SOUTHWEST BANCORP OF TEXAS INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, 2003

[ ] 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 76-0519693
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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 [X] No [ ]

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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 [X] No [ ]

There were 33,966,176 shares of the Registrant's Common Stock outstanding
as of the close of business on May 1, 2003.

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SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Southwest Bancorporation of Texas, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of
Southwest Bancorporation of Texas, Inc. and Subsidiaries (the "Company") as of
March 31, 2003, the related condensed consolidated statements of income and of
cash flows for the three-month periods ended March 31, 2003 and 2002 and the
condensed consolidated statement of changes in shareholders' equity for the
three-month period ended March 31, 2003. These interim financial statements are
the responsibility of the Company's management.

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

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

We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002, 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 28, 2003, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2002 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Houston, Texas
April 30, 2003

2

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated
financial statements.
3

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated
financial statements.
4

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated
financial statements.
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SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated
financial statements.
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SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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. The 2002 consolidated financial
statements also include the accounts of First National Bank of Bay City, a 58%
owned subsidiary of the Company, through November 1, 2002. On this date, the
Company sold its interest in this subsidiary. All material intercompany accounts
and transactions have been eliminated. 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
statement of the Company's consolidated financial position at March 31, 2003 and
December 31, 2002, consolidated net income for the three months ended March 31,
2003 and 2002, consolidated cash flows for the three months ended March 31, 2003
and 2002, and consolidated changes in shareholders' equity for the three months
ended March 31, 2003. Interim period results are not necessarily indicative of
results of operations or cash flows for a full-year period.

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, 2002.

New Accounting Pronouncements

On October 24, 2002, the Financial Accounting Standards Board ("FASB")
approved Statement of Financial Accounting Standards ("SFAS") No. 147,
Acquisitions of Certain Financial Institutions. SFAS No. 147 amends previously
issued guidance regarding the accounting and reporting for the acquisition of
all or part of a financial institution, effective for acquisitions after October
1, 2002. The statement also provides guidance on all accounting for the
impairment or disposal of core deposits. This standard will impact any
acquisitions the Company makes beginning October 1, 2002.

On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN No.
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of FIN
No. 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN No. 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002, and were included in the Company's financial statements for the year ended
December 31, 2002. The accounting provisions of FIN No. 45 did not have a
significant impact on the Company's financial statements.

On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN No.
46") Consolidation of Variable Interest Entities, which addresses consolidation
by business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51 ("ARB No. 51"), Consolidated
Financial Statements, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
the requirements of FIN No. 46 to have a material impact on its financial
condition or results of operations.

7

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Reclassifications

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

Stock-Based Compensation

The Company applies the intrinsic value method of accounting for its
stock-based compensation plans in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25"). In 1995,
the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, ("SFAS
No. 123") as amended by SFAS No. 148, which requires pro forma disclosures of
net income, stock-based employee compensation cost, and earnings per share for
companies not adopting its fair value accounting method for stock-based employee
compensation.

The pro forma disclosures below use the fair value method of SFAS No. 123
to measure compensation expense for stock-based compensation plans.

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

2. COMPREHENSIVE INCOME

Comprehensive income consists of the following:

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SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

3. MORTGAGE SERVICING RIGHTS

The Company originates and purchases residential and commercial mortgage
loans both for its own portfolio and to sell to investors with servicing rights
retained through its ownership of Mitchell Mortgage Company, LLC. ("Mitchell").
Mitchell is an approved seller/servicer for Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") and an
approved issuer of Government National Mortgage Association ("GNMA")
mortgage-backed securities.

The Company periodically evaluates the carrying value of its mortgage
servicing rights in relation to the present value of the estimated future net
servicing revenue based on management's best estimate of remaining loan lives.
Any excess carrying value would be recorded as a valuation allowance with the
provision recorded as a component of other fee income in the accompanying
statement of income.

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

The managed servicing portfolio totaled $1,050,000 at March 31, 2003 and
$1,068,000 at December 31, 2002. Capitalized mortgage servicing rights represent
74 basis points and 77 basis points of the portfolio serviced at March 31, 2003
and December 31, 2002, respectively.

4. EARNINGS PER COMMON SHARE

Earnings per common share is computed as follows:

Stock options outstanding of 527 and 121 at March 31, 2003 and 2002,
respectively, have not been included in diluted earnings per share because to do
so would have been antidilutive for the periods presented.

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SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Stock options are antidilutive when the exercise price is higher than the
current market price of the Company's common stock.

5. SEGMENT INFORMATION

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

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

Summarized financial information by operating segment for the three months
ended March 31, 2003 and 2002 follows:

Intersegment interest was paid to the bank by the mortgage company in the
amount of $1,424 and $1,572 for the three months ended March 31, 2003 and 2002,
respectively. Advances from the bank to the mortgage company of $253,454 and
$232,579 were eliminated in consolidation at March 31, 2003 and 2002,
respectively.

6. 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
recognized in the consolidated balance sheet. The Company minimizes its exposure
to loss under these commitments by subjecting them to credit approval and
monitoring procedures.

The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Company's commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of loan funding. Management assesses the
credit risk associated with certain commitments to extend credit in determining
the level of the allowance for loan losses. Commitments to extend credit totaled
$1,794,312 at March 31, 2003 and $1,644,722 at December 31, 2002.

10

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Standby letters of credit are written conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company's policies generally require that standby letters of credit arrangements
contain collateral and debt covenants similar to those contained in loan
agreements. In the event the customer does not perform in accordance with the
terms of the agreement with the third party, the Company would be required to
fund the commitment. The maximum potential amount of future payments the Company
could be required to make is represented by the contractual amount of the
commitment. If the commitment is funded, the Company would be entitled to seek
recovery from the customer. Standby letters of credit totaled $181,333 at March
31, 2003 and $166,822 at December 31, 2002. As of March 31, 2003 and December
31, 2002, $123 and $139, respectively, has been recorded as a liability for the
fair value of the Company's potential obligations under these guarantees which
represents the unamortized portion of the fee collected. Management believes
this amount to be the fair value of the guarantees.

7. MERGER RELATED ACTIVITY

On March 10, 2003, the Company and Southwest Bank of Texas National
Association entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Maxim Financial Holdings, Inc. ("Maxim"), whereby Maxim will
merge into the Company. Maxim is the parent company of MaximBank located in
Galveston County, Texas. The Merger Agreement, which is subject to approval of
the shareholders of Maxim and various regulatory authorities, provides for an
all-cash transaction valued at $63,000. At March 31, 2003, MaximBank had total
assets of approximately $318,700 and total deposits of approximately $243,900.
The transaction is expected to close in the third quarter of 2003.

11

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) governmental monetary and fiscal policies, as well as
legislative and regulatory changes; (c) 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; (d) 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; and (e) the failure
of assumptions underlying the establishment of reserves for loan losses and
estimations of values of collateral and various financial assets and
liabilities. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.

OVERVIEW

Total assets at March 31, 2003 and December 31, 2002 were $5.11 billion and
$5.17 billion, respectively. Gross loans were $3.27 billion at March 31, 2003,
an increase of $49.1 million, or 2%, from $3.22 billion at December 31, 2002.
Shareholders' equity was $461.0 million and $445.5 million at March 31, 2003 and
December 31, 2002, respectively.

For the three months ended March 31, 2003, net income was $15.1 million
($0.44 per diluted share), compared to $13.5 million ($0.40 per diluted share)
for the same period in 2002, an increase of 11%. Return on average assets and
return on average common shareholders' equity for the three months ended March
31, 2003 was 1.22% and 13.48%, respectively, as compared to 1.26% and 14.78% for
the three months ended March 31, 2002. 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.

RESULTS OF OPERATIONS

Interest Income

Interest income for the three months ended March 31, 2003 was $57.3
million, a decrease of $639,000, or 1%, from the three months ended March 31,
2002. This decrease in interest income is due to a decrease in the average yield
on interest-earning assets to 5.22% for the three months ended March 31, 2003, a
decrease of 82 basis points when compared to the same period in 2002. This
decrease is partially offset by a $558.1 million increase in average
interest-earnings assets to $4.45 billion for the three months ended March 31,
2003, a 14% increase from the same period last year.

Interest income on securities decreased $2.4 million to $12.0 million for
the three months ended March 31, 2003. This decrease was due to a 124 basis
point decrease in the average yield on securities to 4.19% for the three months
ended March 31, 2003, compared to 5.43% for the same period last year. This

12

decrease is partially offset by a $83.6 million increase in average securities
outstanding to $1.16 billion for the three months ended March 31, 2003, an 8%
increase from the same period a year ago.

Interest income on loans increased $1.8 million to $45.2 million for the
three months ended March 31, 2003. This increase was due to a $448.8 million
increase in average loans outstanding to $3.22 billion for the three months
ended March 31, 2003, a 16% increase from the same period a year ago. This
increase is partially offset by a 66 basis point decrease in the average yield
on loans to 5.68% for the three months ended March 31, 2003, compared to 6.34%
for the same period last year.

Interest Expense

Interest expense on deposits and borrowings for the three months ended
March 31, 2003 was $12.2 million, a decrease of $3.3 million, or 21%, from the
three months ended March 31, 2002. This decrease in interest expense was
attributable to a decrease in the average rate on interest-bearing liabilities
to 1.49% for the period, a decrease of 57 basis points when compared to the same
period in 2002. This decrease is partially offset by a $292.5 million increase
in average interest-bearing liabilities to $3.34 billion for the three months
ended March 31, 2003, an increase of 10% from the same period last year.

Net Interest Income

Net interest income for the three months ended March 31, 2003 was $45.1
million compared to $42.5 million in 2002, an increase of $2.6 million, or 6%.
Growth in average interest-earning assets, primarily loans and securities, was
$558.1 million, or 14%, while yields decreased 82 basis points to 5.22%.

The impact of the growth in average interest-earning assets was partially
offset by a $292.5 million, or 10%, increase in average interest-bearing
liabilities, offset by a decrease in the rate paid on interest-bearing
liabilities of 57 basis points to 1.49% in 2003.

For the three months ended March 31, 2003, the net interest margin declined
to 4.11% compared to 4.42% for the three months ended March 31, 2002. This
decrease resulted from a decrease in the yield on interest-earning assets of 82
basis points, from 6.04% for the three months ended March 31, 2002 to 5.22% for
the three months ended March 31, 2003. This decrease in the yield was partially
offset by a decrease in the cost of funds of 57 basis points from 2.06% for the
three months ended March 31, 2002 to 1.49% for the three months ended March 31,
2003.

13

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

14

The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest rates.
For purposes of 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.

Provision for Loan Losses

The provision for loan losses was $3.0 million for the three months ended
March 31, 2003 as compared to $2.5 million for the three months ended March 31,
2002. Changes in the provision for loan losses were attributable to growth in
the loan portfolio and the recognition of changes in current risk factors.
Although no assurance can be given, management believes that the present
allowance for loan losses is adequate considering loss experience, delinquency
trends and current economic conditions. Management regularly reviews the
Company's loan loss allowance in accordance with its standard procedures. (See
"-- Financial Condition -- Loan Review and Allowance for Loan Losses.")

15

Noninterest Income

Noninterest income for the three months ended March 31, 2003 was $19.3
million, an increase of $3.1 million, or 19%, from $16.2 million during the
comparable period in 2002. The following table shows the breakout of noninterest
income between the bank and the mortgage company for the periods indicated.

Banking Segment. The largest component of noninterest income is service
charges on deposit accounts, which were $10.5 million for the three months ended
March 31, 2003, an increase of $1.8 million, or 21%, from $8.7 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 and fee
income up $611,000, or 14%, for the three months ended March 31, 2003 when
compared to the same period last year. This success at winning new business
results from the Company's ability to design custom cost-effective cash
management solutions for middle market and large corporate customers. Second,
net NSF charges on deposit accounts were $4.0 million for the three months ended
March 31, 2003, an increase of $905,000, or 29%, from $3.1 million for the same
period last year. Additionally, the total number of deposit accounts grew from
154,963 at March 31, 2002 to 162,953 at March 31, 2003.

Investment services income was $2.3 million for the three months ended
March 31, 2003, compared to $2.4 million for the same period last year, a
decrease of $122,000, or 5%. The relatively low level of investment services
activity is reflective of industry experience resulting from consumer
uncertainty over the financial markets.

Other income was $1.5 million for the three months ended March 31, 2003, an
increase of $863,000, or 132%, from the same period last year. This increase is
attributable to rental income recorded in the current year as a result of the
purchase of a 211,000 square foot operations center in downtown Houston in May
2002 and an increase in income recorded from equity investees.

Mortgage Segment. Gain on sale of loans, net, was $1.1 million for the
three months ended March 31, 2003, an increase of $521,000, or 90%, from the
same period last year. This increase is attributable to the declining rate
environment 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.

16

Mortgage servicing fees, net of amortization and impairment, was ($318,000)
for the three months ended March 31, 2003, a decrease of $392,000 when compared
to $74,000 for the same period last year. The loss on mortgage servicing
activity in the current period was due to the level of refinance activity that
prevailed during the period. The mortgage industry is experiencing high levels
of prepayment activity as a result of lower interest rates. Capitalized mortgage
servicing costs are expensed against the related fee income as the underlying
loans are paid off.

Noninterest Expenses

For the three months ended March 31, 2003, noninterest expenses totaled
$39.5 million, an increase of $3.3 million, or 9%, from $36.2 million during
2002. The increase in noninterest expenses was primarily due to salaries and
employee benefits and occupancy expenses.

Salaries and employee benefits for the three months ended March 31, 2003
were $23.8 million, an increase of $2.9 million, or 14%, from the three months
ended March 31, 2002. This increase was due primarily to hiring of additional
personnel required to accommodate the Company's growth. Total full-time
employees were 1,528 and 1,363 at March 31, 2003 and 2002, respectively.

Occupancy expense for the three months ended March 31, 2003 was $6.5
million, an increase of $1.0 million, or 19%, from the three months ended March
31, 2002. Major categories within occupancy expense are building lease expense,
depreciation expense and maintenance contract expense. Building lease expense
decreased $464,000, or 28%, to $1.2 million for the three months ended March 31,
2003 compared to $1.7 million for the same period last year. This decrease was
primarily due to the discontinuation of rental payments on the downtown
operations center purchased by the Bank in May 2002. This cost savings was
partially offset by increased building maintenance and utility costs on the same
property. Depreciation expense increased $560,000, or 27%, to $2.6 million for
the three months ended March 31, 2003. This increase was due primarily to
additional depreciation resulting from the purchase of the downtown operations
center and capitalized leasehold improvements associated with renovations at the
Company's headquarters. Maintenance contract expense for the three months ended
March 31, 2003 was $1.1 million, an increase of $344,000, or 45%, compared to
$771,000 for the same period last year. The Company has purchased maintenance
contracts for major operating systems throughout the organization.

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. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of nondeductible interest expense, and
the amount of other nondeductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus certain
officers' salaries, less interest income from federal securities. For the three
months ended March 31, 2003, the provision for income taxes was $6.7 million, an
increase of $357,000, or 6%, from the $6.4 million provided for in the same
period in 2002. The effective tax rate was 31% and 32% for the three months
ended March 31, 2003 and 2002, respectively.

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FINANCIAL CONDITION

Loans Held for Investment

Loans held for investment were $3.18 billion at March 31, 2003, an increase
of $63.1 million, or 2%, from $3.12 billion at December 31, 2002.

The following table summarizes the loan portfolio of the Company by type of
loan as of March 31, 2003 and December 31, 2002:

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

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

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

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

The Company originates and purchases 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

18

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, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 84 months and vary based
upon the nature of collateral and size of loan.

The contractual maturity ranges of the commercial and industrial and funded
real estate construction and land development loan portfolio and the amount of
such loans with fixed interest rates and floating interest rates in each
maturity range as of March 31, 2003 are summarized in the following table:

Loans Held for Sale

Loans held for sale of $87.4 million at March 31, 2003 decreased from
$101.4 million at December 31, 2002. These loans are carried at the lower of
cost or market and are typically sold to investors within one year of
origination. The market value of these loans is impacted by changes in current
interest rates. An increase in interest rates would result in a decrease in the
market value of these loans while a decrease in interest rates would result in
an increase in the market value of these loans. The business of originating and
selling loans is conducted by the Company's mortgage segment.

Off-Balance Sheet Credit Commitments

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

The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Company's commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of loan funding. Management assesses the
credit risk associated with certain commitments to extend credit in determining
the level of the allowance for loan losses. Commitments to extend credit totaled
$1.79 billion at March 31, 2003 and $1.64 billion at December 31, 2002.

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

19

the event the customer does not perform in accordance with the terms of the
agreement with the third party, the Company would be required to fund the
commitment. The maximum potential amount of future payments the Company could be
required to make is represented by the contractual amount of the commitment. If
the commitment is funded, the Company would be entitled to seek recovery from
the customer. Standby letters of credit totaled $181.3 million at March 31, 2003
and $166.8 million at December 31, 2002. As of March 31, 2003 and December 31,
2002, $123,000 and $139,000, respectively, has been recorded as a liability for
the fair value of the Company's potential obligations under these guarantees
which represents the unamortized portion of the fee collected. Management
believes this amount to be the fair value of the guarantees.

Loan Review and Allowance for Loan Losses

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

The Company's loan portfolio is well diversified by industry type but is
generally concentrated in the eight county region defined as its primary market
area. Historically, the Houston metropolitan area has been affected both
positively and negatively by conditions in the energy industry. It is estimated
that approximately 32% 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, among others, 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. Recently, several major employers in the
Houston market have either experienced financial difficulties or reductions in
employment due to changes in the energy trading markets, corporate
consolidations, or political events affecting the global economy. For the
twelve-month period ending February 28, 2003, the local economy recorded a net
job loss of approximately 14,700 or 0.6% of the employment base. As of March 31,
2003, these events have had no material effect on the Company's loan portfolio.
For the quarter ended March 31, 2003, net charge-offs to average loans was
0.15%. The average for all FDIC insured banks was 1.11% for the year ended
December 31, 2002. There can be no assurance, however, the Company's loan
portfolio will not become subject to increasing pressures from deteriorating
borrower credit due to changes in general economic conditions.

The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of 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 generally recorded only when cash payments are
received. Based on an evaluation of the loan portfolio, management presents a
quarterly analysis of the allowance for loan losses to a committee of the Board
of Directors, indicating any changes in the allowance since the last review and
any recommendations as to adjustments in the allowance. In making its
evaluations, management considers both quantitative and qualitative risk factors
in establishing an allowance for loan losses that it considers to be appropriate
at each reporting period. Quantitative factors include historical charge-off
experience, delinquency and past due trends, changes in collateral values,
changes in energy prices, changes in the level of borrower covenant violations,
the level of nonperforming loans, changes in the risk classification of credits,
growth and
20

concentrations of credit in the loan portfolio, the results of regulatory and
internal loan review examinations, and changes in the loan portfolio's
composition by both industry and by borrower.

Qualitative factors include an evaluation of the economic factors affecting
the Company's primary market area, changes in the type and complexity of credit
extensions, the experience levels of its lending and loan review staff, new
lending products, the age of the loan portfolio, and other factors.

In order to determine the adequacy of the allowance for loan losses,
management performs periodic reviews of the loan portfolio, either individually
or in pools. Generally, commercial and real estate loans are reviewed
individually and consumer and single family residential loans are evaluated in
pools.

A general allowance for loan losses is established based upon (i) the
historical loss experience by loan type; (ii) management's internal grading of
the loans resulting in an allowance based upon the historical loss experience by
grade applied to the outstanding principal balance of the adversely graded
loans; and (iii) certain subjective factors such as economic trends, performance
trends, portfolio age and concentrations of credit. In addition, specific
allowances may be established for loans which management believes require
greater reserves than those allocated based on the above methodology. Future
changes in economic conditions, circumstances, or other factors could cause
management to increase or decrease the allowance for loan losses as necessary.

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

21

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

22

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

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 $23.1 million at March 31, 2003, compared to $15.7 million at
December 31, 2002. This resulted in a ratio of nonperforming assets to loans and
other real estate of 0.73% at March 31, 2003 and 0.50% at December 31, 2002.
Nonaccrual loans, the largest component of nonperforming assets, were $20.5
million at March 31, 2003, an increase of $7.4 million from $13.1 at December
31, 2002.

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

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 judgement 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 $295,000 and $196,000 for the three months ended March
31, 2003 and 2002, respectively. On April 1, 2003, the Company foreclosed on a
multi-family loan with a net carrying value of $2.8 million that was classified
as nonaccrual at March 31, 2003.

23

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 an application of
impairment. If the measure of the impaired loan is less than the recorded
investment in the loan, a specific reserve is established for the shortfall as a
component of the Bank's allowance for loan loss methodology. All nonaccrual
loans are considered impaired at March 31, 2003 and December 31, 2002.

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

The average recorded investment in impaired loans during the three months
ended March 31, 2003 and the year ended December 31, 2002 was $23.8 million and
$22.1 million, respectively. Interest income on impaired loans of $79,000 and
$67,000 was recognized for cash payments received during the three months ended
March 31, 2003 and 2002, respectively.

Securities

At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held to maturity, trading or available for sale.
At each reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities classified as held to maturity are stated at
cost, increased by accretion of discounts and reduced by amortization of
premiums, both computed by the interest method, only if management has the
positive intent and ability to hold those securities to maturity. Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the financial
statements with unrealized gains and losses included in earnings. Securities not
classified as either held to maturity or trading are classified as available for
sale and measured at fair value in the financial statements with unrealized
gains and losses reported, net of tax, as a component of accumulated other
comprehensive income (loss) until realized. Gains and losses on sales of
securities are determined using the specific-identification method. The Company
has classified all securities as available for sale at March 31, 2003 and
December 31, 2002.

24

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

Securities totaled $1.19 billion at March 31, 2003, a decrease of $7.3
million from $1.20 billion at December 31, 2002. The yield on the securities
portfolio for the three months ended March 31, 2003 was 4.19% compared to 5.43%
for the three months ended March 31, 2002.

Included in the Company's mortgage-backed securities at March 31, 2003 were
agency issued collateral mortgage obligations with a book value of $323.0
million and a fair value of $324.6 million and non-agency issued collateral
mortgage obligations with a book value and a fair value of $40.3 million.

At March 31, 2003, $653.8 million of the mortgage-backed securities held by
the Company had final maturities of more than 10 years. At March 31, 2003,
approximately $16.2 million of the Company's mortgage-backed securities earned
interest at floating rates and repriced within one year, and accordingly were
less susceptible to declines in value should interest rates increase.

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

25

Other Assets

Other assets were $160.9 million at March 31, 2003, an increase of $20.5
million from $140.4 million at December 31, 2002. This increase is primarily
attributable to increases in factored receivables. Factored receivables result
from providing operating funds to businesses by converting their accounts
receivable to cash. Factored receivables were $33.2 million at March 31, 2003,
an increase of $10.2 million from $23.0 million at December 31, 2002. This
increase is due to the seasonal nature of some of the factoring company's
customers.

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 $228.2 million and $149.4 million of its deposits
classified as brokered funds at March 31, 2003 and December 31, 2002,
respectively. The growth in brokered deposits is attributable to growth in a
major new 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 are stable and relationship in nature and that they
do not have the characteristics or risks normally associated with brokered
deposits.

The Company's ratio of average noninterest-bearing demand deposits to
average total deposits for the periods ended March 31, 2003 and December 31,
2002 was 30% and 29%, respectively.

The average daily balances and weighted average rates paid on deposits for
the three months ended March 31, 2003 and the year ended December 31, 2002 are
presented below:

26

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

Borrowings

Securities sold under repurchase agreements and other borrowings generally
represent borrowings with maturities ranging from one to thirty days. The
Company's long-term borrowings generally consist of borrowings with the Federal
Home Loan Bank maturing within one year. Short-term borrowings consist of
federal funds purchased and overnight borrowings with the Federal Home Loan
Bank. Information relating to these borrowings is summarized as follows:

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 shareholders' equity to fund interest-earning assets.
The Federal Home Loan Bank ("FHLB") is also a major

27

source of liquidity for the Bank. The FHLB allows member banks to borrow against
their eligible collateral to satisfy liquidity requirements.

Maintaining a relatively stable funding base, which is achieved by
diversifying funding sources, competitively pricing deposit products, and
extending the contractual maturity of liabilities, reduces the Company's
exposure to roll over risk on deposits and limits reliance on volatile
short-term purchased funds. Short-term funding needs arise from declines in
deposits or other funding sources, funding of loan commitments and requests for
new loans. The Company's strategy is to fund assets to the maximum extent
possible with core deposits that provide a sizable source of relatively stable
and low-cost funds. Core deposits include all deposits, except certificates of
deposit and other time deposits of $100,000 and over. Average core deposits
funded approximately 73% of total interest-earning assets for the three months
ended March 31, 2003 and 70% for the same period in 2002.

The Company's risk-based capital ratios including Leverage Capital, Tier I
Risk-Based Capital and the Total Risk-Based Capital Ratio were 8.62%, 10.36% and
11.30%, respectively, at March 31, 2003.

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. Certain accounting
policies involve significant judgments and assumptions by management which have
a material impact on the carrying value of assets and liabilities; management
considers such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical experience
and other factors, which are believed to be reasonable under the circumstances.
Because of the nature of the judgments and assumptions made by management,
actual results could differ from these judgments and estimates which could have
a material impact on the carrying values of assets and liabilities and the
results of operations of the Company.

The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates 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 -- Loan Review and Allowance for
Loan Losses" and "Note 1 -- Nature of Operations and Summary of Significant
Accounting Policies" for a detailed description of the Company's estimation
process and methodology related to the allowance for loan losses.

Mortgage servicing rights assets are established and accounted for based on
discounted cash flow modeling techniques which require management to make
estimates regarding the amount and timing of expected future cash flows,
including assumptions about loan repayment rates, credit loss experience, and
costs to service, as well discount rates that consider the risk involved.
Because the values of these assets are sensitive to changes in assumptions, the
valuation of mortgage servicing rights is considered a critical accounting
estimate. See the Company's Annual Report on Form 10-K, "Note 1 -- Nature of
Operations and Summary of Significant Accounting Policies" and "Note
7 -- Mortgage Servicing Rights" for further discussion on the accounting for
these assets.

Other Matters

On October 24, 2002, the Financial Accounting Standards Board ("FASB")
approved Statement of Financial Standards ("SFAS") No. 147, Acquisitions of
Certain Financial Institutions. SFAS No. 147 amends previously issued guidance
regarding the accounting and reporting for the acquisition of all or part of a
financial institution, effective for acquisitions after October 1, 2002. The
statement also provides guidance on all accounting for the impairment or
disposal of core deposits. This standard will impact any acquisitions the
Company makes beginning October 1, 2002.
28

On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN No.
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of FIN
No. 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN No. 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002, and were included in the Company's financial statements for the year ended
December 31, 2002. The accounting provisions of FIN No. 45 did not have a
significant impact on the Company's financial statements.

On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN No.
46") Consolidation of Variable Interest Entities, which addresses consolidation
by business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51 ("ARB No. 51"), Consolidated
Financial Statements, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
the requirements of FIN No. 46 to have a material impact on its financial
condition or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes since December 31, 2002. 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

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

The Company's chief executive officer and chief financial officer have
evaluated the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) and Rule 15d-14(c) under the Exchange Act) as of March 31, 2003 and
concluded that those disclosure controls and procedures are effective.

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

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

29

- ---------------

With respect to the unaudited financial information of Southwest
Bancorporation of Texas, Inc. for the three month periods ended March 31, 2003
and 2002, included in this Form 10-Q, PricewaterhouseCoopers LLP reported that
they have applied limited procedures in accordance with professional standards
for a review of such information. However, their separate report dated April 30,
2003 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.

30

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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 AND REPORTS ON FORM 8-K

a.) Exhibits:

*15.1 Awareness Letter of PricewaterhouseCoopers LLP.
*99.1 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.
*99.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

b.) Reports on Form 8-K:

One report on Form 8-K was filed by the Company during the three months
ended March 31, 2003:

i.) A Current Report on Form 8-K dated March 10, 2003 was filed on
March 12, 2003; Item 7(c) and Item 9.
- ---------------

* Filed herewith

31

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.

32

I, Paul B. Murphy, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Southwest
Bancorporation of Texas, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of March 31, 2003 (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ PAUL B. MURPHY, JR.
--------------------------------------
Paul B. Murphy, Jr.
Director, President and Chief
Executive Officer

Dated: April 30, 2003

33

I, Randall E. Meyer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Southwest
Bancorporation of Texas, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of March 31, 2003 (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ RANDALL E. MEYER
--------------------------------------
Randall E. Meyer
Executive Vice President and Chief
Financial Officer

Dated: April 30, 2003

34

EXHIBIT INDEX

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* Filed herewith