SOUTHWEST BANCORP OF TEXAS INC, 10-Q, 2000-11-13

SOUTHWEST BANCORP OF TEXAS INC
10-Q, 2000-11-13
NATIONAL COMMERCIAL BANKS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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, 2000

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

Commission file number: 000-22007

Southwest Bancorporation of Texas, Inc.
(Exact Name of Registrant as Specified in its Charter)

	Texas		76-0519693
	(State or Other Jurisdiction of Incorporation or Organization)		(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)

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 [ ]

There were 28,652,862 shares of the Registrant's Common Stock outstanding as of the close of business on November 13, 2000.

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants		2
Condensed Consolidated Balance Sheet as of September 30, 2000 and December 31, 1999 (unaudited)		3
Condensed Consolidated Statement of Income for the Three Months Ended September 30, 2000 and 1999, and for the Nine Months Ended September 30, 2000 and 1999 (unaudited)		4
Condensed Consolidated Statement of Changes in Shareholders' Equity for the Nine Months Ended September 30, 2000 (unaudited)		5
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 (unaudited)		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			23
Item 2. Changes in Securities and Use of Proceeds			23
Item 3. Default upon Senior Securities			23
Item 4. Submission of Matters to a Vote of Security Holders			23
Item 5. Other Information			23
Item 6. Exhibits and Reports on Form 8-K			23
Signatures			24

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
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, 2000, the related condensed consolidated statement of income for the three- and nine-month periods ended September 30, 2000 and 1999, the condensed consolidated statement of changes in shareholders' equity for the nine-month period ended September 30, 2000 and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2000 and 1999. These 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 have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 1999, 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 11, 2000, 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, 1999, is fairly stated, in all material respects in relation to the consolidated financial statements from which it has been derived.

PricewaterhouseCoopers LLP

Houston, Texas
October 17, 2000

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
(unaudited)

ASSETS

	September 30, 2000		December 31, 1999
Cash and due from banks	$	139,936	$	148,710
Federal funds sold and other cash equivalents		45,375		20,517

Total cash and cash equivalents		185,311		169,227
Securities — available for sale		648,138		652,539
Loans held for sale		95,515		77,047
Loans held for investment, net		2,158,825		1,817,094
Premises and equipment, net		37,721		31,912
Accrued interest receivable		23,029		17,546
Prepaid expenses and other assets		115,913		86,831

Total assets	$	3,264,452	$	2,852,196

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
Demand — noninterest-bearing	$	701,133		$	605,997
Demand — interest-bearing		20,112			30,483
Money market accounts		1,023,609			906,762
Savings		40,104			35,904
Time, $100 and over		576,385			336,974
Other time		273,761			256,634

Total deposits		2,635,104			2,172,754
Securities sold under repurchase agreements		241,834			216,838
Other borrowings		125,841			248,346
Accrued interest payable		4,347			3,034
Other liabilities		25,782			16,227

Total liabilities		3,032,908			2,657,199

Commitments and contingencies
Shareholders' equity:
Common stock — $1 par value, 75,000,000 shares authorized and 28,635,969 issued and outstanding at September 30, 2000 and 50,000,000 shares authorized and 28,018,783 outstanding at December 31, 1999		28,636			28,019
Additional paid-in capital		70,130			63,182
Retained earnings		144,859			115,417
Accumulated other comprehensive loss		(12,081	)		(11,621	)

Total shareholders' equity		231,544			194,997

Total liabilities and shareholders' equity	$	3,264,452		$	2,852,196

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

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2000			1999		2000			1999
Interest income:
Loans	$	52,757		$	36,332	$	143,638		$	100,886
Securities		10,980			10,922		32,422			33,306
Federal funds sold and other		453			259		1,318			1,411

Total interest income		64,190			47,513		177,378			135,603
Interest expense on deposits and other borrowings		30,193			20,180		80,549			57,866

Net interest income		33,997			27,333		96,829			77,737
Provision for loan losses		1,750			1,500		5,000			4,560

Net interest income after provision for loan losses		32,247			25,833		91,829			73,177

Other income:
Service charges		3,231			2,620		9,672			7,748
Investment services		1,214			1,062		3,757			3,137
Other fee income		2,010			2,094		5,879			5,269
Other operating income		1,669			1,177		4,337			4,082
Gain (loss) on sale of securities, net		(3	)		10		(5	)		(139	)

Total other income		8,121			6,963		23,640			20,097

Other expenses:
Salaries and employee benefits		14,866			12,488		42,583			36,197
Occupancy expense		3,687			3,356		10,530			9,327
Merger-related expenses		—			—		—			4,474
Other operating expenses		5,692			4,839		17,731			14,057

Total other expenses		24,245			20,683		70,844			64,055

Income before income taxes and minority interest		16,123			12,113		44,625			29,219
Provision for income taxes		5,404			4,305		15,183			10,854

Income before minority interest		10,719			7,808		29,442			18,365
Minority interest		—			—		—			(19	)

Net income available for common shareholders	$	10,719		$	7,808	$	29,442		$	18,384

Earnings per common share:
Basic	$	0.38		$	0.28	$	1.04		$	0.66

Diluted	$	0.36		$	0.27	$	1.00		$	0.64

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

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except share amounts)
(unaudited)

	Common Stock
	Shares		Dollars		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Total Shareholders' Equity
BALANCE, DECEMBER 31, 1999		28,018,783	$	28,019	$	63,182		$	115,417	$	(11,621	)	$	194,997
Exercise of stock options		617,186		617		6,954								7,571
Deferred compensation amortization						(6	)							(6	)
Comprehensive income:
Net income for the nine months ended September 30, 2000									29,442					29,442
Net change in unrealized depreciation on securities available for sale, net of deferred taxes of $251											(460	)		(460	)

Total comprehensive income														28,982

BALANCE, SEPTEMBER 30, 2000		28,635,969	$	28,636	$	70,130		$	144,859	$	(12,081	)	$	231,544

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

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)

	Nine Months Ended September 30,
	2000			1999
Cash flows from operating activities:
Net income	$	29,442		$	18,384
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		5,000			4,560
Depreciation		5,252			5,217
Realized loss on securities available for sale, net		5			139
Amortization		1,392			2,797
Minority interest in net loss of consolidated subsidiary		—			(19	)
Gain on sale of loans, net		(158	)		(444	)
Dividends on Federal Home Loan Bank stock		(751	)		(416	)
Origination of loans held for sale and mortgage servicing rights		(69,529	)		(115,031	)
Proceeds from sales of loans		45,246			62,848
Increase in accrued interest receivable, prepaid expenses and other assets		(29,983	)		(23,393	)
Increase in accrued interest payable and other liabilities		15,154			1,492
Other, net		—			80

Net cash provided by (used in) operating activities		1,070			(43,786	)

Cash flows from investing activities:
Proceeds from maturity of securities available for sale		4,000			48,372
Principal paydowns of mortgage-backed securities available for sale		55,758			93,642
Proceeds from sale of securities available for sale		295,518			237,641
Purchase of securities available for sale		350,929			(351,024	)
Net increase in loans receivable		(346,341	)		(154,458	)
Purchase of premises and equipment		(10,417	)		(7,259	)
Other, net		(696	)		684

Net cash used in investing activities		(353,107	)		(132,402	)

Cash flows from financing activities:
Net increase in noninterest-bearing demand deposits		95,136			19,485
Net increase in time deposits		256,538			14,361
Net increase in other interest-bearing deposits		110,676			91,685
Net increase (decrease) in securities sold under repurchase agreements		24,996			(22,538	)
Net (decrease) increase in other short-term borrowings		(118,737	)		38,401
Payments on long term borrowings		(3,768	)		(93	)
Net proceeds from exercise of stock options		3,280			997
Payment of dividends to minority stockholders		—			(328	)

Net cash provided by financing activities		368,121			141,970

Net increase (decrease) in cash and cash equivalents		16,084			(34,218	)
Cash and cash equivalents at beginning of period		169,227			187,493

Cash and cash equivalents at end of period	$	185,311		$	153,275

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

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of Southwest Bancorporation of Texas, Inc. (the “Company”) and its direct and indirect wholly-owned subsidiaries Southwest Holding Delaware, Inc. (the “ Delaware Company”), Southwest Bank of Texas National Association (the “Bank”), and Mitchell Mortgage Company, LLC (“Mitchell”). These financial statements give retroactive effect to the merger of Fort Bend Holding Corp., (“ Fort Bend”) on April 1, 1999 in a transaction accounted for as a pooling of interests. 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 to present fairly the Company's consolidated financial position at September 30, 2000 and December 31, 1999, consolidated income for the three-month and nine-month periods ended September 30, 2000 and 1999, consolidated cash flows for the nine months ended September 30, 2000 and 1999 and the consolidated changes in shareholders' equity for the nine months ended September 30, 2000. 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, 1999.

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 as of September 30, 2000 and for the three months and nine months then ended, 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.

New Accounting Pronouncements

In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, was issued by the Financial Accounting Standards Board to establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for the changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The standard is effective for all fiscal years beginning after June 15, 2000. The Company does not believe adoption of this pronouncement will materially effect the Company's consolidated financial position, results of operations or cash flows.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB No. 101). SAB No. 101, as amended, is required to be implemented in the fourth quarter of 2000 and is not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows.

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)

2. Comprehensive Income

Comprehensive income consists of the following:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2000		1999			2000			1999
Net income	$	10,719	$	7,808		$	29,442		$	18,384
Net change in unrealized appreciation/ (depreciation) on securities available for sale, net of tax		2,973		(4,260	)		(460	)		(13,358	)

Total comprehensive income	$	13,692	$	3,548		$	28,982		$	5,026

3. Earnings per Common Share

Earnings per common share is computed as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2000		1999		2000		1999
	(In thousands, except per share amounts)
Net income	$	10,719	$	7,808	$	29,442	$	18,384
Minority interest in net loss of Mitchell, net of tax		—		—		—		(19	)

Net income, adjusted	$	10,719	$	7,808	$	29,442	$	18,365

Divided by average common shares and common share equivalents:
Average common shares		28,524		27,947		28,310		27,664
Average common shares issuable under the stock option plan		1,268		1,063		1,130		1,037
Average common shares issuable with the conversion of the minority interest of Mitchell		—		—		—		197

Total average common shares and common share equivalents		29,792		29,010		29,440		28,898

Basic earnings per common share	$	0.38	$	0.28	$	1.04	$	0.66

Diluted earnings per common share	$	0.36	$	0.27	$	1.00	$	0.64

4. Supplemental Noncash Financing Activities

During the nine months ended September 30, 2000 and September 30, 1999, the Company reduced its federal current income tax liability by approximately $4.3 million and $706,000, respectively, and recorded a corresponding increase to additional paid-in capital representing the tax benefit related to the exercise of certain stock options.

5. Subsequent Event

On October 17, 2000, the Company and the Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Citizens Bankers, Inc. (“Citizens”), whereby Citizens will merge into the Company. Citizens is the parent company of Citizens Bank and Trust of Baytown, Texas, Pasadena State Bank, Baytown State Bank and a majority owner of First National Bank of Bay City. In connection with the Merger Agreement, the Company has entered into a separate agreement to acquire all of the assets and liabilities of a related partnership that owns the office building currently used by Citizens and its lead bank. The transaction, which is subject to approval of the shareholders of Citizens and various regulatory authorities, provides for the issuance of between 4,000,000 and 4,300,000 shares of the Company's common stock for Citizens and its related partnership depending on the average price of the Company's

common stock during the period of 15 trading days ending five business days preceding the closing date of the merger. The number of shares issued will be determined based on a measurement price of $130 million provided that the stock price is between $30.2326 and $32.50. An average price equal to or greater than $32.50 will result in the issuance of 4,000,000 shares and an average price equal to or less than $30.2326 will result in the issuance of 4,300,000 shares. An average price between $30.2326 and $32.50 will result the issuance of a number of shares equal to $130 million divided by the average share price.

As of September 30, 2000, Citizens had total assets of $425 million, loans of $131 million, and deposits of $374 million. The transaction is expected to be accounted for as a pooling of interests.

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 Southwest Bancorporation of Texas, Inc. (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 September 30, 2000 and December 31, 1999 were $3.26 billion and $2.85 billion, respectively. Gross loans were $2.28 billion at September 30, 2000, an increase of $364.4 million or 19% from $1.91 billion at December 31, 1999. This growth was a result of a strong local economy, and the Company's style of relationship banking. Shareholders' equity was $231.5 million and $195.0 million at September 30, 2000 and December 31, 1999, respectively.

For the nine months ended September 30, 2000, net income was $29.4 million ($1.00 per diluted share) compared to $18.4 million ($0.64 per diluted share) for the same period in 1999, an increase of 60%. For the three months ended September 30, 2000, net income was $10.7 million ($0.36 per diluted share) compared to $7.8 million ($0.27 per diluted share) for the same period in 1999, an increase of 37%. Return on average assets and return on average common shareholders' equity for the three months ended September 30, 2000 was 1.33%, and 19.23%, respectively.

Results of Operations

Interest Income

Interest income for the three months ended September 30, 2000 was $64.2 million, an increase of $16.7 million, or 35% from the three months ended September 30, 1999. This increase in interest income is due to a $527.9 million increase in average earning assets to $2.93 billion for the three months ended September 30, 2000, a 22% increase from the same period last year. For the nine months ended

September 30, 2000, interest income was $177.4 million, a $41.8 million, or 31% increase from the same period a year ago. This increase in interest income is due to a $420.5 million increase in average earning assets to $2.77 billion for the nine months ended September 30, 2000, a 18% increase from the same period last year.

Interest income on loans increased $16.4 million to $52.8 million for the three months ended September 30, 2000. This was due to a $557.7 million increase in average loans outstanding during the same period. The average yield on loans was 9.36% for the three months ended September 30, 2000, an increase of 80 basis points when compared to the same period in 1999. Interest income on securities increased $58,000 from the three month period ended September 30, 1999. This increase was partially due to a $37.4 million decrease in average securities outstanding, down 5% when compared to the three months ended September 30, 1999. Partially offsetting the decrease in average balances was a 41 basis point increase in the average yield on securities to 6.66% for the three months ended September 30, 2000 when compared to the same period in 1999.

For the nine months ended September 30, 2000, interest income on loans increased 42% to $143.6 million, up from $100.9 million for the same period last year. This was due to a $496.8 million increase in average loans outstanding during the same period. The average yield on loans was 9.15% for the nine months ended September 30, 2000, an increase of 72 basis points when compared to the same period in 1999. Interest income on securities decreased to $32.4 million, a decrease of $884,000 or 3% from the nine month period ended September 30, 1999. This decrease was attributable to a $66.5 million decrease in average securities outstanding, down 9% when compared to the nine months ended September 30, 1999. This decrease was partially offset by an increase in the average yield on securities to 6.69% for the nine months ended September 30, 2000 compared to 6.24% for the same period in 1999.

Interest Expense

Interest expense on deposits and other borrowings was $30.2 million for the three months ended September 30, 2000, compared to $20.2 million for the same period in 1999. For the nine months ended September 30, 2000, interest expense on deposits and other borrowings was $80.5 million compared to $57.9 million for the same period a year ago. The increase in interest expense was attributable to a $424.3 million and $343.4 million respective increase in average interest-bearing liabilities for the three- and nine-month comparable periods. The average yield on interest bearing liabilities was 5.25% for the three months ended September 30, 2000, an increase of 95 basis points when compared to the same period in 1999. For the nine months ended September 30, 2000, the average yield on interest bearing liabilities was 4.96%, an increase of 73 basis points when compared to the same period in 1999.

Net Interest Income

Net interest income was $34.0 million for the three months ended September 30, 2000, compared with $27.3 million for the same period in 1999, an increase of 25%. For the nine months ended September 30, 2000, net interest income increased 25% from the same period in 1999 to $96.8 million. The increase in net interest income during the three- and nine-months ended September 30, 2000 was largely due to growth in average interest-earning assets, primarily loans.

The net interest margin was 4.59% for the three months ended September 30, 2000, compared with 4.50% in the second quarter of 1999. This increase resulted from an increase in the yield on earning assets of 87 basis points from 7.86% for the three months ended September 30, 1999 to 8.73% for the three months ended September 30, 2000. This increase in the yield on earning assets was partially offset by an increase in the cost of funds of 95 basis points, from 4.30% for the three months ended September 30, 1999, to 5.25% for the three months ended September 30, 2000. The net interest margin was 4.62% for the nine months ended September 30, 2000, up from 4.41% for the first nine months of 1999. This increase resulted from an increase in the yield on earning assets of 83 basis points from 7.71% for the nine months ended September 30, 1999 to 8.54% for the nine months ended September 30, 2000. This increase in the yield on earning assets was partially offset by an increase in the cost of funds of 73 basis points, from 4.23% for the nine months ended September 30, 1999, to 4.96% for the nine months ended September 30, 2000.

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.

	Three Months Ended September 30, 2000								Three Months Ended September 30, 1999
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans	$	2,242,027		$	52,757		9.36	%	$	1,684,357		$	36,332		8.56	%
Securities		656,092			10,980		6.66			693,481			10,922		6.25
Federal funds sold and other		27,507			453		6.55			19,847			259		5.18

Total interest-earning assets		2,925,626			64,190		8.73	%		2,397,685			47,513		7.86	%

Less allowance for loan losses		(23,106	)							(18,112	)

Total earning assets, net of allowance		2,902,520								2,379,573
Nonearning assets		296,011								237,359

Total assets	$	3,198,531							$	2,616,932

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits	$	1,067,468			11,739		4.37	%	$	837,307			7,541		3.57	%
Certificates of deposits		807,275			12,402		6.11			618,792			7,752		4.97
Repurchase agreements and borrowed funds		412,603			6,052		5.84			406,942			4,887		4.76

Total interest-bearing liabilities		2,287,346			30,193		5.25	%		1,863,041			20,180		4.30	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		658,142								547,276
Other liabilities		31,337								21,790

Total liabilities		2,976,825								2,432,107
Shareholders' equity		221,706								184,825

Total liabilities and shareholder's equity	$	3,198,531							$	2,616,932

Net interest income				$	33,997							$	27,333

Net interest spread							3.48	%							3.56	%

Net interest margin							4.59	%							4.50	%

	Nine Months Ended September 30, 2000								Nine Months Ended September 30, 1999
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate			Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans	$	2,096,618		$	143,638		9.15	%	$	1,599,825		$	100,886		8.43	%
Securities		647,161			32,422		6.69			713,647			33,306		6.24
Federal funds sold and other		29,558			1,318		5.96			39,320			1,411		4.80

Total interest-earning assets		2,773,337			177,378		8.54	%		2,352,792			135,603		7.71	%

Less allowance for loan losses		(21,766	)							(16,933	)

Total earning assets, net of allowance		2,751,571								2,335,859
Nonearning assets		287,075								218,199

Total assets	$	3,038,646							$	2,554,058

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits	$	1,051,631			33,128		4.21	%	$	843,241			22,365		3.55	%
Certificates of deposits		687,639			29,693		5.77			610,479			22,490		4.93
Repurchase agreements and borrowed funds		431,747			17,728		5.48			373,932			13,011		4.65

Total interest-bearing liabilities		2,171,017			80,549		4.96	%		1,827,652			57,866		4.23	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		632,687								530,684
Other liabilities		27,764								24,212

Total liabilities		2,831,468								2,382,548
Shareholders' equity		207,178								171,510

Total liabilities and shareholders' equity	$	3,038,646							$	2,554,058

Net interest income				$	96,829							$	77,737

Net interest spread							3.58	%							3.48	%

Net interest margin							4.62	%							4.41	%

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.

	Three Months Ended September 30,								Nine Months Ended September 30,
	2000 vs. 1999								2000 vs. 1999
	Increase (Decrease) Due to								Increase (Decrease) Due to
	Volume			Rate			Total		Volume			Rate		Days		Total
	(Dollars in thousands)
Interest-earning assets:
Loans	$	12,029		$	4,396		$	16,425	$	31,482		$	10,900	$	370	$	42,752
Securities		(589	)		647			58		(3,114	)		2,108		122		(884	)
Federal funds sold and other		100			94			194		(351	)		253		5		(93	)

Total increase in interest income		11,540			5,137			16,677		28,017			13,261		497		41,775

Interest-bearing liabilities:
Money market and savings deposits		2,073			2,125			4,198		5,547			5,134		82		10,763
Certificates of deposits		2,361			2,289			4,650		2,853			4,268		82		7,203
Repurchase agreements and borrowed funds		68			1,097			1,165		2,019			2,650		48		4,717

Total increase in interest expense		4,502			5,511			10,013		10,419			12,052		212		22,683

Increase (decrease) in net interest income	$	7,038		$	(374	)	$	6,664	$	17,598		$	1,209	$	285	$	19,092

Provision for Loan Losses

The provision for loan losses was $1.8 million for the three months ended September 30, 2000 as compared to $1.5 million for the three months ended September 30, 1999. The provision for loan losses was $5.0 million for the nine months ended September 30, 2000 as compared to $4.6 million for the nine months ended September 30, 1999. 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 as its loan portfolio grows and diversifies. (See — Financial Condition — Loan Review and Allowance for Loan Losses.)

Noninterest Income

Noninterest income for the three months ended September 30, 2000 was $8.1 million, an increase of $1.2 million or 17% over the same period in 1999. Noninterest income for the nine months ended September 30, 2000 was $23.6 million, an increase of 18%, from $20.1 million during the comparable period in 1999. The following table presents for the periods indicated the composition of noninterest income.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2000			1999		2000			1999
	(Dollars in thousands)
Service charges on deposit accounts	$	3,231		$	2,620	$	9,672		$	7,748
Investment services		1,214			1,062		3,757			3,137
Factoring fee income		1,058			892		2,885			2,234
Loan fee income		739			966		2,311			2,444
Bank-owned life insurance income		405			365		1,254			991
Letters of credit fee income		213			236		683			591
Gain (loss) on sale of securities, net		(3	)		10		(5	)		(139	)
Other income		1,264			812		3,083			3,091

Total noninterest income	$	8,121		$	6,963	$	23,640		$	20,097

Service charges were $3.2 million for the three months ended September 30, 2000, compared to $2.6 million for the three months ended September 30, 1999, an increase of $611,000 or 23%. Service charges were $9.7 million for the nine months ended September 30, 2000 compared to $7.7 million for the same period in 1999, an increase of $1.9 million, or 25%. The deposit accounts serviced increased to 91,572 at September 30, 2000 from 74,653 at September 30, 1999.

For the three months ended September 30, 2000, investment services income grew to $1.2 million, an increase of 14% over the 1999 level. For the nine months ended September 30, 2000, investment services income grew to $3.8 million or 20% from the $3.1 million level during the 1999 period. This increase is attributable to the expanding international and foreign exchange departments, as well as the continued strategic focus by the Company to increase its competitive position in providing investment services.

For the three months ended September 30, 2000, factoring fee income was up $166,000, or 19%. For the nine months ended September 30, 2000, factoring fee income was up $651,000, or 29%.

Noninterest Expenses

For the three months ended September 30, 2000, noninterest expenses totaled $24.2 million, an increase of $3.6 million, or 17%, from $20.7 million during 1999. For the nine months ended September 30, 2000, noninterest expenses totaled $70.8 million, an increase of $6.8 million, or 11%, from the same period in 1999. Included in noninterest expense for nine months ended September 30, 1999 is $4.5 million in merger-related expenses and other charges (including investment banking fees, other professional fees, and severance expense) in connection with the merger with Fort Bend.

Salaries and employee benefits for the three months ended September 30, 2000 was $14.9 million, an increase of $2.4 million or 19% from the three months ended September 30, 1999. Salaries and employee benefits for the nine months ended September 30, 2000 was $42.6 million, an increase of $6.4 million or 18% from the same period in 1999. This increase was due primarily to hiring of additional personnel required to accommodate the Company's growth. Total full-time employees at September 30, 2000 and 1999 were 1,057 and 912, respectively.

Occupancy expense increased $331,000, or 10% to $3.7 million for the three months ended September 30, 2000. For the nine months ended September 30, 2000, occupancy expense increased $1.2 million, or 13% from the same period a year ago to $10.5 million. Major categories within occupancy expense are building lease expense and maintenance contract expense. Building lease expense increased to $1.1 million

for the three months ended September 30, 2000 from $888,000 for the same period in 1999. For the nine months ended September 30, 2000, building lease expense was $3.1 million, an increase of 24%, or $600,000 from $2.5 million for the first nine months of 1999. This increase resulted from increasing the rentable square feet at the corporate office to accommodate the Company's growth. Maintenance contract expense for the three months ended September 30, 2000 was $548,000, a 44% or $167,000 increase from $381,000 for the same period last year. For the nine months ended September 30, 2000, maintenance contract expense increased $491,000, or 48%, for the same period a year ago to $1.5 million. This increase was primarily due to new maintenance contracts purchased for technology upgrades throughout the organization. The Company purchases 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 officer salaries, less interest income from federal securities. For the three months ended September 30, 2000, the provision for income taxes was $5.4 million, an increase of $1.1 million or 26% from the $4.3 million provided for the same period in 1999. For the nine months ended September 30, 2000, income tax expense was $15.2 million, an increase of $4.3 million or 39% from the $10.9 million provided for the same period in 1999.

Financial Condition

Loans Held for Investment

Loans were $2.18 billion at September 30, 2000, an increase of $346 million or 18% from $1.84 billion at December 31, 1999.

The following table summarizes the loan portfolio of the Company by type of loan as of September 30, 2000 and December 31, 1999:

	September 30, 2000					December 31, 1999
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial and industrial real estate	$	853,285		39.09	%	$	721,229		39.27	%
Real estate:
Construction and land development		635,572		29.12			494,755		26.94
1-4 family		303,167		13.89			268,349		14.61
Commercial owner occupied		216,107		9.90			185,679		10.11
Farmland		6,384		0.29			13,056		0.71
Other		31,710		1.45			20,447		1.10
Consumer		136,549		6.26			133,295		7.26

Gross loans held for investment	$	2,182,774		100.0	%	$	1,836,810		100.0	%

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.

Generally, the Company's commercial loans are underwritten in the Company's primary market area 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. 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 and other assets of commercial customers. 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 generally have been 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 three to five year period, such loans often remain outstanding for significantly shorter periods than their contractual terms.

The Bank originates and purchases residential and commercial mortgage loans to sell to investors with servicing rights retained. The Bank 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.

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 real estate construction loan portfolio and the amount of such loans with fixed interest rates and floating rates in each maturity range as of September 30, 2000 are summarized in the following table:

	September 30, 2000
	One Year Or Less		After One Through Five Years		After Five Years		Total
	(Dollars in thousands)
Commercial and industrial	$	568,972	$	266,634	$	17,679	$	853,285
Real estate construction and land development		405,838		194,414		35,320		635,572

Total	$	974,810	$	461,048	$	52,999	$	1,488,857

Loans with a fixed interest rate	$	346,260	$	155,219	$	13,949	$	515,428
Loans with a floating interest rate		628,550		305,829		39,050		973,429

Total	$	974,810	$	461,048	$	52,999	$	1,488,857

Loans Held for Sale

Loans held for sale of $95.5 million at September 30, 2000 increased from $77.0 million at December 31, 1999. These loans are typically sold to investors within one month of origination. Approximately $42 million of these loans were previously recorded as loans held for investment and reclassified after the merger of Fort Bend.

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, an independent loan review department staffed with OCC experienced personnel, low individual lending limits for officers, Senior Loan Committee approval for large credit relationships and quality loan documentation procedures. The Company also maintains a well developed monitoring process for credit extensions in excess of

$100,000. The Company performs monthly and quarterly concentration analyses based on various factors such as industries, collateral types, business lines, large credit sizes, international investments 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. There can be no assurance, however, that the Company's loan portfolio will not become subject to increasing pressures from deteriorating borrower credits due to general economic conditions.

Historically, the Houston metropolitan area has been affected by the state of the energy business, but since the mid 1980's the economic impact has been reduced by a combination of increased industry diversification and less reliance on debt to finance expansion. When energy prices fluctuate, it is the Company's practice to review and adjust underwriting standards with respect to companies affected by oil and gas price volatility, and to continuously monitor existing credit exposure to companies which are impacted by this price volatility.

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Based on an evaluation of the loan portfolio, management presents a quarterly review of the allowance for loan losses to 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 evaluation, management considers growth in the loan portfolio, the diversification by industry of the Company's commercial loan portfolio, the effect of changes in the local real estate market on collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge-offs for the period, the amount of nonperforming loans and related collateral security and the evaluation of its loan portfolio by the loan review function. Charge-offs occur when loans are deemed to be uncollectible.

In order to determine the adequacy of the allowance for loan losses, management considers the risk classification or delinquency status of loans and other factors, such as collateral value, portfolio composition, trends in economic conditions and the financial strength of borrowers. Management establishes specific allowances for loans which management believes require reserves greater than those allocated according to their classification or delinquent status. The Company then charges to operations a provision for loan losses determined on an annualized basis to maintain the allowance for loan losses at an adequate level determined according to the foregoing methodology.

Management believes that the allowance for loan losses at September 30, 2000 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 September 30, 2000.

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

	Nine Months Ended September 30, 2000			Year Ended December 31, 1999
	(Dollars in thousands)
Allowance for loan losses beginning of period	$	19,716		$	14,980
Provision for loan losses		5,000			6,060
Charge-offs		(1,024	)		(1,536	)
Recoveries		257			212

Allowance for loan losses end of period	$	23,949		$	19,716

Allowance to period-end loans		1.10	%		1.07	%
Net charge-offs to average loans		0.05	%		0.08	%
Allowance to period-end nonperforming loans		537.70	%		650.91	%

The following table describes the allocation of the allowance for loan losses among various categories of loans and certain other information for the dates indicated. Portions of the allowance for loan losses are allocated to cover the estimated losses inherent in particular risk categories of loans. The allocation of the allowance for loan losses is based upon the Company's loss experience over a period of years and is adjusted for subjective factors such as economic trends, performance trends, portfolio age and concentrations of credit. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future loan losses may occur. The total allowance is available to absorb losses from any segment of loans.

	September 30, 2000					December 31, 1999
	Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans
	(Dollars in thousands)
Balance of allowance for loan losses applicable to:
Commercial and industrial	$	10,575		39.09	%	$	10,125		39.27	%
Real estate:
Construction and land development		5,784		29.12			4,054		26.94
1-4 family residential		2,600		13.89			2,012		14.61
Commercial owner occupied		1,755		9.90			1,364		10.11
Farmland		42		0.29			89		0.71
Other		1,201		1.45			140		1.10
Consumer		1,992		6.26			1,932		7.26

Total allowance for loan losses	$	23,949		100.0	%	$	19,716		100.0	%

Nonperforming Assets and Impaired Loans

The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory. All loans past due 90 days, however, are placed on nonaccrual status, unless the loan is both well collateralized and in the process of collection. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction of principal as long as doubt exists as to collection. In some instances, the bank chooses to revise a loan's payment terms and classify the loan as troubled debt restructuring.

Nonperforming assets were $4.8 million at September 30, 2000 compared with $4.4 million at December 31, 1999. This resulted in a ratio of nonperforming assets to loans plus other real estate of 0.22% and 0.24% at September 30, 2000 and December 31, 1999, respectively.

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

	September 30, 2000			December 31, 1999
	(Dollars in thousands)
Nonaccrual loans	$	2,770		$	2,388
Accruing loans 90 or more days past due		1,684			641
Other real estate and foreclosed property		296			1,337

Total nonperforming assets	$	4,750		$	4,366

Nonperforming assets to total loans and other real estate		0.22	%		0.24	%

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 when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the original contractual terms of the loan agreement. The Company's impaired loans were approximately

$9.0 million and $13.7 million at September 30, 2000 and December 31, 1999, respectively. At December 31, 1999, the largest component of imparied loans was a commercial energy related loan of approximately $10.8 million. This loan was not considered impaired at September 30, 2000 as a result of payments in accordance with terms for a period of at least twelve months. The largest component of impaired loans at September 30, 2000 is a commercial loan of approximately $5.4 million specializing in products and services for fluids handling. The average recorded investment in impaired loans during the nine months ended September 30, 2000 and the year ended December 31, 1999 was $8.7 million and $13.9 million, respectively. The total required allowance for loan losses related to these loans was $0 for each reported period. Interest income on impaired loans of $737,000 and $1.5 million was recognized for cash payments received during the nine months ended September 30, 2000 and the year ended December 31, 1999, 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 are classified as held to maturity and measured at amortized cost in the financial statements 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, 2000. This allows the Company to manage its investment portfolio more effectively and to enhance the average yield on the portfolio.

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

	September 30, 2000
			Gross Unrealized
	Amortized Cost		Gain		Loss			Fair Value
	(Dollars in thousands)
Available for Sale
U.S. Government securities	$	101,405	$	395	$	(1,646	)	$	100,154
Mortgage-backed securities		518,082		310		(17,799	)		500,593
Federal Reserve Bank stock		3,324		—		—			3,324
Federal Home Loan Bank stock		16,437		—		—			16,437
Other securities		27,607		31		(8	)		27,630

Total securities available for sale	$	666,855	$	736	$	(19,453	)	$	648,138

	December 31, 1999
			Gross Unrealized
	Amortized Cost		Gain		Loss			Fair Value
	(Dollars in thousands)
Available for Sale
U.S. Government securities	$	78,527	$	35	$	(1,567	)	$	76,995
Mortgage-backed securities		560,471		356		(16,852	)		543,975
Federal Reserve Bank stock		2,408		—		—			2,408
Federal Home Loan Bank stock		14,886		—		—			14,886
Other securities		14,253		22		—			14,275

Total securities available for sale	$	670,545	$	413	$	(18,419	)	$	652,539

Securities totaled $648.1 million at September 30, 2000, a decrease of $4.4 million from $652.5 million at December 31, 1999. The yield on the securities portfolio for the nine months ended September 30, 2000 was 6.69% while the yield was 6.24% for the nine months ended September 30, 1999.

The Company has no mortgage-backed securities that have been issued by non-agency entities. Included in the Company's mortgage-backed securities at September 30, 2000 were $243.3 million in agency issued collateral mortgage obligations.

At September 30, 2000, $463.1 million of the mortgage-backed securities held by the Company had final maturities of more than 10 years. At September 30, 2000, approximately $43.8 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 (including securities, federal funds sold and interest-bearing deposits) and their weighted average yields at September 30, 2000. 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 other comprehensive income.

	September 30, 2000
	Within One Year					After One Year But Within Five Years					After Five Years But Within Ten Years					After Ten Years
	Amortized Cost		Yield			Amortized Cost		Yield			Amortized Cost		Yield			Amortized Cost		Yield			Total		Yield
	(Dollars in thousands)
U.S. Government securities	$	945		6.59	%	$	100,460		6.27	%	$	—		—	%	$	—		—	%	$	101,405		6.28	%
Mortgage-backed securities		3,520		5.56			17,149		6.90			34,352		6.44			463,061		6.48			518,082		6.48
Federal Reserve Bank stock		3,324		6.00			—		—			—		—			—		—			3,324		6.00
Federal Home Loan Bank stock		16,437		6.60			—		—			—		—			—		—			16,437		6.60
Other securities		16,208		6.26			175		8.03			606		7.00			10,618		7.53			27,607		6.78
Federal funds sold		42,528		6.61			—		—			—		—			—		—			42,528		6.61
Interest-bearing deposits		2,847		6.61			—		—			—		—			—		—			2,847		6.61

Total investments	$	85,809		6.47	%	$	117,784		6.37	%	$	34,958		6.45	%	$	473,679		6.50	%	$	712,230		6.47	%

Prepaid Expenses and Other Assets

Total prepaid expenses and other assets were $115.9 million at September 30, 2000, an increase of $29.1 million from $86.8 million at December 31, 1999. Significant components within prepaid expenses and other assets include the cash value of bank owned life insurance of $27.7 million and accounts receivable purchased of $25.8 million.

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, NOW accounts, money market and time accounts. The Company relies primarily on advertising, competitive pricing policies and customer service to attract and retain these deposits. As of September 30, 2000, the Company had less than 6% of its deposits classified as brokered funds and does not anticipate any significant increase. 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's ratio of average non-interest bearing demand deposits to average total deposits for the periods ended September 30, 2000 and December 31, 1999, was 27% for both periods.

The average daily balances and weighted average rates paid on deposits for the nine months ended September 30, 2000 and the year ended December 31, 1999, are presented below:

	September 30, 2000					December 31, 1999
	Average Outstanding Balance		Rate			Average Outstanding Balance		Rate
	(Dollars in thousands)
NOW accounts	$	19,977		0.87	%	$	28,807		2.31	%
Regular savings		38,283		2.49			36,201		2.44
Premium Yield		632,057		5.13			472,501		4.24
Money market savings		361,314		2.96			332,525		2.92
CD's less than $100,000		218,297		5.35			221,161		4.92
CD's $100,000 and over		414,685		6.01			345,060		4.97
IRA's, QRP's and other		54,657		5.59			43,201		5.43

Total interest-bearing deposits		1,739,270		4.82	%		1,479,456		4.17	%

Noninterest-bearing deposits		632,687					543,961

Total deposits	$	2,371,957				$	2,023,417

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, 2000		December 31, 1999
	(Dollars in thousands)
3 months or less	$	362,421	$	177,432
Between 3 months and 6 months		88,265		68,476
Between 6 months and 1 year		89,501		67,388
Over 1 year		36,198		23,678

Total time deposits $100,000 and over	$	576,385	$	336,974

Borrowings

Securities sold under repurchase agreements and other short-term borrowings, consisting of federal funds purchased and other bank borrowings, generally represent borrowings with maturities ranging from one to thirty days. Information relating to these borrowings is summarized as follows:

	September 30, 2000			December 31, 1999
	(Dollars in thousands)
Securities sold under repurchase agreements:
Average	$	206,926		$	184,815
Period-end		241,834			216,838
Maximum month-end balance during period		241,834			216,838
Interest rate:
Average		4.60	%		4.06	%
Period-end		4.89	%		4.03	%
Other short-term borrowings:
Average	$	224,821		$	189,929
Period-end		125,841			248,346
Maximum month-end balance during period		371,841			265,440
Interest rate:
Average		6.30	%		5.33	%
Period-end		6.68	%		5.23	%

Securities sold under repurchase agreements are maintained in safekeeping by correspondent banks.

Liquidity and Capital Resources

Liquidity involves the Company's ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate the Company on an ongoing basis. For the nine months ended September 30, 2000, the Company's liquidity needs have primarily been met by growth in deposits.

The Company's risk-based capital ratios including Leverage Capital, Tier 1 Risk-Based Capital and the Total Risk-Based Capital Ratio were 7.82%, 9.55% and 10.48%, respectively, at September 30, 2000.

Other Matters

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes since December 31, 1999. 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.”

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 Security Holders

None.

ITEM 5. Other Information

None.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit 2.1 — Purchase Agreement, dated November 9, 2000, among the Company, Southwest Bank of Texas National Association, Citizens Bankers Limited Partnership and Baytown Land I, Ltd.

Exhibit 15.1 — Awareness Letter of PricewaterhouseCoopers LLP

Exhibit 27 — Financial Data Schedule

(b) Reports on Form 8-K

No report on Form 8-K was filed by the Company during the three months ended September 30, 2000.

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.	Chief Executive Officer and President (Principal Executive Officer)	November 13, 2000
/s/ DAVID C. FARRIES David C. Farries	Executive Vice President, Treasurer and Secretary (Principal Financial Officer)	November 13, 2000
/s/ R. JOHN McWHORTER R. John McWhorter	Senior Vice President and Controller (Principal Accounting Officer)	November 13, 2000