |   |            |         |  |   |        |        |   |   |         |         |  |   |        |         |  
|------------------- | ------------------------------------- | ----------------------------------- | - | ------------ | ------- | ----- | - | ---------- | ------ | ----- | - | ---------- | ------- |  | - | ------ | ------ | - | - | ------- | ------- |  | - | ------ | ------- | -
|                    |                                       |                                     |   |              |         |       |   |            |        |      
|                    |                                       |                                     |   | Greater Than |         |      
|                    |                                       | Less Than 12 Months                 |   | 12 Months    |         | Total
|                    |                                       |                                     |   |              |         |      
|                    |                                       | Fair                                |   | Unrealized   |         | Fair  |   | Unrealized |        | Fair  |   | Unrealized
|                    |                                       | Value                               |   | Loss         |         | Value |   | Loss       |        | Value |   | Loss      
|                    |                                       |                                     |   |              |         |       |   |            |        |       |   |           
|                    |                                       |                                    
|                    |                                       | (Dollars in thousands)             
|Available for sale: |                                       |                                     |   |              |         |       |   |            |        |       |   |            |         |  |   |        |        |   |   |         |         |  |   |       
|                    | U.S. Government and agency securities |                                     | $ | 183,439      |         |       | $ | (1,891     | )      |       | $ |           |         |  | $ |       |        |   | $ | 183,439 |         |  | $ | (1,891 | )      
|                    | Mortgage-backed securities            |                                     |   | 483,861      |         |       |   | (4,583     | )      |       |   | 212,574    |         |  |   | (4,146 | )      |   |   | 696,435 |         |  |   | (8,729 | )      
|                    | Municipal securities                  |                                     |   | 59,261       |         |       |   | (1,251     | )      |       |   | 12,672     |         |  |   | (367   | )      |   |   | 71,933  |         |  |   | (1,618 | )      
|                    | Federal Reserve Bank stock            |                                     |   |             |         |       |   |           |        |       |   |           |         |  |   |       |        |   |   |        |         |  |   |       |        
|                    | Federal Home Loan Bank stock          |                                     |   |             |         |       |   |           |        |       |   |           |         |  |   |       |        |   |   |        |         |  |   |       |        
|                    | Other securities                      |                                     |   | 66           |         |       |   | (1         | )      |       |   |           |         |  |   |       |        |   |   | 66      |         |  |   | (1     | )      
|                    |                                       |                                     |   |              |         |       |   |            |        |       |   |            |         |  |   |        |        |   |   |         |         |  |   |       
|                    |                                       | Total securities available for sale |   | $            | 726,627 |       |   | $          | (7,726 | )     |   | $          | 225,246 |  |   | $      | (4,513 | ) |   | $       | 951,873 |  |   | $      | (12,239 | )
|                    |                                       |                                     |   |              |         |       |   |            |        |       |   |            |         |  |   |        |        |   |   |         |         |  |   |       

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 and the
Companys intent and ability to hold the securities until
their recovery, none of the unrealized loss on securities should
be considered other than temporary.

Securities were $1.70 billion at
September 30, 2004, an increase of $153.0 million from
$1.55 billion at December 31, 2003. The
taxable-equivalent yield on the securities portfolio for the
nine months ended September 30, 2004 was 4.01% compared to
3.91% for the nine months ended September 30, 2003.

Included in the Companys mortgage-backed
securities at September 30, 2004 were agency issued
collateral mortgage obligations with a book and fair value of
$29.2 million and non-agency issued collateral mortgage
obligations with a book value of $18.4 million and a fair
value of $18.2 million.

At September 30, 2004, $578.8 million
of the mortgage-backed securities held by the Company had
contractual maturities of more than 10 years, however such
investments often prepay before their maturity date. At
September 30, 2004, approximately $20.6 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.

34



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##### Table of Contents



The following table summarizes the contractual
maturity of investments and their weighted average yields at
September 30, 2004. The yield on the securities portfolio
includes amounts to convert tax-exempt income to a
taxable-equivalent basis, assuming a 35% tax rate. The yield is
based on average historical cost balances and does not give
effect to changes in the fair value that are reflected as a
separate component of other comprehensive income.

|                             |                   |                        |        |                |  |                  |      |                 |   |           |         |          |  |           |      |          |   |       |         |          |  |  |      |      |   |   |         |         |  |  |      |      |   |   |           |           |  |  |      |      |  
|---------------------------- | ----------------- | ---------------------- | ------ | -------------- |  | ---------------- | ---- | --------------- | - | --------- | ------- | -------- |  | --------- | ---- | -------- | - | ----- | ------- | -------- |  |  | ---- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | - | - | --------- | --------- |  |  | ---- | ---- | -
|                             |                   |                       
|                             |                   | September 30, 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(1)       |  | Cost             |      | Yield(1)        |   | Cost      |         | Yield(1) |  | Cost      |      | Yield(1) |   | Total |         | Yield(1)
|                             |                   |                        |        |                |  |                  |      |                 |   |           |         |          |  |           |      |          |   |       |         |         
|                             |                   |                       
|                             |                   | (Dollars in thousands)
|U.S. Government securities   |                   | $                      |       |                |  |                  |     | %               |   | $         | 309,525 |          |  |           | 3.34 | %        |   | $     | 6,108   |          |  |  | 3.91 | %    |   | $ |        |         |  |  |     | %    |   | $ | 315,633   |           |  |  | 3.35 | %   
|Mortgage-backed securities   |                   |                        | 82     |                |  |                  | 5.29 |                 |   |           | 39,742  |          |  |           | 4.18 |          |   |       | 478,206 |          |  |  | 4.06 |      |   |   | 578,759 |         |  |  | 3.98 |      |   |   | 1,096,789 |           |  |  | 4.02 |     
|Municipal securities         |                   |                        | 765    |                |  |                  | 7.08 |                 |   |           | 3,060   |          |  |           | 6.91 |          |   |       | 30,607  |          |  |  | 6.18 |      |   |   | 207,628 |         |  |  | 6.67 |      |   |   | 242,060   |           |  |  | 6.61 |     
|Federal Reserve Bank stock   |                   |                        | 7,903  |                |  |                  | 6.00 |                 |   |           |        |          |  |           |     |          |   |       |        |          |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 7,903     |           |  |  | 6.00 |     
|Federal Home Loan Bank stock |                   |                        | 34,879 |                |  |                  | 1.50 |                 |   |           |        |          |  |           |     |          |   |       |        |          |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 34,879    |           |  |  | 1.50 |     
|Other securities             |                   |                        | 2,323  |                |  |                  | 1.50 |                 |   |           | 674     |          |  |           | 3.19 |          |   |       | 953     |          |  |  | 3.50 |      |   |   | 44      |         |  |  | 3.03 |      |   |   | 3,994     |           |  |  | 2.28 |     
|Federal funds sold           |                   |                        | 69,767 |                |  |                  | 1.87 |                 |   |           |        |          |  |           |     |          |   |       |        |          |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 69,767    |           |  |  | 1.87 |     
|Interest-bearing deposits    |                   |                        | 6,081  |                |  |                  | 1.90 |                 |   |           |        |          |  |           |     |          |   |       |        |          |  |  |     |      |   |   |        |         |  |  |     |      |   |   | 6,081     |           |  |  | 1.90 |     
|                             |                   |                        |        |                |  |                  |      |                 |   |           |         |          |  |           |      |          |   |       |         |          |  |  |      |      |   |   |         |         |  |  |      |      |   |   |           |           |  |  |      |     
|                             | Total investments |                        | $      | 121,800        |  |                  |      | 2.06            | % |           | $       | 353,001  |  |           |      | 3.47     | % |       | $       | 515,874  |  |  |      | 4.19 | % |   | $       | 786,431 |  |  |      | 4.69 | % |   | $         | 1,777,106 |  |  |      | 4.12 | %
|                             |                   |                        |        |                |  |                  |      |                 |   |           |         |          |  |           |      |          |   |       |         |          |  |  |      |      |   |   |         |         |  |  |      |      |   |   |           |           |  |  |      |     



---



|    |                                                
|--- | -----------------------------------------------
|(1) | Taxable-equivalent rates used where applicable.



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

Other assets were $197.0 million at
September 30, 2004, an increase of $3.4 million from
$193.6 million at December 31, 2003. This increase is
primarily attributable to an increase in other real estate and
foreclosed property to $8.1 million at September 30,
2004 from $4.2 million at December 31, 2003. This
increase is primarily due to the addition of one foreclosed
commercial real estate property. See Nonperforming
Assets and Impaired Loans.



| |         
| | --------
| | 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 $135.7 million and
$156.4 million of its deposits classified as brokered funds
at September 30, 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 September 30, 2004 and
December 31, 2003 were 33% and 31%, respectively.

35



---



##### Table of Contents



The average daily balances and weighted average
rates paid on deposits for the nine months ended
September 30, 2004 and the year ended December 31,
2003 are presented below:

|                                 |                |                        |           |                   |  |        |      |      |  |   |           |           |  |  |      |   | 
|-------------------------------- | -------------- | ---------------------- | --------- | ----------------- |  | ------ | ---- | ---- |  | - | --------- | --------- |  |  | ---- | - | 
|                                 |                |                        |           |                  
|                                 |                | September 30, 2004     |           | December 31, 2003
|                                 |                |                        |           |                  
|                                 |                | Amount                 |           | Rate              |  | Amount |      | Rate
|                                 |                |                        |           |                   |  |        |      |     
|                                 |                |                       
|                                 |                | (Dollars in thousands)
|Interest-bearing demand          |                | $                      | 67,640    |                   |  |        | 0.44 | %    |  | $ | 45,493    |           |  |  | 0.22 | %
|Regular savings                  |                |                        | 141,507   |                   |  |        | 0.27 |      |  |   | 115,211   |           |  |  | 0.33 |  
|Premium yield                    |                |                        | 981,065   |                   |  |        | 0.83 |      |  |   | 847,045   |           |  |  | 0.96 |  
|Money market savings             |                |                        | 846,579   |                   |  |        | 0.69 |      |  |   | 827,816   |           |  |  | 0.80 |  
|Time deposits less than $100,000 |                |                        | 274,798   |                   |  |        | 2.41 |      |  |   | 283,670   |           |  |  | 2.67 |  
|Time deposits $100,000 and over  |                |                        | 684,424   |                   |  |        | 1.72 |      |  |   | 629,749   |           |  |  | 1.85 |  
|IRAs, QRPs and other           |                |                        | 94,049    |                   |  |        | 2.45 |      |  |   | 91,509    |           |  |  | 2.74 |  
|                                 |                |                        |           |                   |  |        |      |      |  |   |           |           |  |  |      |  
|Total interest-bearing deposits  |                |                        | 3,090,062 |                   |  |        | 1.15 | %    |  |   | 2,840,493 |           |  |  | 1.30 | %
|                                 |                |                        |           |                   |  |        |      |      |  |   |           |           |  |  |      |  
|Noninterest-bearing deposits     |                |                        | 1,551,178 |                   |  |        |      |      |  |   | 1,281,546 |           |  |  |      |  
|                                 |                |                        |           |                   |  |        |      |      |  |   |           |           |  |  |      |  
|                                 | Total deposits |                        | $         | 4,641,240         |  |        |      |      |  |   | $         | 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:

|                              |                                       |                        |         |              |  |   |         |         | 
|----------------------------- | ------------------------------------- | ---------------------- | ------- | ------------ |  | - | ------- | ------- | 
|                              |                                       | September 30,          |         | December 31,
|                              |                                       | 2004                   |         | 2003        
|                              |                                       |                        |         |             
|                              |                                       |                       
|                              |                                       | (Dollars in thousands)
|3 months or less              |                                       | $                      | 544,011 |              |  | $ | 417,384 |        
|Between 3 months and 6 months |                                       |                        | 76,265  |              |  |   | 60,101  |        
|Between 6 months and 1 year   |                                       |                        | 101,303 |              |  |   | 78,948  |        
|Over 1 year                   |                                       |                        | 79,365  |              |  |   | 86,157  |        
|                              |                                       |                        |         |              |  |   |         |        
|                              | Total time deposits $100,000 and over |                        | $       | 800,944      |  |   | $       | 642,590 | 
|                              |                                       |                        |         |              |  |   |         |        

36



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##### Table of Contents





| |                      
| | ---------------------
| | 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
September 30, 2004 and December 31, 2003 is summarized
as follows:

|                                             |                                         |                        |   |              |   |  |   |         |  
|-------------------------------------------- | --------------------------------------- | ---------------------- | - | ------------ | - |  | - | ------- | -
|                                             |                                         | September 30,          |   | December 31,
|                                             |                                         | 2004                   |   | 2003        
|                                             |                                         |                        |   |             
|                                             |                                         |                       
|                                             |                                         | (Dollars in thousands)
|Securities sold under repurchase agreements: |                                         |                        |   |              |   |  |   |        
|                                             | Average                                 |                        | $ | 370,795      |   |  | $ | 261,320 |  
|                                             | Period-end                              |                        |   | 367,428      |   |  |   | 285,571 |  
|                                             | Maximum month-end balance during period |                        |   | 518,719      |   |  |   | 303,764 |  
|Interest rate:                               |                                         |                        |   |              |   |  |   |        
|                                             | Weighted average for the period         |                        |   | 0.86         | % |  |   | 0.88    | %
|                                             | Weighted average at period-end          |                        |   | 1.07         | % |  |   | 0.72    | %
|Short-term borrowings:                       |                                         |                        |   |              |   |  |   |        
|                                             | Average                                 |                        | $ | 472,076      |   |  | $ | 276,193 |  
|                                             | Period-end                              |                        |   | 712,658      |   |  |   | 473,154 |  
|                                             | Maximum month-end balance during period |                        |   | 998,753      |   |  |   | 473,154 |  
|Interest rate:                               |                                         |                        |   |              |   |  |   |        
|                                             | Weighted average for the period         |                        |   | 1.24         | % |  |   | 1.11    | %
|                                             | Weighted average at period-end          |                        |   | 1.78         | % |  |   | 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 one independent director, in
accordance with the committees 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.

37



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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 September 30, 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 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 September 30, 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,
instantaneous, and sustained 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 to 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:  |                          |  |     |        |   |  |      |       |      |  |  |       |  |  |  |       |    |  |  |      
|                                            |                  | September 30, 2004       |  |     | (0.20) | % |  |      | (0.05 | )%   |  |  | 0.00% |  |  |  | 2.00  | %  |  |  | 4.03  | % 
|                                            |                  | December 31, 2003        |  |     | (1.20) | % |  |      | 0.25  | %    |  |  | 0.00% |  |  |  | 1.23  | %  |  |  | 3.33  | % 
|                                            | Months 13 to 24: |                          |  |     |        |   |  |      |       |      |  |  |       |  |  |  |       |    |  |  |      
|                                            |                  | September 30, 2004       |  |     | (2.52) | % |  |      | (1.07 | )%   |  |  | 0.00% |  |  |  | 3.51  | %  |  |  | 6.76  | % 
|                                            |                  | December 31, 2003        |  |     | (4.37) | % |  |      | (1.43 | )%   |  |  | 0.00% |  |  |  | 3.37  | %  |  |  | 6.65  | % 
|Impact on market value of portfolio equity: |                  |                          |  |     |        |   |  |      |       |      |  |  |       |  |  |  |       |    |  | 
|                                            |                  | September 30, 2004       |  |     | (0.80) | % |  |      | 0.19  | %    |  |  | 0.00% |  |  |  | (0.66 | )% |  |  | (1.44 | )%
|                                            |                  | 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 September 30, 2004 was a positive
$479.5 million, or 7.23%, of total 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.

38



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The following table sets forth an interest rate
sensitivity analysis for the Company as of September 30,
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)
|Cash and due from banks                                              |                                            | $                      |          |             |  | $           |         |             |  | $          |        |                |  | $     |          |           |  | $ |          |           |  | $ | 246,002   |           |  | $ | 246,002   |          
|Federal funds sold and other cash equivalents                        |                                            |                        | 75,848    |             |  |             |         |             |  |            |        |                |  |       |          |           |  |   | 75,848    |           |  |   |          |           |  |   | 75,848    |          
|Securities                                                           |                                            |                        | 53,781    |             |  |             | 128,457  |             |  |            | 355,315 |                |  |       | 1,164,840 |           |  |   | 1,702,393 |           |  |   |          |           |  |   | 1,702,393 |          
|Loans                                                                |                                            |                        | 2,749,966 |             |  |             | 455,910  |             |  |            | 582,818 |                |  |       | 430,083   |           |  |   | 4,218,777 |           |  |   | 11,370    |           |  |   | 4,230,147 |          
|Allowance for loan losses                                            |                                            |                        |          |             |  |             |         |             |  |            |        |                |  |       |          |           |  |   |          |           |  |   | (49,203   | )         |  |   | (49,203   | )        
|Other assets                                                         |                                            |                        |          |             |  |             |         |             |  |            |        |                |  |       |          |           |  |   |          |           |  |   | 428,183   |           |  |   | 428,183   |          
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |         |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                                                     | Total assets                               |                        | $         | 2,879,595   |  |             | $        | 584,367     |  |            | $       | 938,133        |  |       | $         | 1,594,923 |  |   | $         | 5,997,018 |  |   | $         | 636,352   |  |   | $         | 6,633,370 | 
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |         |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Deposits                                                             |                                            | $                      | 1,036,843 |             |  | $           | 702,471  |             |  | $          | 611,883 |                |  | $     | 859,613   |           |  | $ | 3,210,810 |           |  | $ | 1,593,652 |           |  | $ | 4,804,462 |          
|Securities sold under repurchase agreements and
    other borrowings |                                            |                        | 1,094,118 |             |  |             | 63,440   |             |  |            | 1,060   |                |  |       | 6,994     |           |  |   | 1,165,612 |           |  |   |          |           |  |   | 1,165,612 |          
|Junior subordinated deferrable interest debentures                   |                                            |                        | 87,630    |             |  |             |         |             |  |            |        |                |  |       |          |           |  |   | 87,630    |           |  |   |          |           |  |   | 87,630    |          
|Other liabilities                                                    |                                            |                        |          |             |  |             |         |             |  |            |        |                |  |       |          |           |  |   |          |           |  |   | 25,881    |           |  |   | 25,881    |          
|Shareholders equity                                                 |                                            |                        |          |             |  |             |         |             |  |            |        |                |  |       |          |           |  |   |          |           |  |   | 549,785   |           |  |   | 549,785   |          
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |         |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                                                     | Total liabilities and shareholders equity |                        | $         | 2,218,591   |  |             | $        | 765,911     |  |            | $       | 612,943        |  |       | $         | 866,607   |  |   | $         | 4,464,052 |  |   | $         | 2,169,318 |  |   | $         | 6,633,370 | 
|                                                                     |                                            |                        |           |             |  |             |          |             |  |            |         |                |  |       |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Period GAP                                                           |                                            | $                      | 661,004   |             |  | $           | (181,544 | )           |  | $          | 325,190 |                |  | $     | 728,316   |           |  | $ | 1,532,966 |           |  |   |           |           |  |   |           |          
|Cumulative GAP                                                       |                                            | $                      | 661,004   |             |  | $           | 479,460  |             |  | $          | 804,650 |                |  | $     | 1,532,966 |           |  | $ | 1,532,966 |           |  |   |           |           |  |   |           |          
|Period GAP to total assets                                           |                                            |                        | 9.96      | %           |  |             | (2.73    | )%          |  |            | 4.90    | %              |  |       | 10.98     | %         |  |   | 23.11     | %         |  |   |           |           |  |   |           |          
|Cumulative GAP to total assets                                       |                                            |                        | 9.96      | %           |  |             | 7.23     | %           |  |            | 12.13   | %              |  |       | 23.11     | %         |  |   | 23.11     | %         |  |   |           |           |  |   |           |          
|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.

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. The Bank has a credit facility
established with the Federal Reserve Bank for contingency
funding purposes.

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 71% of total interest-earning
assets for the nine months ended September 30, 2004 and 73%
for the same period in 2003.

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A component of the Companys growth strategy
has been to diversify its sources of funding through mergers
with banks that possess a preponderance of stable core deposits,
primarily from retail customers. The October 1, 2004 merger
with Klein Bancshares, Inc. will add $535.6 million in low
cost deposits. 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 September 30, 2004 and December 31, 2003
to the minimum regulatory standards:

|                         |                                           |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |     |  |   |         |  |  |  |       |  
|------------------------ | ----------------------------------------- | ---------------------- |  | --------------- | ------- | ----------------- |  | ----------------- | ----- | ------------------ |  | ----- | ------- |  |  |  | ---- | --- |  | - | ------- |  |  |  | ----- | -
|                         |                                           |                        |  |                 |         |                   |  |                   |       |                   
|                         |                                           |                        |  |                 |         |                   |  |                   |       | Minimum To Be Well
|                         |                                           |                        |  |                 |         |                   |  | Capitalized Under
|                         |                                           |                        |  | Minimum Capital |         | Prompt Corrective
|                         |                                           | Actual                 |  | Requirement     |         | Action Provisions
|                         |                                           |                        |  |                 |         |                  
|                         |                                           | Amount                 |  | Ratio           |         | Amount            |  | Ratio             |       | Amount             |  | Ratio
|                         |                                           |                        |  |                 |         |                   |  |                   |       |                    |  |      
|                         |                                           |                       
|                         |                                           | (Dollars in thousands)
|As of September 30, 2004 |                                           |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |     |  |   |         |  |  | 
|                         | Total Capital (to Risk Weighted Assets):  |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |     |  |   |         |  |  |  |      
|                         |                                           | The Company            |  | $               | 696,108 |                   |  |                   | 12.05 | %                  |  | $     | 462,298 |  |  |  | 8.00 | %   |  | $ | 577,872 |  |  |  | 10.00 | %
|                         |                                           | The Bank               |  |                 | 597,723 |                   |  |                   | 10.36 |                    |  |       | 461,561 |  |  |  | 8.00 |     |  |   | 576,951 |  |  |  | 10.00 |  
|                         | Tier 1 Capital (to Risk Weighted Assets): |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |     |  |   |         |  |  |  |      
|                         |                                           | The Company            |  |                 | 571,905 |                   |  |                   | 9.90  |                    |  |       | 231,149 |  |  |  | 4.00 |     |  |   | 346,723 |  |  |  | 6.00  |  
|                         |                                           | The Bank               |  |                 | 547,911 |                   |  |                   | 9.50  |                    |  |       | 230,781 |  |  |  | 4.00 |     |  |   | 346,171 |  |  |  | 6.00  |  
|                         | Tier 1 Capital (to Average Assets):       |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |     |  |   |         |  |  |  |      
|                         |                                           | The Company            |  |                 | 571,905 |                   |  |                   | 8.90  |                    |  |       | 257,128 |  |  |  | 4.00 | (1) |  |   | 321,410 |  |  |  | 5.00  |  
|                         |                                           | The Bank               |  |                 | 547,911 |                   |  |                   | 8.53  |                    |  |       | 257,058 |  |  |  | 4.00 | (1) |  |   | 321,322 |  |  |  | 5.00  |  
|As of December 31, 2003  |                                           |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |     |  |   |         |  |  | 
|                         | Total Capital (to Risk Weighted Assets):  |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |     |  |   |         |  |  |  |      
|                         |                                           | The Company            |  |                 | 558,858 |                   |  |                   | 11.90 |                    |  |       | 375,630 |  |  |  | 8.00 |     |  |   | 469,537 |  |  |  | 10.00 |  
|                         |                                           | 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 |     |  |   | 375,630 |  |  |  | 6.00  |  
|                         |                                           | The Bank               |  |                 | 461,438 |                   |  |                   | 9.84  |                    |  |       | 187,566 |  |  |  | 4.00 |     |  |   | 375,132 |  |  |  | 6.00  |  
|                         | Tier 1 Capital (to Average Assets):       |                        |  |                 |         |                   |  |                   |       |                    |  |       |         |  |  |  |      |     |  |   |         |  |  |  |      
|                         |                                           | The Company            |  |                 | 515,850 |                   |  |                   | 9.15  |                    |  |       | 169,086 |  |  |  | 4.00 | (1) |  |   | 281,810 |  |  |  | 5.00  |  
|                         |                                           | The Bank               |  |                 | 461,438 |                   |  |                   | 8.20  |                    |  |       | 168,917 |  |  |  | 4.00 | (1) |  |   | 281,529 |  |  |  | 5.00  |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Tier 1 leverage ratio consists of
    Tier 1 capital divided by quarterly average total assets,
    excluding goodwill and certain other items. The minimum leverage
    ratio guideline is 3% for banking organizations that do not
    anticipate significant growth and that have well-diversified
    risk, excellent asset quality, high liquidity, good earnings,
    effective management and monitoring of market risk and, in
    general, are considered top-rated, strong banking organizations.



| |                             
| | ----------------------------
| | 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 asset 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

40



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##### Table of Contents



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 that 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.

Goodwill is recorded for the excess of the
purchase price over the fair value of identifiable net assets,
including core deposit intangibles, acquired through a merger
transaction. Goodwill is not amortized, but instead is tested
for impairment at least annually using both a discounted cash
flow analysis and a review of the valuation of recent bank
acquisitions. The discounted cash flow analysis utilizes a
risk-free interest rate, estimates of future cash flows and
probabilities as to the occurrence of the future cash flows. The
Company utilizes its budgets and projections of future
operations based upon historical and expected industry trends to
estimate future cash flows and the probability of their
occurring as projected. 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.

The fair value of mortgage servicing rights is
estimated based on the objective characteristics of the
servicing portfolio and is derived through discounted cash flow
analysis. These analyses also take into consideration existing
conditions in the secondary servicing markets as well as
recently executed servicing transactions. Because the values of
these assets are sensitive to change 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 December 16, 2003, the American Institute
of Certified Public Accountants (AICPA) issued
Statement of Position 03-3 (SOP 03-3),
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. SOP 03-3 provides guidance on the accounting
for differences between contractual and expected cash flows from
the purchasers initial investment in loans or debt
securities acquired in a transfer, if those differences are
attributable, at least in part, to credit quality. Among other
things, SOP 03-3: (1) prohibits the recognition of the
excess of contractual cash flows over expected cash flows as an
adjustment of yield, loss accrual, or valuation allowance at the
time of purchase; (2) requires that subsequent increases in
expected cash flows be recognized prospectively through an
adjustment of yield; and (3) requires the subsequent
decreases in expected cash flows be recognized as an impairment.
In addition, SOP 03-3 prohibits the creation or carrying
over of a valuation allowance in the initial accounting of all
loans within its scope that are acquired in a transfer.
SOP 03-3 becomes effective for loans or debt securities
acquired in fiscal years beginning after December 15, 2004.
The Company does not expect the requirements of SOP 03-3 to
have a material impact on its financial condition or results of
operations.

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 requirements
of SAB No. 105 did not have a material impact on the
financial condition or results of operations of the Company.

On March 31, 2004, the Financial Accounting
Standards Board (FASB) issued an exposure draft
entitled Share Based Paymentwhich would amend Statement
of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation,(SFAS No. 123), and Statement of
Financial Accounting Standards No. 95, Statement of Cash
Flows. Among other items, the new standard would require the
expensing of stock options issued by the Company. The new

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standard, as proposed, would be effective
January 1, 2005. Throughout 2004, the FASB has continued to
deliberate on different aspects of a new standard and currently
expects to issue a final standard in the fourth quarter of 2004.
Although the Company has not yet completed an analysis to
quantify the exact impact the new standard will have on its
future financial performance, the Stock-Based Compensationdisclosures in Note 1  Basis of
Presentation provide detail as to the Companys
financial performance as if the Company had applied the fair
value based method and recognition provision of
SFAS No. 123 to stock-based compensation in the
current reporting periods.


On June 4, 2004, the Emerging Issues Task
Force (EITF) issued EITF Issue 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments.EITF 03-1 provides guidance for
determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an
impairment loss. An investment is considered impaired if the
fair value of the investment is less than its cost. Generally,
an impairment is considered other-than-temporary unless:
(i) the investor has the ability and intent to hold an
investment for a reasonable period of time sufficient for an
anticipated recovery of fair value up to or beyond the cost of
the investment; and (ii) evidence indicating that the cost
of the investment is recoverable within a reasonable period of
time outweighs evidence to the contrary. If impairment is
determined to be other-than-temporary, an impairment loss should
be recognized equal to the difference between the
investments cost and its fair value. Certain disclosure
requirements of EITF 03-01 were adopted in 2003. The
recognition and measurement provisions were initially effective
for other-than-temporary impairment evaluations in reporting
periods beginning after June 15, 2004. In September 2004
the effective date of these provisions was delayed until the
finalization of a FASB Staff Position (FSP) to
provide additional implementation guidance. Currently, the FASB
expects to issue the FSP no later than December 2004.






|        |                                                               
|------- | --------------------------------------------------------------
|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 has 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 of
each process. Infrastructure supporting the ERM includes a Board
Executive and Risk Committee, an internal Risk Management
Committee, and centralized Risk Management supervision. An
automated application, Enterprise Risk Management System
(ERMS), has also been developed to facilitate
execution of this methodology. The basic ERMS 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.

Section 404 of the Sarbanes-Oxley Act of
2002 requires that we evaluate and report on the effectiveness
of our systems of internal control over financial reporting
beginning with the Annual Report filed on Form 10-K as of
December 31, 2004. In addition, our registered independent
public accounting firm will be required to attest to whether our
assessment of the effectiveness of our internal control over
financial reporting is fairly stated in all material respects
and separately report on whether it believes we maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2004.

We are currently evaluating our internal control
systems in order to allow management to report on, and our
registered independent public accounting firm to attest to the
effectiveness of, our internal control over financial reporting.
As a result, we are incurring additional expenses and devoting a
significant amount of managements time to this process.
Although no assurance can be given, management is
conscientiously working toward achieving compliance with the
requirements of Section 404. If we are not able to
implement the requirements of Section 404 in a timely
manner or with adequate compliance, we might become subject to
regulatory sanctions or a loss of confidence in our internal
controls which could have an adverse effect on the market price
of our common stock.

As a result of this evaluation process, during
the quarter the Company identified certain weaknesses in its
control environment which it is addressing. These weaknesses
generally relate to segregation of duties, access to computer

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systems, and reconciliation of accounts. Based on
the Companys compensating controls and testing, management
has concluded that these design weaknesses did not result in a
material weakness in the Companys internal control over
financial reporting. As part of the enhancement process, during
the quarter the Company installed new software systems to
improve the control over and the quality of information relating
to financial reporting, specifically in the area of accounting
for its securities portfolio.


Other than as discussed above, there were no
other changes in the Companys internal control over
financial reporting identified with the evaluation required by
paragraph (d) of Rule 13a-15 that have materially
affected, or are reasonably likely to materially affect, the
internals controls over financial reporting.

The Companys management, with the
participation of the Companys chief executive officer and
chief financial officer, evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended) as of
September 30, 2004. Based on this evaluation, the chief
executive officer and the chief financial officer have concluded
that the Companys disclosure controls and procedures were
effective as of September 30, 2004 to ensure that
information that is required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.




With respect to the unaudited financial
information of Southwest Bancorporation of Texas, Inc. for the
three and nine month periods ended September 30, 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 November 4, 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.

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PART II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

On October 1, 2004, the Bank and the Company
were sued in the 281st Judicial District of Harris County,
Texas for various contract, tort, and securities claims
(Appleby et. al. v. Southwest Bank of Texas N.A.).
The plaintiffs are 128 individuals, trusts, and partnerships,
all of which held money market accounts with the Bank and 33 of
which also held self-directed IRA accounts of which the Bank
served as custodian. The plaintiffs are seeking recovery for
losses incurred through a series of self-directed investments
with Lapin & Wiggington and its various related
entities. In October 2001, Lapin & Wiggington filed for
bankruptcy, and this filing sparked numerous lawsuits against
other parties seeking recovery of the plaintiffs
investment losses. The new lawsuit is the first claim against
the Bank relative to these matters, and management is in the
process of analyzing the plaintiffs claims and preparing a
response. Management intends to vigorously defend this lawsuit.






|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 2. | Changes in Securities and Use of Proceeds
    and Issuer Purchases of Equity Securities

None.






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

| |     |    |  |                                                                                                                                                           
| | --- | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | *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

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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)             |  | November 5, 2004
|                                                
|/s/ RANDALL E. MEYERRandall E. Meyer             |  | Executive Vice President
    and Chief Financial Officer (Principal Financial Officer) |  | November 5, 2004
|                                                
|/s/ SCOTT J. MCLEANScott J. McLean               |  | President                                                                              |  | November 5, 2004
|                                                
|/s/ LAURENCE L. LEHMAN IIILaurence L. Lehman III |  | Senior Vice President and Controller
    (Principal Accounting Officer)                |  | November 5, 2004

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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