RIVERWAY HOLDINGS INC, S-1, 1998-08-11

RIVERWAY HOLDINGS INC
S-1, 1998-08-11

Previous: AMERICAN COMMUNITY PROPERTIES TRUST, DEF 14A, 1998-08-11

Next: DERBY CYCLE CORP, S-4, 1998-08-11

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1998
REGISTRATION NO.
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

RIVERWAY HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

TEXAS 6711 76-0455179
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

JOHN E. PHILLIPS
PRESIDENT
FIVE RIVERWAY FIVE RIVERWAY
HOUSTON, TEXAS 77056 HOUSTON, TEXAS 77056
(713) 552-9000 (713) 881-0612
(ADDRESS, INCLUDING ZIP CODE, AND (NAME, ADDRESS, INCLUDING ZIP CODE,
TELEPHONE NUMBER, AND TELEPHONE
INCLUDING AREA CODE, OF REGISTRANT'S NUMBER, INCLUDING AREA CODE, OF AGENT
PRINCIPAL EXECUTIVE OFFICES) FOR SERVICE)

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

COPIES TO:

FRED B. WHITE, III, ESQ.
WILLIAM T. LUEDKE IV, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM
BRACEWELL & PATTERSON, L.L.P. LLP
2900 SOUTH TOWER PENNZOIL PLACE 919 THIRD AVENUE
HOUSTON, TEXAS 77002-2781 NEW YORK, NEW YORK 10022

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par
value.................. 1,450,000 $16.00 $23,200,000 $6,844
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 11, 1998

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

PROSPECTUS

1,434,875 SHARES

[LOGO]

RIVERWAY HOLDINGS, INC.

COMMON STOCK

Of the 1,434,875 shares of Common Stock (the "Common Stock") offered
hereby (the "Offering"), 1,350,000 shares are being sold by Riverway Holdings,
Inc. (the "Company") and 84,875 shares are being sold by certain stockholders
of the Company (the "Selling Stockholders"). Prior to the Offering, there has
been no established public market for the Common Stock. The initial public
offering price will be determined by negotiations between the Company and the
representatives of the Underwriters (the "Representatives"). It is estimated
that the initial public offering price will be in the range of $14.00 to $16.00
per share. See "Underwriting." Application has been made to have the shares of
Common Stock approved for quotation on The Nasdaq Stock Market's National Market
("Nasdaq/National Market") under the symbol "RWHI."

THE COMPANY INTENDS TO USE THE PROCEEDS OF THE OFFERING FOR GENERAL
CORPORATE PURPOSES, INCLUDING BALANCE SHEET GROWTH. SEE "USE OF PROCEEDS."

THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENTAL AGENCY.

SEE "RISK FACTORS" ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

PROCEEDS PROCEEDS
PRICE TO UNDERWRITING TO TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------
Per Share.... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)..... $ $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."

(2) Before deducting offering expenses payable by the Company, estimated at
$300,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
215,231 additional shares of Common Stock, on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discount,
Proceeds to Company and Proceeds to Selling Stockholders will be
approximately $ , $ , $ and
$ , respectively. See "Underwriting."

The shares of Common Stock to be distributed to the public are offered by
the Underwriters, subject to prior sale, when, as and if received and accepted
by the Underwriters, subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the certificates for the shares of
Common Stock will be made against payment therefor in Houston, Texas on or about
, 1998.

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

KEEFE, BRUYETTE & WOODS, INC. LEGG MASON WOOD WALKER
INCORPORATED

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

The date of this Prospectus is , 1998.
<PAGE>
[BAR GRAPHS DEPICTING HISTORICAL
RETURN ON AVERAGE EQUITY AND HISTORICAL EARNINGS PER SHARE.]

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE MARKET PRICE OF
THE COMMON STOCK, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. IN ADDITION, IN CONNECTION WITH
THE OFFERING, THE UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ/NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION HAS BEEN
ADJUSTED TO GIVE EFFECT TO A FIVE FOR ONE COMMON STOCK SPLIT EFFECTED IN THE
FORM OF A STOCK DIVIDEND ISSUED TO STOCKHOLDERS OF RECORD AS OF AUGUST 4, 1998.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITER'S OVER-ALLOTMENT OPTION IS NOT EXERCISED.

THE COMPANY

Riverway Holdings, Inc. (the "Company") is a bank holding company
headquartered in Houston, Texas, which derives substantially all of its income
from the operation of its wholly-owned bank subsidiary, Riverway Bank (the
"Bank"). The Company was formed in 1995 as a bank holding company for the
Bank, which was chartered in 1983. As of June 30, 1998, the Company had assets
of $433.9 million, gross loans of $231.3 million, total deposits of $352.2
million and total stockholders' equity of $21.6 million. Based on total assets
as of June 30, 1998, the Company is the fifth largest independent bank holding
company headquartered in Houston.

The Company has developed and implemented a highly efficient operating
philosophy that has resulted in a 23.0% compound annual growth rate in earnings
before extraordinary items since 1991. From 1991 through 1997, diluted earnings
per share before extraordinary items have increased from $0.23 to $1.00 and
return on stockholders' equity before extraordinary items has increased from
11.1% to 15.5%. In addition to its strong earnings performance, the Company has
also experienced steady balance sheet growth. From 1991 through 1997, using
compound annual growth rates, the Company's assets increased 16.3% from $120.7
million to $348.2 million, total deposits increased 15.5% from $107.6 million to
$295.3 million and gross loans increased 19.4% from $51.6 million to $178.3
million. Substantially all of the earnings and balance sheet growth resulted
from internal growth. During the first six months of 1998, while growth in
assets, deposits, loans and net interest income continued at the Company's
historical rates, net income decreased slightly due to a higher than normal
provision for credit losses and several nonrecurring noninterest expenses.

Management of the Company believes that modern communication and increased
access to information for all consumers will significantly impact banking
activities. It is management's opinion that pricing for all bank products will
continue to move toward industry-wide standards, and that an individual bank's
ability to extract premium pricing from isolated markets will decline.
Management believes that in this environment, those institutions such as the
Company, whose cost structures are the most competitive, will be those with the
best chance of long-term success. Consistent with these beliefs, the Company has
developed the following four-pronged strategy to maintain its position as a
low-cost provider of products and services: (i) reliance on a single-location,
multi-channel delivery system, (ii) utilization of technology in order to
enhance employee efficiency, (iii) generation of assets through a network of
third party providers at a cost that is below the comparable cost of
self-origination and (iv) identification and pursuit of highly specialized,
under-served niche markets which lend themselves to efficient, highly automated
servicing.

The primary goal of the Company is to maximize return on equity by
implementing an operating strategy that focuses on diligent cost control,
optimum operating efficiency and effective capital management. For 1997, the
Company's efficiency ratio (as computed by the FDIC) was 50.91%, which was well
below the national average of 59.16% for all commercial banking organizations in
the United States. By maintaining this low-cost operating structure, the Company
gains a competitive advantage that allows it to price its deposit products and
loans at competitive market rates while still achieving an acceptable overall
return on equity. This strategy enables the Company to compete throughout the
Houston metropolitan area without being dependent on costly branch locations and
expensive staffing.

3
<PAGE>
The Company currently conducts its marketing activities along the following
three broad product lines, each of which represents a significant portion of the
Company's assets and deposits:

o PERSONAL BANKING. The Company offers a wide variety of consumer
banking products, both in its lending and deposit gathering. Consumer
lending activities include a full range of single-family mortgage
products and loans for vehicles and other consumer durables. Following
a major commitment to this market sector in 1995, the Company's total
consumer loan portfolio has grown from less than 200 loans totaling
$16.4 million at December 31, 1995, to a portfolio as of June 30,
1998, of over 3,000 loans totaling $95.9 million, including
approximately 375 mortgage loans and approximately 2,700 other
consumer loans. In addition, as of June 30, 1998, the Company serviced
another 730 mortgage loans totaling $78.8 million. Growth in consumer
deposits has been even more dramatic as a result of the attractive
deposit interest rates offered by the Company. As an extension of the
Company's concept of high-technology/low-overhead delivery, the
Company has introduced a free direct deposit checking product with
Internet and telephone access. By implementing this delivery system,
which is accessed by personal computer and other alternative delivery
channels, the Company believes that it is at the forefront of
developing Personal Banking customers who both deposit with and borrow
from the Company without requiring expensive person-to-person
interaction in their day-to-day banking activities. Development of the
Personal Banking area has resulted in consumer-based deposits of
approximately $190.8 million at June 30, 1998.

o COMMERCIAL BANKING. The Company has provided Commercial Banking
services since its inception. The major product lines offered in this
area include loans for commercial real estate, loans to homebuilders
for the construction of housing, equipment loans and leases, accounts
receivable financing and inventory loans. Growth in this sector has
been steady, with total assets of approximately $104.6 million at June
30, 1998. On the deposit side, the Company offers cash management
products such as sweep accounts, security repurchase agreements and
short-term investment accounts. Commercial deposits currently provide
approximately one-half of the funding for the Company's commercial
lending activities.

o MUNICIPAL BANKING. The Company acts as the primary commercial bank
for approximately 425 separate municipal utility districts ("MUDs"),
which are small public water companies that typically provide services
to an average of 1,000 homes each. The Company maintains over 1,000
separate NOW and money market accounts for these MUDs and also issues
certificates of deposit to these entities. While the aggregate deposit
balances in these accounts fluctuate on a seasonal basis, since 1990
they have averaged approximately $100 million and are used to fund a
significant portion of the Company's investment portfolio. As of June
30, 1998, the Company had a net interest spread of 1.59% on these
accounts. The Company plans to vertically integrate its Municipal
Banking area by providing additional services to the MUD industry,
such as an automated lock box collection system. These services are
expected to provide additional fee income for the Company.

Management of the Company believes that it can continue to increase the
Company's asset size and maximize stockholder value by providing both
traditional and innovative products in a manner designed to achieve maximum cost
control.

4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the
Company............................ 1,350,000 shares
Common Stock offered by the Selling
Stockholders....................... 84,875 shares
Common Stock to be outstanding after
the Offering....................... 4,167,815 shares
Use of Proceeds...................... The estimated net proceeds of the Offering
(approximately $18.5 million) will be used for
general corporate purposes, including balance sheet
growth.
Risk Factors......................... See "Risk Factors" and "Dilution" for a
discussion of certain factors that should be
considered by each prospective investor.
Nasdaq/National Market Symbol........ "RWHI"
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data of the Company is derived
from the Selected Consolidated Financial Data appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994(1) 1993(1)(2)
--------- --------- --------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income..................... $ 5,801 $ 4,276 $ 9,379 $ 8,100 $ 6,708 $ 6,882 $ 6,545
Provision for credit losses............. 1,000 308 570 765 145 160 --
--------- --------- --------- --------- --------- ---------- ----------
Net interest income after provision
for credit losses................. 4,801 3,968 8,809 7,335 6,563 6,722 6,545
Noninterest income...................... 611 511 1,032 811 603 1,028 777
Noninterest expenses.................... 3,922 2,837 5,869 4,717 4,336 5,206 5,406
--------- --------- --------- --------- --------- ---------- ----------
Income before income taxes.......... 1,490 1,642 3,972 3,429 2,830 2,544 1,916
Provision for income taxes.............. 381 434 1,055 1,041 821 814 650
Cumulative effect of change in
accounting principle(2)............... -- -- -- -- -- -- 1,258
--------- --------- --------- --------- --------- ---------- ----------
Net income.............................. $ 1,109 $ 1,208 $ 2,917 $ 2,388 $ 2,009 $ 1,730 $ 2,524
========= ========= ========= ========= ========= ========== ==========
Net income available to common
stockholders(3)....................... $ 1,109 $ 1,208 $ 2,917 $ 2,388 $ 2,009 $ 1,709 $ 2,503
========= ========= ========= ========= ========= ========== ==========

PER SHARE DATA(4):
Net income(5)
Basic............................... $ 0.39 $ 0.42 $ 1.02 $ 0.84 $ 0.70 $ 0.60 $ 0.88
Diluted............................. 0.39 0.41 1.00 0.81 0.69 0.59 0.86
Book value.............................. 7.67 6.59 7.23 6.10 5.25 4.40 4.42
Tangible book value..................... 7.67 6.59 7.23 6.10 5.25 4.40 4.42
Cash dividends.......................... -- -- -- -- -- -- --
Weighted average shares outstanding
(in thousands)
Basic............................... 2,818 2,859 2,869 2,859 2,859 2,859 2,859
Diluted............................. 2,818 2,936 2,908 2,931 2,921 2,915 2,908

BALANCE SHEET DATA:
Total assets............................ $ 433,934 $ 292,962 $ 348,201 $ 299,900 $ 228,186 $227,908 $226,870
Securities.............................. 172,803 136,699 134,911 139,689 142,309 145,410 141,495
Loans held to maturity.................. 211,186 133,345 175,974 130,330 70,773 66,328 59,578
Loans held for sale..................... 20,126 5,710 2,359 3,394 1,094 1,771 3,871
Allowance for credit losses............. 2,103 1,191 1,210 898 656 904 773
Total deposits.......................... 352,186 264,779 295,253 274,488 188,463 205,981 210,117
Other borrowings and subordinated
debentures............................ 58,681 8,592 31,488 6,942 24,174 8,831 3,595
Total stockholders' equity.............. 21,605 18,855 20,384 17,443 15,001 12,585 12,651

(TABLE CONTINUED ON FOLLOWING PAGE)

6
<PAGE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994(1) 1993(1)(2)
--------- --------- --------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AVERAGE BALANCE SHEET DATA:
Total assets............................ $ 413,119 $ 301,340 $ 322,982 $ 259,686 $ 227,099 $227,698 $191,838
Securities.............................. 166,616 146,723 151,179 146,161 143,252 143,896 115,973
Loans held to maturity.................. 183,003 132,330 143,810 95,576 64,875 58,389 54,658
Loans held for sale..................... 9,007 1,136 1,870 1,091 3,684 1,809 673
Allowance for credit losses............. 1,293 1,026 1,107 738 827 849 775
Total deposits.......................... 342,776 272,340 275,289 213,005 195,244 207,915 177,604
Total stockholders' equity.............. 20,844 17,889 18,868 16,157 14,189 12,707 12,025

PERFORMANCE RATIOS(6):
Return on average assets................ 0.54% 0.81% 0.90% 0.92% 0.88% 0.76% 1.32%
Return on average common equity......... 10.73 13.62 15.46 14.78 14.16 13.61 20.99
Net interest margin..................... 2.97 3.05 3.08 3.33 3.16 3.31 3.67
Efficiency ratio(7)..................... 59.28 53.47 50.91 51.60 58.04 64.77 74.53

ASSET QUALITY RATIOS(8):
Nonperforming assets to total loans and
other real estate(9).................. 0.60% 2.43% 1.23% 2.67% 2.14% 4.27% 4.60%
Net loan charge-offs to average
loans(6).............................. 0.11 0.02 0.18 0.54 0.57 0.05 0.01
Allowance for credit losses to loans
held to maturity...................... 1.00 0.89 0.69 0.69 0.93 1.36 1.30
Allowance for credit losses to
nonperforming loans(9)................ 1,194.88 84.59 192.06 60.47 431.58 54.13 396.41

CAPITAL RATIOS(8):
Leverage ratio.......................... 5.13% 6.81% 6.07% 6.22% 7.07% 6.38% 5.58%
Average stockholders' equity to average
total assets.......................... 5.05 5.94 5.84 6.22 6.25 5.58 6.27
Tier 1 risk-based capital ratio......... 9.35 12.93 11.17 12.25 16.84 13.99 14.04
Total risk-based capital ratio.......... 10.13 13.70 11.61 12.29 17.50 14.86 15.59
</TABLE>
- ------------

(1) The Company was formed and became the parent holding company of the Bank
effective February 23, 1995. Financial data presented as of and for the
years ended December 31, 1994 and 1993 is for the Bank. Financial data for
1995 reflects that the Company and the Bank were combined for the full year.

(2) The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," effective January 1, 1993. The cumulative
effect of the accounting change increased basic and diluted earnings per
share by $0.44 and $0.43, respectively.

(3) The difference in net income and net income available to common stockholders
of $21,000 for the years ended December 31, 1994 and 1993 was due to the
accretion of liquidation preferences on preferred shares.

(4) Adjusted for a five for one stock split effective August 5, 1998.

(5) Net income per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share."

(6) All interim periods for these line items have been annualized.

(7) Defined as noninterest expense, less the amortization expense of mortgage
servicing rights and intangible assets, as a percent of the sum of net
interest income and noninterest income, excluding securities transactions.

(8) At period end, except net loan charge-offs to average loans and average
stockholders' equity to average total assets.

(9) Nonperforming loans consist of nonaccrual loans, restructured loans and
loans 90 days or more past due, not on nonaccrual. Nonperforming assets
consist of nonperforming loans and other real estate.

7
<PAGE>
RISK FACTORS

AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. IN
ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN,
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. INFORMATION CONTAINED IN THIS
PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY
THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS,"
"WILL," "SHOULD," "PROJECTED," "CONTEMPLATED" OR "ANTICIPATES" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. NO
ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS COVERED BY THE FORWARD-LOOKING
STATEMENTS WILL BE ACHIEVED. THE FOLLOWING FACTORS COULD CAUSE ACTUAL EXPERIENCE
TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH FORWARD-LOOKING
STATEMENTS. OTHER FACTORS, SUCH AS THE GENERAL STATE OF THE ECONOMY, COULD ALSO
CAUSE ACTUAL EXPERIENCE TO VARY MATERIALLY FROM THE MATTERS COVERED IN SUCH
FORWARD-LOOKING STATEMENTS.

EXPOSURE TO LOCAL ECONOMIC CONDITIONS

The Company's success is dependent to a significant extent upon general
economic conditions in Texas and the metropolitan Houston area. The banking
industry in Texas and Houston is affected by general economic conditions such as
inflation, recession, unemployment and other factors beyond the Company's
control. During the mid 1980's, severely depressed oil and gas and real estate
prices materially and adversely affected the Texas and Houston economies,
causing recession and unemployment in the region and resulting in excess
vacancies in the Houston real estate market and elsewhere in the state. Since
1987, the Texas economy has improved in part due to its expansion into
industries other than those related to energy. As the Texas and Houston
economies have diversified away from the energy industry, however, they have
become more susceptible to adverse effects resulting from recession in the
national economy. Economic recession over a prolonged period or other economic
dislocation in the Texas and Houston area could cause increases in nonperforming
assets, thereby causing operating losses, impairing liquidity and eroding
capital. There can be no assurance that future adverse changes in the Texas or
Houston economies would not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.

INTEREST RATE RISK

The Company's earnings depend to a great extent on "rate differentials,"
which are the differences between the interest income that the Company earns on
loans and investments and the interest expense paid on deposits and other
borrowings. These rates are highly sensitive to many factors which are beyond
the Company's control, including general economic conditions and the policies of
various government and regulatory authorities. Increases in the discount rate by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
usually lead to rising interest rates, which affect the Company's interest
income, interest expense and investment portfolio. Also, governmental policies
such as the creation of a tax deduction for individual retirement accounts can
increase savings and affect the cost of funds. From time to time, maturities of
assets and liabilities are not balanced, and a rapid increase or decrease in
interest rates could have an adverse effect on the net interest margin and
results of operations of the Company. The nature, timing and effect of any
future changes in federal monetary and fiscal policies on the Company and its
results of operations are not predictable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Interest Rate Sensitivity and Liquidity."

COMPETITION

The banking business is highly competitive, and the profitability of the
Company depends principally upon the Company's ability to compete in the market
area in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other
nonfinancial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable

8
<PAGE>
financing than the Company. Many of such competitors may have greater financial
and other resources than the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing customer service,
technology and responsive decision-making on loans, by establishing long-term
customer relationships and building customer loyalty and by providing products
and services designed to address the specific needs of its customers. Although
the Company has been able to compete effectively in the past, no assurances may
be given that the Company will continue to be able to compete effectively in the
future. Various legislative acts in recent years have led to increased
competition among financial institutions. There can be no assurance that the
United States Congress or the Texas legislature will not enact legislation that
may further increase competitive pressures on the Company. Competition from both
financial and non-financial institutions is expected to continue. See "The
Company -- Competition."

REGULATION AND SUPERVISION

Bank holding companies and banks operate in a highly regulated environment
and are subject to extensive supervision and examination by several federal and
state regulatory agencies. The Company is subject to the Bank Holding Company
Act of 1956, as amended (the "BHCA"), and to regulation and supervision by the
Federal Reserve Board. The Bank, as a Texas state banking association, is
subject to regulation and supervision by the Texas Banking Department and, as a
result of the insurance of its deposits, by the Federal Deposit Insurance
Corporation ("FDIC"). The regulations promulgated by these agencies are
intended primarily for the protection of depositors and customers, rather than
for the benefit of investors. The Company and the Bank are subject to changes in
federal and state laws, as well as changes in regulations and governmental
policies, income tax laws and accounting principles. The effects of any
potential changes cannot be predicted but could adversely affect the business,
operations and cash flows of the Company and the Bank in the future. See
"Supervision and Regulation."

The Federal Reserve Board has adopted a policy that requires a bank holding
company such as the Company to serve as a source of financial strength to its
banking subsidiaries. The Federal Reserve Board has required bank holding
companies to contribute cash to their troubled bank subsidiaries based upon this
"source of strength" policy, which could have the effect of decreasing funds
available for distributions to stockholders. In addition, a bank holding company
in certain circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary. See "Supervision and Regulation."

DIVIDEND HISTORY AND RESTRICTIONS ON ABILITY TO PAY DIVIDENDS

The Company has never paid cash dividends on the Common Stock, and
currently does not expect to pay dividends in the foreseeable future. It is the
policy of the Federal Reserve Board that a bank holding company should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that a bank
holding company should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.

The Company's principal source of funds to pay dividends on the shares of
Common Stock will be cash dividends that the Company receives from the Bank. The
payment of dividends by the Bank to the Company is subject to certain
restrictions imposed by federal and state banking laws, regulations and
authorities. As of June 30, 1998, an aggregate of approximately $9.4 million was
available for payment of dividends by the Bank to the Company under applicable
restrictions, without regulatory approval. See "Supervision and
Regulation -- The Bank."

The federal banking statutes prohibit federally insured banks from making
any capital distributions (including a dividend payment) if, after making the
distribution, the institution would be "undercapitalized" as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit an insured bank from engaging in an unsafe or unsound
practice, as determined by the agency, in conducting an activity. The payment of
dividends could be deemed to constitute such an unsafe or unsound practice,
depending on the financial condition of the Bank. Regulatory authorities could
impose administratively stricter limitations on the ability of the Bank to pay
dividends to the Company if such limits were

9
<PAGE>
deemed appropriate to preserve certain capital adequacy requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Capital Resources" and "Supervision and
Regulation."

DEPENDENCE ON KEY PERSONNEL

The Company and the Bank are dependent on certain key personnel including
John E. Phillips, James D. MacIntyre and Patrick C. Reed, all of whom are
considered to be important to the success of the Company and the Bank. The
unexpected loss of Messrs. Phillips, MacIntyre or Reed or other members of
senior management could have an adverse effect on the Company and the Bank. The
Company has entered into an employment agreement with each of Messrs. Phillips,
MacIntyre and Reed. See "Management -- Employment Agreements."

CERTAIN CHARTER AND BYLAW PROVISIONS

The Company's Articles of Incorporation and Bylaws contain certain
provisions which may delay, discourage or prevent an attempted acquisition or
change of control of the Company. These provisions include: (i) a Board of
Directors classified into three classes of directors with the directors of each
class having staggered three-year terms, (ii) a provision that any action
required or permitted to be taken by the Company's stockholders may not be
effected by consent in writing, (iii) a provision establishing certain advance
notice procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at an annual or special meeting of
stockholders and (iv) a provision that denies stockholders the right to amend
the Bylaws of the Company. The Company's Articles of Incorporation provide for
noncumulative voting for directors and authorize the Board of Directors of the
Company to issue shares of preferred stock of the Company, $1.00 par value per
share, without stockholder approval and upon such terms as the Board of
Directors may determine. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions, financings and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
controlling interest in the Company. In addition, certain provisions of Texas
law, including a provision which restricts certain business combinations between
a Texas corporation and certain affiliated stockholders, may delay, discourage
or prevent an attempted acquisition or change in control of the Company. See
"Supervision and Regulation," "Description of Securities of the
Company -- Preferred Stock" and "-- Texas Law and Certain Provisions of the
Articles of Incorporation and Bylaws."

MANAGEMENT'S OWNERSHIP INTEREST AND POSSIBLE EFFECTS

After the consummation of the Offering, the executive officers and
directors of the Company will beneficially own 29.23% of the outstanding shares
of Common Stock, and approximately 27.79% of such shares of Common Stock if the
Underwriter's over-allotment option is fully exercised. Accordingly, these
executive officers and directors will be able to influence, to a significant
extent, the outcome of all matters required to be submitted to the Company's
stockholders for approval, including decisions relating to the election of
directors of the Company, the determination of day-to-day corporate and
management policies of the Company and other significant corporate transactions.
See "Management," "Principal Stockholders" and "Description of Securities
of the Company."

DILUTION OF COMMON STOCK

Investors purchasing shares of Common Stock in the Offering will incur
immediate dilution of approximately 35.8% in their investment, in that the
tangible book value per share of the Company after the Offering will be
approximately $9.63 compared with an assumed initial public offering price of
$15.00 per share. See "Dilution."

NO PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the shares of
Common Stock. An application has been filed to have the Common Stock approved
for quotation on the Nasdaq/National Market under the symbol "RWHI." The
Representatives have advised the Company that they intend to make a market in
the

10
<PAGE>
Common Stock as long as the volume of trading activity in the Common Stock and
certain other market making conditions justify doing so. Nonetheless, there can
be no assurance that an active public market will develop or be sustained after
the Offering or that if such a market develops, investors in the Common Stock
will be able to resell their shares at or above the initial public offering
price. Making a market involves maintaining bid and asked quotations for the
Common Stock and being available as principal to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of willing buyers and sellers of the Common Stock at any given
time, which presence is dependent upon the individual decisions of investors
over which neither the Company nor any market maker has any control. The initial
public offering price of the shares of Common Stock will be determined by
negotiations between the Company and the Representatives and will not
necessarily bear any relationship to the Company's book value, past operating
results, financial condition or other established criteria of value and may not
be indicative of the market price of the Common Stock after the Offering. See
"Nature of the Trading Market and Market Prices" and "Underwriting" for
information relating to the method of determining the initial public offering
price. The stock market has from time to time experienced price and volume
volatility. These market fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded and may adversely
affect the market price of the Common Stock. There can be no assurance that the
market price of the Common Stock will not decline below the initial offering
price.

SHARES ELIGIBLE FOR FUTURE SALE

The Company will have 4,167,815 shares of Common Stock outstanding after
the Offering. The Company, its officers and directors and certain stockholders
(who collectively will own 37.11% of the outstanding shares after the
consummation of the Offering) have agreed with the Representatives not to offer,
sell, contract to sell or otherwise dispose of any of their shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
permission of the Representatives. The currently outstanding shares of Common
Stock which are not subject to such agreement are held by approximately 125
stockholders of record, and all of such shares are "restricted securities" as
that term is defined by Rule 144 promulgated under the Securities Act of 1933,
as amended (the "Securities Act"), and will be eligible for sale in compliance
with Rule 144 volume and other requirements. Shares held for at least two years
by a person who has not been an "affiliate" of the Company at any time during
the 90 days preceding the sale of such shares will be freely tradable in
accordance with Rule 144(k) under the Securities Act without regard to volume
and other restrictions of Rule 144. In addition, all of the shares of Common
Stock sold in the Offering, other than shares purchased by affiliates of the
Company, will generally be freely tradable under the Securities Act. No
prediction can be made as to the effect, if any, that future sales of Common
Stock or the availability of Common Stock for future sale will have on the
market price of the Common Stock prevailing from time to time. Sales of a
substantial number of such shares in the future, or the perception that such
sales could occur, could adversely affect the market price of the Common Stock.
See "Management" and "Principal Stockholders."

REGULATION OF CONTROL

Individuals, alone or acting in concert with others, seeking to acquire 10%
or more of any class of voting securities of the Company must comply with the
Change in Bank Control Act, which requires the prior approval of the Federal
Reserve Board for any such acquisition. Entities seeking to acquire 5% or more
of any class of voting securities of, or otherwise to control, the Company must
obtain the prior approval of the Federal Reserve Board under the BHCA.
Accordingly, prospective investors need to be aware of and to comply with these
requirements, if applicable, in connection with any purchase of shares of the
Common Stock offered hereby.

YEAR 2000 ISSUES

11
<PAGE>
will not be adversely affected by Year 2000 software problems. The Company has
formed a Year 2000 project team and the Board of Directors and management are
supporting all compliance efforts and allocating the necessary resources to
ensure compliance. An inventory of all systems and products that could be
affected by the Year 2000 date change has been developed, verified and
categorized as to its importance to the Company. The software for the Company's
systems is primarily provided through service bureaus and software vendors. The
Company is requiring its software providers to demonstrate and represent that
the products provided are or will be Year 2000 compliant and has planned a
program of testing compliance. The Company has developed a contingency plan to
address the failure of any system during testing, and based upon the results of
such testing, is prepared to switch software vendors if necessary and/or perform
certain functions manually. The Company believes it is in compliance with
regulatory guidelines regarding Year 2000 compliance, including the timetable
for achieving compliance. Management does not expect that the costs of bringing
the Company's systems into Year 2000 compliance will have a materially adverse
effect on the Company's financial condition, results of operations or liquidity.
Nonetheless, the Company's ability to predict the costs associated with Year
2000 compliance is subject to some uncertainties, and the Company may incur
additional unexpected expenditures in connection with Year 2000 compliance,
which expenditures could be material. In addition, there can be no assurance
that the Company's operational and financial systems will not be adversely
affected by Year 2000 software problems.

THE COMPANY

GENERAL

The Company was incorporated as a business corporation under the laws of
the State of Texas in 1995 as a bank holding company for the Bank, which was
chartered in 1983. Based on total assets as of June 30, 1998, the Company is the
fifth largest independent bank holding company headquartered in Houston. The
Company's headquarters are located at Five Riverway, Houston, Texas 77056, and
its telephone number is (713) 552-9000.

The Company has developed and implemented a highly efficient operating
philosophy that has resulted in a 23.0% compound annual growth rate in earnings
before extraordinary items since 1991. From 1991 through 1997, diluted earnings
per share before extraordinary items have increased from $0.23 to $1.00 and
return on stockholders' equity before extraordinary items has increased from
11.1% to 15.5%. In addition to its strong earnings performance, the Company has
experienced steady balance sheet growth. From 1991 through 1997, using compound
annual growth rates, the Company's assets increased 16.3% from $120.7 million to
$348.2 million, total deposits increased 15.5% from $107.6 million to $295.3
million and gross loans increased 19.4% from $51.6 million to $178.3 million.
Substantially all of the earnings and balance sheet growth resulted from
internal growth. During the first six months of 1998, while growth in assets,
deposits, loans and net interest income continued at the Company's historical
rates, net income decreased slightly due to a higher than normal provision for
credit losses and several nonrecurring noninterest expenses.

BUSINESS STRATEGY

12
<PAGE>
a cost that is below the comparable cost of self-origination and (iv)
identification and pursuit of highly specialized, under-served niche markets
which lend themselves to efficient, highly automated servicing.

SINGLE LOCATION, MULTI-CHANNEL DELIVERY SYSTEM. Based on total deposits,
the Company's subsidiary, the Bank, is the largest single location bank in the
State of Texas, and one of the 20 largest single location banks in the United
States. As it has grown, the Company has developed a multi-channel alternative
delivery system to reach its customers without reliance on a traditional branch
network. These alternative delivery channels include the telephone, the fax
machine, the mail and the Internet. The overall combined delivery system is
marketed by the Company under the servicemarked title of DirectAccess, and
includes NetAccess, CallAccess and VoiceAccess (which is trademarked with a
vendor). To support these various channels, the Company has developed its own
internal Call Center and an electronic scanning-based mail processing center. In
connection with outside vendors, the Company has developed its own interactive
web site and a voice or touch-tone activated account inquiry system. In
combination, these systems have allowed the Company to increase its number of
accounts serviced from less than 5,100 at December 31, 1995 to over 14,500 as of
June 30, 1998, while at the same time adding only 21 employees and utilizing
less than approximately 4,500 square feet of additional office space.
Furthermore, the development of this infrastructure has provided a scaleable
platform that can support significant growth in the future without incremental
fixed cost increases.

TECHNOLOGICAL INNOVATION. Management believes that the Company is a leader
in the community bank segment of the financial services industry in terms of
technological innovation and utilization. Each employee of the Company has his
own individual personal computer which can be linked to (i) a custom designed
local area network, (ii) a specialized wide area network which accesses the
Bank's mainframe computer service provider and (iii) the Internet. In addition,
all Company databases are fed into an internally maintained Marketing Customer
Information File ("MCIF") system that provides detailed customer profitability
and demographic information. This system is particularly useful in maximizing
the efficiency of cross-selling activities by Company staff. In addition, the
Company has invested heavily in open platform-based customized software which
has automated many routine functions and has lowered the cost of producing many
internal management information reports. The overall benefit of the Company's
investment in technology is evidenced in several measures of employee
productivity. For 1997, the Company's ratio of total assets per employee (as
computed by the FDIC) was $5.91 million to one, substantially above the
commercial banking industry average of $3.26 million to one. Similarly, the
Company generated $1.01 of net income for every $1.00 of personnel expense in
1997, a ratio that is 23% above the national average for commercial banks of
$0.82 of net income per $1.00 of personnel expense. Both of these ratios are
expected to continue to improve in the future as additional volume is spread
over the existing operating structure.

THIRD PARTY ASSET GENERATORS. Over the last ten years the Company has
developed a network of independent asset generators who provide loan and
investment opportunities for the Company. These generators are experienced
financial professionals, mostly with banking or thrift backgrounds, who
typically maintain their own staff and pursue their own independent marketing
strategies. The Company currently maintains relationships with generators who
supply customers for loans such as residential mortgages, commercial mortgages,
home construction loans, equipment leases to medical professionals, account
receivable-based loans, home improvement loans, car loans and boat loans. Once
the generators have developed the loan application, the data is transmitted to
the Company (normally by e-mail) and Company staff underwrites the credit
decision. The generator then prepares the loan documents and, using Company-
approved software, closes the loan. The loan documents are then transmitted to
the Company for approval and funding. These generators also provide the Company
with investment opportunities, such as mortgage-backed securities and municipal
securities. By using these third party sources, who are paid strictly on a
production basis, the Company can minimize asset production overhead and
maintain maximum flexibility. Should the Company decide to increase or decrease
its level of activity in any one area, it can do so quickly and without
cumbersome staffing implications. Utilizing its MCIF technology, the Company is
able to cross-sell other deposit and loan products in an effort to convert the
relationship with customers located by asset generators from that of
single-product customers into long-term, multi-product customers. In the last

13
<PAGE>
year, the supply of loan products from the Company's network of generators has
exceeded the Company's capital capacity to support the addition of new assets.

NICHE MARKETS. Over the years, the Company has focused on special niche
markets which can be profitably serviced while maintaining a 50% efficiency
ratio on the activity. For example, the Company is the largest depository for
Municipal Utility Districts ("MUDs") in the State of Texas. These entities, of
which there are approximately 1,000 in Texas, are small public water companies
which typically provide service to an average of 1,000 homes each. Because of a
MUD's small size and a legal requirement that all of its deposits must be either
insured or collateralized, the deposit accounts of individual MUDs typically are
not pursued by other banks. By focusing on this market, however, the Company has
been able to attract approximately 425 separate MUD relationships that in the
aggregate have maintained an average of approximately $100 million in low-cost,
low-overhead deposits since 1993. Similarly, the Company's Trust Department is
one of the largest independent custodians of third party brokered deposits in
the country. As custodian, the Company acts as an intermediary, receiving large
certificates of deposit ("CDs") from other financial institutions and breaking
them into smaller federally-insured amounts for distribution to various
purchasers as directed by the broker. The sources for this business are numerous
small broker-dealers who wish to offer CD brokerage as a product but who do not
have the capacity to safekeep and transfer the instruments. For the Company,
this product is a source of substantial demand deposit float and fee income and
can also be managed with a high degree of automation. Both of these product
lines are examples of the Company's ability to identify unique fragmented
markets which lend themselves to automation and yield satisfactory returns when
sufficient economies of scale have been achieved.

The primary goal of the Company is to maximize return on equity by
implementing an operating strategy that focuses on diligent cost control,
optimum operating efficiency and effective capital management. For 1997, the
Company's noninterest expense as a percentage of total assets was 1.82% compared
with the industry average of 3.54% for all commercial banks. Similarly, the
Company's efficiency ratio (as computed by the FDIC) for 1997 was 50.91%, which
was well below the national average of 59.16% for all commercial banks and the
60.36% average for peer group banks with between $300 million to $500 million in
assets. By maintaining this low-cost operating structure, the Company gains a
competitive advantage that allows it to price its deposit products and loans at
competitive market rates while still achieving an acceptable overall return on
equity. This strategy enables the Company to compete throughout the Houston
metropolitan area without being dependent on costly branch locations and
expensive staffing.

PRODUCT LINES

The Company has divided its marketing activities along the following three
broad product lines based on the nature of the customer: Personal Banking,
Commercial Banking and Municipal Banking.

PERSONAL BANKING. The Company's efforts to develop its Personal Banking
activities did not begin in earnest until 1995. Prior to that time, the Company
offered Personal Banking products only on an as needed basis as a supplement to
its commercial banking activities. Since 1995, Personal Banking has been the
Company's fastest growing sector and it is expected to continue to spearhead the
Company's growth in the future. The primary loan products provided by the
Personal Banking area are home mortgages, home improvement loans, home equity
loans, car loans, boat loans, overdraft protection lines and credit cards. The
Company offers credit cards only to existing customers whose creditworthiness
has already been demonstrated. As of June 30, 1998, the Company had over 3,000
personal loans totaling $95.9 million and was servicing another 730 mortgage
loans totaling $78.8 million which had been originated through third-party asset
generators, purchased by the Company and then sold and/or securitized through
FNMA.

The Company offers a wide range of Personal Banking deposit products,
emphasizing CDs and the DirectAccess Checking account. CDs are offered onsite at
the Bank and also by telephone and via the Internet. Unlike most financial
institutions, the Company does not stratify its CD rates, but offers the same
rate for all deposit amounts. The Company constantly monitors CD rates and makes
an effort to keep its one-year and five-year rates at the top of the local
market. As of June 30, 1998, the Company had 4,225 Personal Banking-related CDs
aggregating approximately $160.7 million, which results in an average CD

14
<PAGE>
amount of $38,000. Management of the Company believes that it can attract
substantially greater amounts of CDs through its existing delivery systems and
pricing strategy.

The DirectAccess Checking account, which the Company introduced in the
first quarter of 1998, was developed in order to provide a checking product to
cross-sell to the Personal Banking loan customers who were developed through the
Company's third party asset generators. DirectAccess Checking provides free
checking with direct deposit of payroll and Internet and telephone access to
information. The account also provides a free debit card and the rebate of ATM
charges imposed by other banks. The Company is planning a substantial marketing
campaign for this product and has a goal of opening 2,000 of these accounts on
an annual basis going forward. The Company believes that such a product will
facilitate the development of well-rounded Personal Banking customers who both
deposit with and borrow from the Company without requiring expensive
person-to-person interaction in their day-to-day banking activities.

COMMERCIAL BANKING. The Company has been engaged in commercial banking and
commercial real estate finance activities since the founding of the Bank in
1983, providing a wide variety of loan and deposit products primarily to
privately held corporations and business partnerships. Loan products include
loans for the acquisition of premises or other income producing real estate,
real estate development and home loan construction, equipment loans and leases,
accounts receivable financing and the warehousing of mortgages and securities on
behalf of mortgage bankers and broker-dealers. Virtually all loans made in the
Commercial Banking area are fully secured. Approximately 50% of the Company's
commercial loans are generated by third parties and the remainder represent
direct customer relationships. Many loans are set for five-year terms with fixed
interest rates and are typically match-funded by longer term CDs issued through
the Personal Banking area. Management of the Company believes that the ability
to quote fixed rates for these loans, as opposed to less marketable floating
rate pricing, provides the Company with a competitive advantage in its market.
As of June 30, 1998, total loans in the Commercial Banking area were
approximately $104.6 million.

On the deposit side, the Company offers cash management products such as
sweep accounts, security repurchase agreements and short-term investment
accounts that can assist a depositor in maximizing its return on cash assets. As
of June 30, 1998, the Commercial Banking area provided approximately $51.9
million of deposits, including approximately three-fourths of the Company's
noninterest-bearing demand deposits. Management of the Company believes that
loans and deposits in the Commercial Banking area will continue to grow, but at
a more moderate pace than in the Personal Banking area.

MUNICIPAL BANKING. The Company's Municipal Banking activities are unlike
those of any other banking organization in the State of Texas. The Company
currently acts as the primary commercial depository for approximately 425 MUDs.
The Company maintains over 1,000 separate NOW and money market accounts for
these MUDs and also issues CDs to these entities. Deposit balances in these
accounts fluctuate on a seasonal basis from approximately $90 million to $125
million, and averaged approximately $100 million during 1997. As of June 30,
1998, the weighted average interest rate paid by the Company on these balances
was approximately 4.58%. These balances are used to fund a majority of the
Company's investment portfolio, which for the same period had a weighted average
yield of 6.17%, producing a net interest spread of 1.59% generated from these
balances. Operating expenses related to these accounts are very low as almost
all functions have been automated. Because only two people are required to
administer this area, the Company is able to earn an acceptable return on assets
and equity despite a narrow net interest spread. Since the investment portfolio
funded by the Company's Municipal Banking deposits is invested entirely in
adjustable rate securities, these returns can be maintained during virtually all
interest rate environments. The Company anticipates that the eventual runoff of
the existing investment portfolio will be replaced by self-generated
mortgage-backed securities created through mortgage loans generated in the
Personal Banking area. Overall, the Company's Municipal Banking activities are
very mature, and Company management does not expect deposits from municipal
entities to increase appreciably in the future.

In addition to deposits, the Company's Municipal Banking activities include
loans and bond purchases. Because of its small size, most MUD debt is
bank-eligible for a federal income tax preference. The

15
<PAGE>
Company actively solicits these credit opportunities and as of June 30, 1998 had
approximately $13.5 million of loans and bonds from the MUD industry. This
amount is expected to increase in the future. The Company plans to vertically
integrate its Municipal Banking area by providing additional services to the MUD
industry. In particular, the Company has developed the first automated lock box
collection system for Texas water districts. Currently, approximately 50,000
water bills are processed by the Company monthly, which represents approximately
10% of the local market. The Company's goal is to increase this market share to
over 50% by the year 2000. Similarly, the Company is also experimenting with one
local water district to introduce direct ACH payment of water bills. If this
experiment is successful, it could provide a substantial fee income source which
could be highly automated with little on-going operational expense.

FACILITIES

The Company conducts business at its only banking facility located at Five
Riverway in Houston. The Company occupies approximately 27,000 square feet of
office space in the Five Riverway building, which is owned by the Company, and
leases another 10,000 square feet of space on the third floor to two tenants.
The Company also leases approximately 4,500 square feet of office space in the
adjacent Three Riverway building for its own use.

COMPETITION

The banking business is highly competitive, and the profitability of the
Company depends principally on the Company's ability to compete in the greater
Houston market. The Company competes with other commercial banks, savings banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking firms, asset-based
non-bank lenders and certain other nonfinancial entities, including retail
stores which may maintain their own credit programs and certain governmental
organizations which may offer more favorable financing than the Company. The
Company has been able to compete effectively with other financial institutions
by emphasizing customer service, technology, and responsive decision-making on
loans, by establishing long-term customer relationships based on customer
loyalty, and by providing products and services designed to address the specific
needs of its customers. See "Risk Factors -- Competition."

EMPLOYEES

As of June 30, 1998, the Company had 69 full-time employees, 23 of whom
were officers of the Bank. The Company provides medical and hospitalization
insurance to its full-time employees. The Company considers its relations with
employees to be excellent. Neither the Company nor the Bank is a party to any
collective bargaining agreement.

LEGAL PROCEEDINGS

The Company and the Bank from time to time are parties to or otherwise
involved in legal proceedings arising in the normal course of business.
Management does not believe that there is any pending or threatened proceeding
against the Company or the Bank which, if determined adversely, would have a
material effect on the business, results of operations or financial position of
the Company or the Bank.

USE OF PROCEEDS

The net proceeds to be received by the Company from the Offering (based
upon an assumed initial public offering price of $15.00 per share), after
deducting the underwriting discount and estimated expenses, are estimated to be
approximately $18.5 million, or $21.5 million if the Underwriters' over-
allotment option is fully exercised. The Company intends to use all of such
proceeds for general corporate purposes, including balance sheet growth.

Pending the application of the net proceeds, the Company intends to invest
such proceeds in short-term, interest-bearing securities, certificates of
deposit or guaranteed obligations of the United States of America.

16
<PAGE>
DIVIDEND POLICY

Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. The Company has not declared any dividends on its Common Stock since
its inception and currently has no plans to pay dividends in the forseeable
future.

For a foreseeable period of time, the principal source of cash revenues to
the Company will be dividends paid by the Bank with respect to the Bank's
capital stock. There are certain restrictions on the payment of such dividends
imposed by federal and state banking laws, regulations and authorities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Capital Resources" and "Supervision and
Regulation -- The Bank."

In the future, the declaration and payment of dividends on the Common Stock
will depend upon the earnings and financial condition of the Company, liquidity
and capital requirements, the general economic and regulatory climate, the
Company's ability to service any equity or debt obligations senior to the Common
Stock and other factors deemed relevant by the Company's Board of Directors. See
"Supervision and Regulation" and "Description of Securities of the Company."
As of June 30, 1998, an aggregate of approximately $9.4 million was available
for payment of dividends by the Bank to the Company under applicable
restrictions, without regulatory approval. Regulatory authorities could impose
administratively stricter limitations on the ability of the Bank to pay
dividends to the Company if such limits were deemed appropriate to preserve
certain capital adequacy requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Capital Resources" and "Supervision and Regulation."

DILUTION

As of June 30, 1998, the tangible book value of the Common Stock was $7.67
per share. "Tangible book value per share" represents the amount of total
tangible assets less total liabilities divided by the number of shares of Common
Stock outstanding. After giving effect to the sale by the Company of 1,350,000
shares of Common Stock offered hereby (after deducting the underwriting discount
and other estimated offering expenses to be paid by the Company), the pro forma
tangible book value of the Company as of June 30, 1998 would have been $9.63 per
share. This represents an immediate increase in net tangible book value of $1.96
per share to current stockholders and an immediate dilution of $5.37 per share
to new investors. The following table illustrates this per share dilution:

Assumed price to public.............. $ 15.00
Tangible book value per share
before Offering................ 7.67
Increase per share attributable
to new investors............... 1.96
---------
Pro forma tangible book value per
share after Offering............... 9.63
---------
Dilution to new investors............ $ 5.37
=========

17
<PAGE>
CAPITALIZATION

The following table sets forth the total capitalization of the Company as
of June 30, 1998, and as adjusted to give effect to the sale by the Company of
1,350,000 shares of Common Stock offered hereby, at a per share price of $15.00
(which is the mid-point of the estimated offering range), net of underwriting
discounts and other estimated offering expenses. See "Use of Proceeds."

JUNE 30, 1998,
------------------------
ACTUAL AS ADJUSTED
--------- ------------
(DOLLARS IN THOUSANDS)
Subordinated debt.................... $ 4,400 $ 4,400
Stockholders' Equity:
Preferred Stock, $1 par value,
20,000,000 shares authorized;
none issued and outstanding.... -- --
Common Stock, $1 par value;
50,000,000 shares authorized;
2,909,105 shares issued and
2,817,815 shares outstanding;
4,259,105 shares issued and
4,167,815 outstanding, as
adjusted(1).................... 2,909 $ 4,259
Additional paid-in capital...... 11,952 29,134
Retained earnings............... 7,920 7,920
Net unrealized loss on available
for sale securities, net of
tax............................ (651) (651)
Unearned compensation........... (121) (121)
Less common stock held in
treasury-at cost............... (404) (404)
--------- ------------
Total stockholders'
equity.................. 21,605 40,137
--------- ------------
Total consolidated
capitalization.......... $ 26,005 $ 44,537
========= ============

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

(1) Does not include 210,000 shares of Common Stock reserved for issuance upon
exercise of options granted under the Company's 1998 Incentive Stock Option
Plan. See "Management -- Stock Option Plans."

18
<PAGE>
NATURE OF THE TRADING MARKET AND MARKET PRICES

Prior to the Offering, there has been no public market for the shares of
Common Stock and there can be no assurance that an active public market will
develop or be sustained after the Offering or that if such a market develops,
investors in the Common Stock will be able to resell their shares at or above
the initial public offering price. See "Risk Factors -- No Prior Trading
Market; Possible Volatility of Stock Price." The initial public offering price
of the shares of Common Stock will be determined by negotiations between the
Company and the Representatives and will not necessarily bear any relationship
to the Company's book value, past operating results, financial condition or
other established criteria of value and may not be indicative of the market
price of the Common Stock after the Offering. Among the factors that will be
considered in such negotiations are prevailing market and general economic
conditions, the market capitalizations, trading histories and stages of
development of other traded companies that the Company and the Representatives
believe to be comparable to the Company, the results of operations of the
Company in recent periods, the current financial position of the Company,
estimates of the business potential of the Company and the present state of the
Company's development and the availability for sale in the market of a
significant number of shares of Common Stock. Additionally, consideration will
be given to the general status of the securities market, the market conditions
for new issues of securities and the demand for securities of comparable
companies at the time the Offering is made. See "Underwriting" for information
relating to the method of determining the initial public offering price.
Application has been made for quotation of the shares of Common Stock on the
Nasdaq/National Market under the symbol "RWHI."

19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto appearing elsewhere in this Prospectus, and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected historical consolidated financial data as
of December 31, 1997 and 1996 and for the three years in the period ended
December 31, 1997 are derived from the Consolidated Financial Statements which
have been audited by Deloitte & Touche LLP. The selected historical consolidated
financial data as of December 31, 1995, 1994 and 1993 and for the two years in
the period ended December 31, 1994 are derived from the Consolidated Financial
Statements which have been audited by independent public accountants. The
selected historical consolidated financial data as of and for each of the six
months ended June 30, 1998 and June 30, 1997, have not been audited but, in the
opinion of management, contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position and
results of operations of the Company as of such dates and for such periods. The
results of operations for the six months ended June 30, 1998, are not
necessarily indicative of the results of operations that may be expected for the
year ended December 31, 1998, or for any future periods.
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994(1) 1993(1)(2)
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income...................... $ 14,722 $ 10,452 $ 23,048 $ 18,172 $ 15,489 $ 13,579 $ 11,546
Interest expense..................... 8,921 6,176 13,669 10,072 8,781 6,697 5,001
--------- --------- --------- --------- --------- --------- ---------
Net interest income.............. 5,801 4,276 9,379 8,100 6,708 6,882 6,545
Provision for credit losses.......... 1,000 308 570 765 145 160 --
--------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for credit losses.... 4,801 3,968 8,809 7,335 6,563 6,722 6,545
Noninterest income................... 611 511 1,032 811 603 1,028 777
Noninterest expenses................. 3,922 2,837 5,869 4,717 4,336 5,206 5,406
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes....... 1,490 1,642 3,972 3,429 2,830 2,544 1,916
Provision for income taxes........... 381 434 1,055 1,041 821 814 650
Cumulative effect of change in
accounting principle(2)............ -- -- -- -- -- -- 1,258
--------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 1,109 $ 1,208 $ 2,917 $ 2,388 $ 2,009 $ 1,730 $ 2,524
========= ========= ========= ========= ========= ========= =========
Net income available to common
stockholders(3).................... $ 1,109 $ 1,208 $ 2,917 $ 2,388 $ 2,009 $ 1,709 $ 2,503
========= ========= ========= ========= ========= ========= =========
PER SHARE DATA(4):
Net income(5)
Basic............................ $ 0.39 $ 0.42 $ 1.02 $ 0.84 $ 0.70 $ 0.60 $ 0.88
Diluted.......................... 0.39 0.41 1.00 0.81 0.69 0.59 0.86
Book value........................... 7.67 6.59 7.23 6.10 5.25 4.40 4.42
Tangible book value.................. 7.67 6.59 7.23 6.10 5.25 4.40 4.42
Cash dividends....................... -- -- -- -- -- -- --
Weighted average shares outstanding
(in thousands)
Basic............................ 2,818 2,859 2,869 2,859 2,859 2,859 2,859
Diluted.......................... 2,818 2,936 2,908 2,931 2,921 2,915 2,908
BALANCE SHEET DATA:
Total assets......................... $ 433,934 $ 292,962 $ 348,201 $ 299,900 $ 228,186 $ 227,908 $ 226,870
Securities........................... 172,803 136,699 134,911 139,689 142,309 145,410 141,495
Loans held to maturity............... 211,186 133,345 175,974 130,330 70,773 66,328 59,578
Loans held for sale.................. 20,126 5,710 2,359 3,394 1,094 1,771 3,871
Allowance for credit losses.......... 2,103 1,191 1,210 898 656 904 773
Total deposits....................... 352,186 264,779 295,253 274,488 188,463 205,981 210,117
Other borrowings and subordinated
debentures......................... 58,681 8,592 31,488 6,942 24,174 8,831 3,595
Total stockholders' equity........... 21,605 18,855 20,384 17,443 15,001 12,585 12,651

(TABLE CONTINUED ON FOLLOWING PAGE)

20
<PAGE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994(1) 1993(1)(2)
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AVERAGE BALANCE SHEET DATA:
Total assets......................... $ 413,119 $ 301,340 $ 322,982 $ 259,686 $ 227,099 $ 227,698 $ 191,838
Securities........................... 166,616 146,723 151,179 146,161 143,252 143,896 115,973
Loans held to maturity............... 183,003 132,330 143,810 95,576 64,875 58,389 54,658
Loans held for sale.................. 9,007 1,136 1,870 1,091 3,684 1,809 673
Allowance for credit losses.......... 1,293 1,026 1,107 738 827 849 775
Total deposits....................... 342,776 272,340 275,289 213,005 195,244 207,915 177,604
Total stockholders' equity........... 20,844 17,889 18,868 16,157 14,189 12,707 12,025

PERFORMANCE RATIOS(6):
Return on average assets............. 0.54% 0.81% 0.90% 0.92% 0.88% 0.76% 1.32%
Return on average common equity...... 10.73 13.62 15.46 14.78 14.16 13.61 20.99
Net interest margin.................. 2.97 3.05 3.08 3.33 3.16 3.31 3.67
Efficiency ratio(7).................. 59.28 53.47 50.91 51.60 58.04 64.77 74.53

ASSET QUALITY RATIOS(8):
Nonperforming assets to total loans
and other real estate(9)........... 0.60% 2.43% 1.23% 2.67% 2.14% 4.27% 4.60%
Net loan charge-offs to average
loans(6)........................... 0.11 0.02 0.18 0.54 0.57 0.05 0.01
Allowance for credit losses to loans
held to maturity................... 1.00 0.89 0.69 0.69 0.93 1.36 1.30
Allowance for credit losses to
nonperforming loans(9)............. 1,194.88 84.59 192.06 60.47 431.58 54.13 396.41

CAPITAL RATIOS(8):
Leverage ratio....................... 5.13% 6.81% 6.07% 6.22% 7.07% 6.38% 5.58%
Average stockholders' equity to
average total assets............... 5.05 5.94 5.84 6.22 6.25 5.58 6.27
Tier 1 risk-based capital ratio...... 9.35 12.93 11.17 12.25 16.84 13.99 14.04
Total risk-based capital ratio....... 10.13 13.70 11.61 12.29 17.50 14.86 15.59
</TABLE>
- ------------

(4) Adjusted for a five for one stock split effective August 5, 1998.

(5) Net income per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share."

(6) All interim periods for these line items have been annualized.

(8) At period end, except net loan charge-offs to average loans and average
stockholders' equity to average total assets.

21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's balance
sheets and statements of income. This section should be read in conjunction with
the Company's Consolidated Financial Statements and accompanying Notes appearing
elsewhere in this Prospectus.

FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997

OVERVIEW

The period ended June 30, 1998 was marked by strong balance sheet growth
due primarily to a $92.3 million increase in total loans since June 30, 1997.
Total assets at June 30, 1998 increased to $433.9 million from $293.0 million at
June 30, 1997, an increase of $140.9 million or 48.1%. This increase was
primarily the result of strong loan growth and growth in the securities
portfolio. Deposits increased to $352.2 million at June 30, 1998 from $264.8
million at June 30, 1997, an increase of $87.4 million or 33.0%. Total
stockholders' equity was $21.6 million at June 30, 1998, representing an
increase of $2.7 million or 14.6% over total stockholders' equity of $18.9
million at June 30, 1997.

Net income for the six months ended June 30, 1998 was $1.1 million, a
decrease of $98,000 or 8.1% over the six months ended June 30, 1997. Diluted net
income per common share was $0.39 for the six months ended June 30, 1998 and
$0.41 for the six months ended June 30, 1997. This decline in net income was due
to both a $692,000 increase in the provision for credit losses and higher
operating expenses of $1.1 million. The increase in the provision for credit
losses was made to incorporate additional peer and industry information into the
Company's allowance methodology as a result of the Company's rapid loan growth
and expansion into new lending markets. Included in the $1.1 million increase in
operating expenses are $296,000 of litigation settlements paid and related legal
expenses and approximately $150,000 of expenses associated with the startup of
the Call Center, the introduction of the new DirectAccess checking account and
Year 2000 compliance. Net interest income increased $1.5 million or 35.7% from
$4.3 million for the six months ended June 30, 1997 to $5.8 million for the same
period in 1998. Exclusive of the litigation settlements paid and related legal
expenses, and charges associated with the Call Center, DirectAccess checking
account and Year 2000 compliance, operating earnings would have been $1.4
million or $0.50 per diluted share for the six months ended June 30, 1998.
Return on average assets and return on average common equity were 0.54% and
10.73%, respectively, for the six months ended June 30, 1998 compared with 0.81%
and 13.62%, respectively, for the same period in 1997.

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowings. Net interest income is the principal source of the Company's
earnings. Interest rate fluctuations, as well as changes in the amount and type
of interest-earning assets and liabilities, combine to affect net interest
income.

Net interest income for the six months ended June 30, 1998 was $5.8 million
compared with $4.3 million for the six months ended June 30, 1997, an increase
of $1.5 million or 35.7%. The Company's net interest margin was 2.97% and 3.05%
and net interest spread was 2.61% and 2.67% for the periods ended June 30, 1998
and June 30, 1997, respectively. Net interest income increased as a result of
higher interest-earning assets derived primarily from loan growth. Average
interest-earning assets increased to $394.1 million for the six months ended
June 30, 1998 from $282.7 million for the six months ended June 30, 1997, an
increase of $111.4 million or 39.4%. Average total loans increased to $192.0
million for the six months ended June 30, 1998 from $133.5 million for the six
months ended June 30, 1997, an increase of $58.5

22
<PAGE>
million or 43.9%. This increase was the result of growth in the consumer,
single-family residential, lease financing and loans held for sale portfolios.

The increase in net interest income was partially offset by higher interest
expense on interest-bearing liabilities. Average interest-bearing liabilities
increased to $365.7 million for the six months ended June 30, 1998 from $260.5
million for the six months ended June 30, 1997, an increase of $105.2 million or
40.4%. This growth was primarily attributable to an increase in consumer
certificates of deposits.

The six basis point decrease in the net interest spread for the first half
of 1998 compared with the first half of 1997 reflects an eight basis point
increase in the yield on average interest-earning assets, and a 14 basis point
increase in the cost of interest-bearing liabilities. The yield on average
interest-earning assets increased to 7.53% for the six months ended June 30,
1998 from 7.45% for the six months ended June 30, 1997. The increase in yield on
average interest-earning assets was due primarily to loan growth, but it was
reduced by the investment of a large portion of the deposit growth into lower
yielding securities. The cost of interest-bearing liabilities increased to 4.92%
for the six months ended June 30, 1998 from 4.78% for the six months ended June
30, 1997. This increase was due mainly to the higher cost of consumer
certificates of deposit.

23
<PAGE>
The following table presents for the periods indicated the total dollar
amount of average balances, 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. Nonaccruing
loans have been included in the tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING INCOME/ YIELD/ OUTSTANDING INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- ------- ------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Total loans(1)..................... $ 192,010 $ 8,392 8.81% $ 133,466 $ 5,817 8.79%
Securities(2):
Taxable....................... 158,795 4,783 6.07 138,516 4,342 6.32
Nontaxable.................... 7,821 207 5.34 8,207 214 5.26
Federal funds sold and other
temporary investments............ 35,485 1,340 7.62 2,531 79 6.29
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets..................... 394,111 14,722 7.53% 282,720 10,452 7.45%
------- ------- ------- -------
Less allowance for credit losses... (1,293) (1,026)
----------- -----------
Total earning assets, net of
allowance........................ 392,818 281,694
Nonearning assets....................... 20,301 19,646
----------- -----------
Total assets.................. $ 413,119 $ 301,340
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits... $ 43,362 $ 474 2.20% $ 46,053 $ 635 2.78%
Savings and money market
accounts......................... 99,689 2,397 4.85 61,682 1,330 4.35
Certificates of deposit............ 174,496 4,888 5.65 142,441 3,938 5.58
Other borrowings and subordinated
debentures....................... 48,151 1,162 4.87 10,331 273 5.33
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities................ 365,698 8,921 4.92% 260,507 6,176 4.78%
----------- ------- ------- ----------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 25,229 22,164
Other liabilities.................. 1,348 780
----------- -----------
Total liabilities............. 392,275 283,451
Stockholders' equity.................... 20,844 17,889
----------- -----------
Total liabilities and
stockholders' equity....... $ 413,119 $ 301,340
=========== ===========
Net interest rate spread................ 2.61% 2.67%
======= =======
Net interest income and margin (tax
equivalent basis)(3).................. $ 5,939 3.04% $ 4,352 3.10%
======= ======= ======= =======
</TABLE>
- ------------

(1) Loan fees of $295,000 and $80,000 are included in interest income for the
six months ended June 30, 1998 and 1997.

(2) Yield on securities does not include unrealized gains or losses.

(3) The tax equivalent adjustment has been computed using an effective tax rate
of 27.2% and has increased interest income by $138,000 for the six months
ended June 30, 1998 and by $76,000 for the six months ended June 30, 1997.

24
<PAGE>
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 related
to higher 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 to rate.

SIX MONTHS ENDED JUNE 30,
----------------------------
1998 VS. 1997
----------------------------
INCREASE
(DECREASE)
DUE TO
-----------------
VOLUME RATE TOTAL
------ ------ ------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Total loans..................... $2,552 $ 23 $2,575
Securities:
Taxable.................... 635 (194) 441
Nontaxable................. (10) 3 (7)
Federal funds sold and other
temporary investments......... 1,028 233 1,261
------ ------ ------
Total increase in interest
income.................. 4,205 65 4,270
------ ------ ------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits...................... (37) (124) (161)
Savings and money market
accounts...................... 820 247 1,067
Certificates of deposit......... 887 63 950
Other borrowings and
subordinated debentures....... 1,000 (111) 889
------ ------ ------
Total increase in interest
expense................. 2,670 75 2,745
------ ------ ------
Increase (decrease) in net
interest income............... $1,535 $ (10) $1,525
====== ====== ======

PROVISION FOR CREDIT LOSSES

The provision for credit losses increased to $1,000,000 for the six months
ended June 30, 1998 from $308,000 for the same time period in 1997, an increase
of $692,000 or 224.7%. This increase brings the ratio of loan loss allowance to
loans held to maturity to 1.00%. Historically, the Company has operated with a
ratio below this level due to its low net loan charge-off experience. The
increase was made to incorporate additional peer and industry information into
the Company's allowance methodology as a result of the Company's rapid loan
growth and expansion into new lending markets.

NONINTEREST INCOME

Noninterest income is an important source of revenue for financial
institutions. The Company's primary sources of noninterest income are customer
service fees and mortgage servicing fees.

The following table presents for the periods indicated the major categories
of noninterest income:

SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Customer service fees................ $ 289 $ 223
Mortgage servicing fees.............. 257 179
Income from trust operations......... 54 44
Net realized gains on sales of
available for sale securities...... 2 61
Other................................ 9 4
--------- ---------
Total noninterest income........ $ 611 $ 511
========= =========

The increase in customer service fees for the first six months of 1998
compared with the first six months of 1997 resulted mainly from lockbox fees.
The Company began lockbox services to MUD

25
<PAGE>
depositors during the fourth quarter of 1997. Mortgage servicing fees increased
as a result of the growth in the number of loans serviced for others. This
portfolio grew from $50.4 million at June 30, 1997 to $78.8 million at June 30,
1998, an increase of $28.4 million or 56.3%. The Company earns an average
servicing fee of 0.54% on mortgages serviced.

NONINTEREST EXPENSE

In the six month period ended June 30, 1998, noninterest expenses increased
$1.1 million or 38.2% to $3.9 million from $2.8 million for the six month period
ended June 30, 1997. The Company's efficiency ratio, calculated by dividing
total noninterest expense (excluding amortization of mortgage servicing rights)
by net interest income plus noninterest income (excluding securities
transactions), was 59.28% for the six months ended June 30, 1998 and 53.47% for
the six months ended June 30, 1997. The increase in the efficiency ratio was
partially due to litigation settlements paid and related legal expenses of
$296,000. Excluding these expenses, the Company's efficiency ratio would have
been 54.66% for the six month period ended June 30, 1998.

The following table presents for the periods indicated the major categories
of noninterest expense:

SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Salaries and employee benefits....... $ 1,721 $ 1,457
Net occupancy expense................ 391 314
Litigation settlements paid and
related legal expenses............. 296 2
Other professional fees.............. 400 299
Office expense....................... 222 186
Net (gain) loss and carrying costs of
other real estate.................. (7) 51
Other................................ 899 528
--------- ---------
Total noninterest expense....... $ 3,922 $ 2,837
========= =========

Salaries and employee benefits expense for the six months ended June 30,
1998 was $1.7 million, an increase of $264,000 or 18.1% from $1.5 million in the
same period of 1997. The increase was principally due to Call Center staff hired
and trained in the second quarter of 1998 for an opening in the third quarter of
1998 and additional loan staff hired to service the growing loan portfolio.
Total full-time equivalent employees at June 30, 1998 increased to 73 from 55 at
June 30, 1997.

Net occupancy expense increased to $391,000 for the six month period ended
June 30, 1998 from $314,000 for the same period in 1997, an increase of $77,000
or 24.3%. This increase was largely due to the lease of additional office space
required to accommodate growth and the opening of the Call Center.

Litigation settlements paid and related legal expenses totaled $296,000 for
the six months ended June 30, 1998 as the Company settled its two outstanding
lawsuits in June 1998. The lawsuits were brought against the Company in
connection with its prior role as an investment advisor to a mutual fund which
was dissolved in 1995 and in connection with the purchase of a custodial trust
company in 1996.

Other professional fees increased to $400,000 for the six months ended June
30, 1998 from $299,000 for the same period in 1997, an increase of $101,000 or
33.8%. This increase was primarily a result of Year 2000 consulting expenses,
increased data processing expenses and increased local area network
administration expenses.

Other noninterest expense increased $371,000 or 70.3% from $528,000 for the
six months ended June 30, 1997 to $899,000 for the same period in 1998. This
increase was primarily a result of increased business development expenses
associated with the introduction of the DirectAccess checking account, as well
as a $45,000 increase in mortgage servicing amortization.

26
<PAGE>
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 non-deductible interest expense and
the amount of other non-deductible expense. 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 on federal securities. The income tax
component of the Texas franchise tax was zero in the first six months of 1998
and 1997. During the six months ended June 30, 1998, income tax expense was
$381,000 compared with $434,000 for the six months ended June 30, 1997. The
effective tax rates for the six months ended June 30, 1998 and 1997 were 25.6%
and 26.5%, respectively.

IMPACT OF INFLATION

The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates. The
Company tries to control the impact of interest rate fluctuations by managing
the relationship between its interest rate sensitive assets and liabilities. See
"-- Financial Condition -- Interest Rate Sensitivity and Liquidity" below.

FINANCIAL CONDITION

LOAN PORTFOLIO

Total loans were $231.3 million at June 30, 1998, an increase of $92.2
million or 66.3% from $139.1 million at June 30, 1997. The Company has
experienced loan growth in substantially all categories, but the single-family
residential, consumer, lease financing and loans held for sale portfolios
comprised $70.5 million of the $92.2 million increase.

The following table summarizes the loan portfolio of the Company by type of
loan:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------
1998 1997
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Held to Maturity:
Commercial, financial and
industrial.................... $ 19,425 8.4% $ 12,693 9.1%
Real estate mortgage:
Interim construction....... 30,892 13.4 23,682 17.0
Multi-family and
commercial.............. 44,302 19.2 39,283 28.2
Single-family
residential............. 64,350 27.8 32,055 23.1
Lease financing................. 10,006 4.3 -- --
Municipal....................... 5,862 2.5 2,564 1.8
Consumer........................ 31,553 13.6 17,752 12.8
Small Business Administration
(SBA), government
guaranteed.................... 3,506 1.5 4,105 3.0
Other........................... 1,290 0.6 1,211 0.9
---------- ------- ---------- -------
Loans held to maturity............... 211,186 91.3 133,345 95.9
Loans held for sale.................. 20,126 8.7 5,710 4.1
---------- ------- ---------- -------
Total loans................ $ 231,312 100.0% $ 139,055 100.0%
========== ======= ========== =======
</TABLE>
The primary lending focus of the Company is on real estate and consumer
loans. The real estate lending emphasis is on home building, lot development and
home mortgages. Generally, the home mortgages are FNMA-qualified fixed-rate
mortgages which are sold with servicing retained. The Company also provides
financing on income producing properties such as retail centers, office
buildings and multi-

27
<PAGE>
family residential developments. Consumer loan products include automobile,
boat, credit card, home improvement/equity, personal and overdraft protection
loans.

The Officers Loan Committee meets weekly and approves credits up to $1.0
million. Loans in excess of $1.0 million are approved by the Bank's Loan
Committee, which is comprised of the full Board of Directors and meets twice per
month. As a general practice, the Company's financings are secured and are
further supported by a personal guaranty.

A major portion of the Company's lending activity has consisted of the
purchase of single-family residential mortgage loans collateralized by
owner-occupied properties located in Texas. Loans collateralized by
single-family residential real estate generally have been originated in amounts
of no more than 80% of appraised value. Loans in amounts greater than 80% of
appraised value have private mortgage insurance. The Company requires mortgage
title insurance and hazard insurance in the amount of the loan. The Company
generally retains mortgage loans having shorter terms or variable rates and
sells longer-term, fixed-rate loans, retaining the servicing rights. The
Company's commercial mortgage loans are secured by first liens on real estate,
typically have fixed interest rates and amortize over a 15 to 20 year period
with balloon payments due at the end of three to five years. In underwriting
commercial mortgage loans, consideration is given to the property's operating
history, future operating projections, current and projected occupancy, location
and physical condition. The underwriting analysis also includes credit checks,
appraisals and a review of the financial condition of the borrower.

The Company makes loans to finance the construction of residential and, to
a limited extent, nonresidential properties. Construction loans generally are
secured by first liens on real estate and have variable rates. The Company
conducts periodic inspections, either directly or through an agent, prior to
approval of periodic draws on these loans. Underwriting guidelines similar to
those described above are also used in the Company's construction lending
activities.

Consumer loans made by the Company include automobile loans, boat loans,
credit card loans to existing customers, home improvement/equity loans, personal
loans (collateralized and uncollateralized) and overdraft protection loans. The
terms of these loans typically range from 12 to 72 months varying based upon the
nature of the collateral and size of the loan. Home improvement loans typically
have terms of up to 15 years. Growth in the consumer loan portfolio has been
significant. Prior to beginning to originate consumer loans in September 1996,
total consumer loans outstanding were less than $3.0 million. As of June 30,
1998, consumer loans outstanding were $31.6 million, which represented 13.6% of
the total loan portfolio. The Company's goal is to have consumer loans represent
approximately 25% of the total loan portfolio. Seventy-three percent of the
consumer loan portfolio at June 30, 1998 consisted of "A" quality automobile
loans. This percentage represented a total of $23.1 million in loans. An
additional 15% of the portfolio, or $4.7 million consisted of boat loans. All of
these loans are underwritten and approved by experienced consumer loan officers,
under a policy approved by the Board of Directors.

Additionally, overdue consumer loans are handled by an experienced
collection staff. The staff starts contacting the borrower after seven days with
a past due notice as well as a telephone call. A second past due notice is sent
at 15 days while telephone contact is continued. Written notices are sent to the
customer on days 20, 25 and 30 and a formal demand letter is sent on day 40,
with a review for repossession on day 50. The Company's delinquency rate for
consumer loans past due 30 days or more was 1.42% as of June 30, 1998.

Management expects that growth will continue in the primary areas of real
estate and consumer lending. The Company will continue to make commercial loans
secured by accounts receivable, inventory and equipment. On a percentage basis,
however, the Company expects that these loans will decrease.

Lease financings, which totaled less than 5% of the total portfolio at June
30, 1998, are expected to increase to approximately 10% of the total portfolio.
These leases are predominantly for medical equipment and have been guaranteed by
nationally-rated insurance companies. The average yield on these leases was
10.5% at June 30, 1998.

28
<PAGE>
The contractual maturity ranges of the commercial, financial and industrial
and real estate construction loan portfolios and the amount of such loans with
fixed interest rates and variable interest rates in each maturity range as of
June 30, 1998 are summarized in the following table:
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and
industrial......................... $ 9,022 $ 9,910 $ 493 $ 19,425
Real estate interim construction..... 22,742 8,150 -- 30,892
-------- ---------- ---------- ---------
Total........................... $31,764 $ 18,060 $ 493 $ 50,317
======== ========== ========== =========
Loans at fixed interest rates........ $13,930 $ 5,924 $ 493 $ 20,347
Loans at variable interest rates..... 17,834 12,136 -- 29,970
-------- ---------- ---------- ---------
Total........................... $31,764 $ 18,060 $ 493 $ 50,317
======== ========== ========== =========
</TABLE>
NONPERFORMING ASSETS

The Company has several procedures in place to assist it in maintaining the
overall quality of its loan portfolio. 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 credit due to general economic
conditions.

The Company focuses on maintaining strong asset quality. Nonperforming
assets (nonaccrual loans, restructured loans, loans 90 days or more past due,
not on nonaccrual and other real estate) at June 30, 1998 were $1.4 million
compared with $3.4 million at June 30, 1997. This decrease was primarily
attributable to a decrease in other real estate to $1.2 million at June 30, 1998
from $2.0 million at June 30, 1997. The Company's ratio of nonperforming assets
to total loans and other real estate was 0.60% at June 30, 1998 compared with
2.43% at June 30, 1997. The Company records real estate acquired by foreclosure
at the fair value of the real estate at the time of foreclosure less costs to
sell.

The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is delinquent for 90 days, or
earlier in some cases, unless the loan is both well-secured 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. The Company is sometimes required to revise a loan's interest rate
or repayment terms in a troubled debt restructuring. The Company's internal loan
review department evaluates additional loans which are potential problem loans
as to risk exposure in determining the adequacy of the allowance for credit
losses.

The Company maintains current appraisals on loans secured 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 credit losses.

29
<PAGE>
The following table presents information regarding nonperforming assets at
June 30, 1998 and June 30, 1997:

JUNE 30,
--------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Nonaccrual loans..................... $ 37 $ 445
90 days or more past due loans, not
on nonaccrual...................... 140 481
Restructured loans................... -- 482
Other real estate.................... 1,215 2,025
--------- ---------
Total nonperforming assets...... $ 1,392 $ 3,433
========= =========
Nonperforming assets to total loans
and other real estate.............. 0.60% 2.43%

Although classified as a nonperforming asset, one of the Company's other
real estate assets with a carrying value of $915,000 has generated positive cash
flows and operating income since 1992.

With respect to the above loans, interest income forgone on nonaccrual
loans, additional interest income that would have been earned on restructured
loans under their original terms and interest earned on restructured loans were
not material.

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is a valuation allowance established
through charges to income in the form of a provision for credit losses.
Management has established an allowance for credit losses which it believes is
adequate to absorb losses in the Company's existing loan portfolio. Based on an
evaluation of the loan portfolio, management presents a monthly review of the
allowance for credit losses to the Board of Directors, indicating any change in
the allowance since the last review and any recommendations as to adjustments in
the allowance. Management's judgment as to the level of losses on existing loans
involves the consideration of current and anticipated future economic conditions
and their potential effects on specific borrowers; an evaluation of the existing
relationships among loans, probable credit losses and the present level of the
allowance; results of examinations of the loan portfolio by regulatory agencies;
and management's internal review of the loan portfolio. In determining the
collectibility of certain loans, management also considers the fair value of any
underlying collateral. The amounts ultimately realized may differ from the
carrying value of these assets because of economic, operating or other
conditions beyond the Company's control. Charge-offs occur when loans are deemed
to be uncollectible.

The Company's internal loan review program evaluates credit risk in the
loan portfolio. Through the loan review process, the Company maintains an
internally classified loan list which, along with the delinquency list of loans,
helps management assess the overall quality of the loan portfolio and the
adequacy of the allowance for credit losses. Loans classified as "substandard"
are those loans with clear and defined weaknesses, such as a highly-leveraged
position, unfavorable financial ratios, uncertain repayment sources or poor
financial condition, which may jeopardize recoverability of the debt.

Loans classified as "doubtful" are those loans which have characteristics
similar to substandard loans but with an increased risk that a loss may occur.
Both substandard and doubtful loans include some loans that are delinquent at
least 30 days or on nonaccrual status. Loans classified as "loss" are those
loans which are in the process of being charged off.

In addition to the internally classified loan list and delinquency list of
loans, the Company maintains a separate "watch list" which further aids in
monitoring the quality of loan portfolios. Watch list loans show warning
elements where the present status portrays one or more deficiencies that require
attention in the short term or where pertinent ratios of the loan account have
weakened to a point where more frequent monitoring is warranted. These loans do
not have all of the characteristics of a classified loan (substandard or
doubtful) but do show weakened elements as compared with those of a satisfactory
credit. The Company reviews these loans to assist in assessing the adequacy of
the allowance for credit losses.

30
<PAGE>
In order to determine the adequacy of the allowance for credit 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. An unallocated allowance is also established based on the
Company's historical charge-off experience and peer and industry information.
The Company then charges to operations a provision for credit losses to maintain
the allowance for credit losses at an adequate level determined by the foregoing
methodology.

For the six months ended June 30, 1998, net charge-offs totaled $107,000 or
0.11% of average total loans outstanding for the period, compared with $15,000
in net charge-offs or 0.02% of average total loans for the six months ended June
30, 1997. During the six months ended June 30, 1998, the Company recorded a
provision for credit losses of $1,000,000 compared with $308,000 for the six
months ended June 30, 1997. At June 30, 1998, the allowance totaled $2.1
million, resulting in an allowance to nonperforming loans of 1,194.88%. The
Company's allowance for credit losses to loans held to maturity was 1.00% at
June 30, 1998 compared with 0.89% at June 30, 1997. The increase in the
allowance for credit losses as a percentage of loans held to maturity was made
to incorporate additional peer and industry information into the Company's
allowance methodology as a result of growth in the loan portfolio and the
expansion into new lending markets.

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

SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Allowance for credit losses at
beginning of period................ $ 1,210 $ 898
Provision for credit losses.......... 1,000 308
Charge-offs:
Consumer........................ (114) (39)
Recoveries:
Commercial, financial and
industrial.................... -- 2
Real estate-mortgage............ -- 21
Consumer........................ 7 1
---------- ----------
Net charge-offs...................... (107) (15)
---------- ----------
Allowance for credit losses at end of
period............................. $ 2,103 $ 1,191
========== ==========
Ratio of allowance for credit losses
to loans held to maturity.......... 1.00% 0.89%
Ratio of net charge-offs to average
total loans........................ 0.11% 0.02%
Ratio of allowance for credit losses
to nonperforming loans............. 1,194.88% 84.59%
Average total loans outstanding...... $ 192,010 $ 133,466
Total loans outstanding at end of
period............................. $ 231,312 $ 139,055

31
<PAGE>
The following table describes the allocation of the allowance for credit
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------
1998 1997
----------------------- -----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------- ------------ ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for credit
losses applicable to:
Commercial, financial and
industrial...................... $ 11 8.4% $ 271 9.1%
Real estate mortgage:
Interim construction............ -- 13.4 -- 17.0
Multi-family.................... -- 19.2 -- 28.2
Single-family residential....... 13 27.8 23 23.1
Lease financing.................... -- 4.3 -- --
Municipal.......................... -- 2.5 -- 1.8
Consumer........................... 60 13.6 6 12.8
Small Business Administration,
government guaranteed........... -- 1.5 -- 3.0
Other.............................. -- 0.6 -- 0.9
Loans held for sale................ -- 8.7 -- 4.1
Unallocated........................ 2,019 891
------- ------------ ------- ------------
Total allowance for credit
losses.................. $2,103 100.0% $1,191 100.0%
======= ============ ======= ============
</TABLE>
The Company believes that the allowance for credit losses at June 30, 1998
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 substantial in relation to the size of the allowance at
June 30, 1998.

SECURITIES

The Company uses its securities portfolio primarily as a source of income
and secondarily as a source of liquidity. At June 30, 1998, securities totaled
$172.8 million, an increase of $36.1 million from $136.7 million at June 30,
1997. At June 30, 1998, securities represented 39.8% of total assets, compared
with 46.7% of total assets at June 30, 1997. The yield on the portfolio for the
six months ended June 30, 1998 was 6.04% (6.11% on a tax-equivalent basis),
compared with a yield of 6.26% (6.34% on a tax-equivalent basis) for the six
months ended June 30, 1997.

The following table presents the amortized cost and fair value of
securities classified as available for sale at June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency
securities......................... $ 39,117 $ 35 $ (35) $ 39,117
Mortgage-backed securities........... 45,526 44 (993) 44,577
Federal Home Loan Bank Stock, at
cost............................... 2,090 -- -- 2,090
Other................................ 624 3 -- 627
---------- ----------- ----------- ---------
Total........................... $ 87,357 $ 82 $(1,028) $ 86,411
========== =========== =========== =========
</TABLE>
32
<PAGE>
The following table presents the amortized cost and fair value of
securities classified as held to maturity at June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities........... $ 78,779 $ 122 $(2,025) $ 76,876
State and municipal securities....... 7,612 125 (3) 7,734
---------- ----------- ----------- ---------
Total........................... $ 86,391 $ 247 $(2,028) $ 84,610
========== =========== =========== =========
</TABLE>
Mortgage-backed securities have been developed by pooling a number of real
estate mortgages and are principally issued by federal agencies such as the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. These securities are deemed to have high credit ratings, and
minimum regular monthly cash flows of principal and interest are guaranteed by
the issuing agencies. The Company has no mortgage-backed securities that have
been issued by non-agencies.

At June 30, 1998, 93.3% of the mortgage-backed securities held by the
Company had final contractual maturities of more than 10 years. Approximately
$112.0 million of the Company's mortgage-backed securities earn interest at
floating rates and reprice within one year, and accordingly are less susceptible
to declines in value should interest rates increase. Expected maturities will
differ from contractual maturities because borrowers may have the right to
prepay the obligation with or without prepayment penalties. The remaining
mortgage-backed securities of the Company earn interest at fixed rates and in a
period of decreasing interest rates tend to experience heavy prepayments, thus
shortening the maturities of these securities.

Included in the Company's mortgage-backed securities at June 30, 1998 were
$83.2 million of agency issued collateralized mortgage obligations ("CMOs") of
which 91.2% had floating rates. At June 30, 1998, $28.4 million of these CMOs
were classified as available for sale and had gross unrealized losses of
$878,000. The remaining $54.8 million of these CMOs were classified as held to
maturity and had gross unrealized losses of $1.9 million. Management of the
Company does not expect such losses to be realized, since it intends to hold
such securities to their maturity, and full payment of principal is anticipated.
The Company uses a national pricing service to value its investment securities
portfolio. Substantially all of the Company's CMOs were pledged to secure MUD
deposits at June 30, 1998. These MUD deposits are considered by management of
the Company to be core deposits.

33
<PAGE>
The following table summarizes the contractual maturity of securities
(including federal funds sold and other temporary investments) and their
weighted average yields. Weighted average yields of state and municipal
securities are computed on a tax-equivalent basis.
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT WITHIN YEARS BUT WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL
---------------- ---------------- ---------------- ----------------- --------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------- ------ ------- ------ ------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government and agency
securities......................... $ -- --% $10,056 5.55% $29,061 6.54% $ -- --% $ 39,117
Mortgage-backed securities........... -- -- -- -- 8,248 6.86 115,108 5.94 123,356
Federal Home Loan Bank Stock, at
cost............................... -- -- -- -- -- -- 2,090 6.00 2,090
State and municipal securities....... 1,676 7.56 5,636 8.16 300 9.11 -- -- 7,612
Other securities..................... -- -- -- -- -- -- 627 6.42 627
Federal funds sold and other
temporary investments.............. 12,023 6.40 -- -- -- -- -- -- 12,023
------- ------ ------- ------ ------- ------ -------- ------ --------
Total....................... $13,699 6.54% $15,692 6.49% $37,609 6.63% $117,825 5.94% $184,825
======= ====== ======= ====== ======= ====== ======== ====== ========
</TABLE>
YIELD
------

U.S. Government and agency
securities......................... 6.29%
Mortgage-backed securities........... 6.00
Federal Home Loan Bank Stock, at
cost............................... 6.00
State and municipal securities....... 8.07
Other securities..................... 6.42
Federal funds sold and other
temporary investments.............. 6.40
------
Total....................... 6.17%
======

Securities which are classified as held to maturity are carried at cost,
adjusted for the amortization of premiums and the accretion of discounts.
Management has the positive intent and the Company has the ability to hold these
assets as long-term investments until their maturities. Under certain
circumstances (including the deterioration of the issuer's creditworthiness or a
change in tax law or statutory or regulatory requirements), securities may be
sold or transferred to another portfolio.

Securities which are classified as available for sale are carried at fair
value. Unrealized gains and losses are excluded from income and reported, net of
tax, as a separate component of stockholders' equity. Securities within the
available for sale portfolio may be used as part of the Company's
asset/liability strategy and may be sold in response to changes in interest rate
risk, prepayment risk or other similar economic factors.

Declines in the fair value of individual held to maturity and available for
sale securities below their cost that are other than temporary may result in
write-downs of the individual securities to their fair value. The related
write-downs would be included in earnings as realized losses.

Premiums and discounts are amortized and accreted to operations using the
level-yield method of accounting, adjusted for prepayments as applicable. The
specific identification method is used to compute gains or losses on the sale of
these assets. Interest earned on these assets is included in interest income.

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,
money market and time accounts. The Company relies primarily on competitive
pricing policies and customer service to attract and retain these deposits. The
Company does not have any brokered deposits. The Company's Trust Department,
however, serves as custodian for independently sold brokered deposits of other
financial institutions.

The Company's lending and investing activities are funded principally by
deposits. The Company's average total deposits for the six months ended June 30,
1998 increased to $342.8 million or 25.9% over average total deposits during the
same period in 1997. The Company's total deposits at June 30, 1998, were $352.2
million, up $87.4 million or 33.0% over total deposits at June 30, 1997. This
increase is principally due to an increase in consumer CDs of less than
$100,000.

Average noninterest-bearing deposits for the six months ended June 30, 1998
were $25.2 million compared with $22.2 million for the first six months of 1997,
an increase of $3.0 million or 13.5%. Approximately 7.4% of average deposits for
the six months ended June 30, 1998 were noninterest-bearing.

34
<PAGE>
The Company's MUD deposits at June 30, 1998 were $110.2 million, an
increase of $9.4 million or 9.3% over MUD deposits at June 30, 1997. MUD money
market and NOW accounts comprise $94.8 million or 86.0% of total MUD deposits at
June 30, 1998.

The daily average balances and weighted average rates paid on
interest-bearing deposits for the six month period ended June 30, 1998 are
presented below:

SIX MONTHS ENDED
JUNE 30, 1998
--------------------
AMOUNT RATE
-------- -----
(DOLLARS IN
THOUSANDS)
NOW.................................. $ 43,362 2.20%
Regular savings...................... 2,245 2.34
Money market accounts................ 97,444 4.90
Time deposits less than $100,000..... 119,359 5.81
Time deposits $100,000 and over...... 55,137 5.31
-------- -----
Total interest-bearing deposits...... 317,547 4.93
Noninterest-bearing deposits......... 25,229 --
-------- -----
Total deposits.................. $342,776 4.56%
======== =====

The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater by time remaining until maturity:

JUNE 30, 1998
-----------------------
(DOLLARS IN THOUSANDS)
Three months or less................. $23,685
Over three through six months........ 9,995
Over six through twelve months....... 11,586
Over twelve months................... 10,477
-----------------------
Total........................... $55,743
=======================

At June 30, 1998, the Company had time deposits of $126.5 million that
mature within one year. Management believes it is likely that a majority of
these time deposits will be renewed and will not have a significant impact on
liquidity.

Deposits by foreign depositors totaled $2.2 million at June 30, 1998.

OTHER BORROWINGS AND SUBORDINATED DEBENTURES

Information relating to the Company's borrowings as of and for the six
months ended June 30, 1998, is summarized below:

JUNE 30, 1998
-----------------------
(DOLLARS IN THOUSANDS)
Federal Home Loan Bank (FHLB)........ $40,000
Customer repurchase agreements....... 2,536
Note payable......................... 70
Treasury, tax and loan (TT&L) note
option............................. 1,750
Subordinated debentures.............. 4,400
Reverse repurchase agreement......... 9,925
-----------------------
Total........................... $58,681
=======================

35
<PAGE>
SIX MONTHS
ENDED
JUNE 30, 1998
-----------------------
(DOLLARS IN THOUSANDS)
FHLB Borrowings:
Maximum outstanding at any month
end........................... $40,200
Daily average balance........... 27,170
Average interest rate........... 5.03%
Reverse Repurchase Agreements:
Maximum outstanding at any month
end........................... $19,775
Daily average balance........... 12,864
Average interest rate........... 3.49%

The FHLB borrowings are secured by a blanket pledge of the Company's
single-family residential loan portfolio. The FHLB borrowings are callable
quarterly and, if not called, begin to mature in 2007 and bear interest at a
weighted average rate of 4.90% at June 30, 1998.

Customer repurchase agreements are collateralized by securities. Amounts
outstanding at June 30, 1998 matured on July 1, 1998 and had an interest rate of
5.08%.

The note payable was secured by a pledge of the Bank's common stock. The
balance of the note payable is due December 31, 1998 and bears interest at the
prime rate (8.5% at June 30, 1998) payable quarterly.

The TT&L note is due on demand and bears interest at variable rates. The
TT&L note is secured by the Company's SBA loan portfolio.

In March of 1998, the Company issued $4.4 million of 10% subordinated
debentures maturing in 2003. Proceeds totaling approximately $3.4 million were
contributed to the Bank as additional capital and the remainder was used to
repay a portion of the Company's indebtedness under the note payable.

Borrowings under the reverse repurchase agreement totaled $9.9 million at
June 30, 1998. The reverse repurchase agreement matured July 29, 1998 and had an
interest rate of 3.49%. Proceeds of this borrowing were used to purchase a
five-year U.S. Treasury security.

INTEREST RATE SENSITIVITY AND LIQUIDITY

The Company's Funds Management Policy provides management with the
necessary guidelines for effective funds management, and the Company has
established a measurement system for monitoring its net interest rate
sensitivity position. The Company manages its sensitivity position within
established guidelines.

An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time ("GAP") and
by analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive GAP,
when the amount of its interest-earning assets maturing or repricing within a
given period exceeds the amount of its interest-bearing liabilities also
maturing or repricing within that time period. Conversely, a company is
considered to be liability sensitive, or having a negative GAP, when the amount
of its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of its interest-earning assets also maturing or repricing
within that time period. During a period of rising interest rates, a negative
GAP would tend to affect net interest income adversely, while a positive GAP
would tend to result in an increase in net interest income. During a period of
falling interest rates, a negative GAP would tend to result in an increase in
net interest income, while a positive GAP would tend to affect net interest
income adversely.

36
<PAGE>
The following table sets forth an interest rate sensitivity analysis for
the Company at June 30, 1998:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
----------------------------------------------------------------------
0-3 3-12 1-3 3-5 OVER 5
MONTHS MONTHS YEARS YEARS YEARS TOTAL
-------- -------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities......................... $140,180 $ 7,551 $ 8,060 $ 5,252 $11,760 $172,803
Total loans........................ 71,902 46,904 62,333 35,850 14,323 231,312
Federal funds sold and other
temporary investments............ 12,023 -- -- -- -- 12,023
-------- -------- ------- ------- ------- --------
Total interest-earning
assets...................... 224,105 54,455 70,393 41,102 26,083 416,138
-------- -------- ------- ------- -------
Less allowance for credit losses... (2,103)
--------
Total interest-earning assets, net
of allowance..................... 414,035
Noninterest-earning assets........... 19,899
--------
Total assets................... $433,934
========
Interest-bearing liabilities:
Demand, money market and savings
deposits......................... 106,693 12,001 17,094 4,018 538 140,344
Certificates of deposit and other
time deposits.................... 47,038 79,391 40,014 17,581 1,712 185,736
Other borrowings and subordinated
debentures....................... 54,211 70 -- 4,400 -- 58,681
-------- -------- ------- ------- ------- --------
Total interest-bearing
liabilities................. 207,942 91,462 57,108 25,999 2,250 384,761
-------- -------- ------- ------- ------- --------
Noninterest-bearing demand
deposits........................... 26,106
Other liabilities.................... 1,462
--------
Total liabilities.............. 412,329
Stockholders' equity................. 21,605
--------
Total liabilities and
stockholders' equity........ $433,934
========
Period GAP......................... $ 16,163 $(37,007) $13,285 $15,103 $23,833
Cumulative GAP..................... $ 16,163 $(20,844) $(7,559) $ 7,544 $31,377
Period GAP to total assets......... 3.72% (8.53)% 3.06% 3.48% 5.49%
Cumulative GAP to total assets..... 3.72% (4.81)% (1.75)% 1.73% 7.22%
</TABLE>
Shortcomings are inherent in GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change. Consequently,
in addition to GAP analysis the Company uses a simulation model and shock
analysis to test the interest rate sensitivity of net interest income and the
balance sheet, respectively. Based on the Company's June 30, 1998 simulation
analysis, the Company estimates that a 200 basis point rise or decline in rates
over the next twelve month period would have an impact of less than 15% on its
net interest income for the same period. The change is relatively small, despite
the Company's asset sensitive GAP position. This results primarily from the
behavior of demand, money market and savings deposits. The Company has found
that historically interest rates on these deposits change more slowly in a
rising rate environment than in a declining rate environment. The Bank's
Asset-Liability Committee reviews the Bank's interest rate risk position on a
monthly basis.

The Company applies a market value ("MV") methodology to gauge its
interest rate risk exposure as derived from its simulation model. Generally, MV
is the discounted present value of the difference between incoming cash flows on
interest-earning assets and other investments and outgoing cash flows on
interest-bearing liabilities. The application of the methodology attempts to
quantify interest rate risk by measuring the change in the MV that would result
from a theoretical change in market interest rates of up to 200 basis points.
Changes of up to a 200 basis point increase and a 200 basis point decrease in
market rates are considered.

At June 30, 1998, it was estimated that the Company's MV would decrease
10.12% in the event of a 200 basis point increase in market interest rates. The
Company's MV at the same date would decrease 3.13% in the event of a 200 basis
point decrease in market interest rates.

37
<PAGE>
Presented below, as of June 30, 1998, is an analysis of the Company's
interest rate risk as measured by changes in MV for instantaneous and sustained
parallel shifts in market interest rates:
<TABLE>
<CAPTION>
MARKET VALUE AS A %
OF
PRESENT VALUE OF
ASSETS
$ CHANGE IN MV ---------------------
CHANGE IN RATES (IN THOUSANDS) % CHANGE IN MV MV RATIO CHANGE
- ---------------------------------------------- --------------- --------------- -------- ------
<S> <C> <C> <C> <C>
-200 bps $ (777) (3.13)% 5.44% (0.22 )%
0 bps 5.66% 0
+200 bps $(2,509) (10.12)% 5.13% (0.53 )%
</TABLE>
Management believes that the MV methodology overcomes three shortcomings of
the typical maturity GAP methodology. First, it does not use arbitrary repricing
intervals and accounts for all expected future cash flows. Second, because the
MV method projects cash flows of each financial instrument under different
interest rate environments, it can incorporate the effect of embedded options on
an institution's interest rate risk exposure. Third, it allows interest rates on
different instruments to change by varying amounts in response to a change in
market interest rates, resulting in more accurate estimates of cash flows.

As with any method of gauging interest rate risk, however, there are
certain shortcomings inherent in the MV methodology. The model assumes interest
rate changes are instantaneous parallel shifts in the yield curve. In reality,
rate changes are rarely instantaneous or parallel. The use of the simplifying
assumption that short-term and long-term rates change by the same degree may
also misstate historic rate patterns, which rarely show parallel yield curve
shifts. Further, the model assumes that certain assets and liabilities of
similar maturity or repricing will react identically to changes in rates. In
reality, the market value of certain types of financial instruments may adjust
in anticipation of changes in market rates, while any adjustment in the
valuation of other types of financial instruments may lag behind the change in
general market rates. Additionally, the MV methodology does not reflect the full
impact of contractual restrictions on changes in rates for certain assets, such
as adjustable rate loans. When interest rates change, actual loan prepayments
and actual early withdrawals from certificates of deposit may deviate
significantly from the assumptions used in the model. Finally, this methodology
does not measure or reflect the impact that higher rates may have on the ability
of adjustable-rate loan clients to service their debt. All of these factors are
considered in monitoring the Company's exposure to interest rate risk.

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. During the past three years, the Company's
liquidity needs have primarily been met by growth in core deposits, as
previously discussed. In addition, the Company has access to purchased funds
from correspondent banks and the Federal Home Loan Bank which are utilized on
occasion to take advantage of investment opportunities. The cash and federal
funds sold position, supplemented by amortizing investment and loan portfolios,
have generally created an adequate liquidity position.

CAPITAL RESOURCES

Capital management consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve Board and the Bank is subject to capital adequacy
requirements imposed by the FDIC and the Texas Banking Department. Both the
Federal Reserve Board and the FDIC have adopted risk-based capital requirements
for assessing bank holding company and bank capital adequacy. These standards
define capital and establish minimum capital requirements in relation to assets
and off-balance sheet exposure, adjusted for credit risk. The risk-based capital
standards currently in effect are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among bank holding
companies and banks, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate relative risk weights.
The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.

38
<PAGE>
The risk-based capital standards issued by the Federal Reserve Board apply
to the Company. The risk-based capital standards require all financial
institutions to have "Tier 1 capital" of at least 4.0% and "total
risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted
assets. "Tier 1 capital" generally includes common stockholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings, less deductions for goodwill and various other intangibles.
"Tier 2 capital" may consist of a limited amount of intermediate-term
preferred stock, a limited amount of term subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock not
qualifying as Tier 1 capital, and a limited amount of the general valuation
allowance for credit losses. The sum of Tier 1 capital and Tier 2 capital is
"total risk-based capital."

The Federal Reserve Board has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to average
total consolidated assets ("leverage ratio") of 3.0% for institutions with
well diversified risk, including no undue interest rate exposure; excellent
asset quality; high liquidity; good earnings; and that are generally considered
to be strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets.

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), each federal banking agency revised its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of nontraditional activities,
as well as reflect the actual performance and expected risk of loss on
multifamily mortgages. The Bank is subject to capital adequacy guidelines of the
FDIC that are substantially similar to the Federal Reserve Board's guidelines.
Also pursuant to FDICIA, the FDIC has promulgated regulations setting the levels
at which an insured institution such as the Bank would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under the FDIC's
regulations, the Bank is classified "well capitalized" for purposes of prompt
corrective action. See "Supervision and Regulation -- The Company" and
"-- the Bank."

Stockholders' equity increased from $18.9 million at June 30 , 1997 to
$21.6 million at June 30, 1998, an increase of $2.7 million or 14.6%. This
increase was primarily the result of net income during the period.

The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of June 30, 1998 to the minimum and
well capitalized regulatory standards:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL RATIO AT ADEQUACY CORRECTIVE ACTION
JUNE 30, 1998 PURPOSES PROVISION
--------------- ----------- -----------------
<S> <C> <C> <C>
THE COMPANY
Leverage ratio....................... 5.13% 4.00%(1) N/A
Tier 1 risk-based capital ratio...... 9.35% 4.00% N/A
Risk-based capital ratio............. 10.13% 8.00% N/A
THE BANK
Leverage ratio....................... 6.15% 4.00%(2) 5.00%
Tier 1 risk-based capital ratio...... 11.21% 4.00% 6.00%
Risk-based capital ratio............. 11.98% 8.00% 10.00%
</TABLE>
- ------------

(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio of up to 100 basis points above the required minimum.

(2) The FDIC may require the Bank to maintain a leverage ratio of up to 100
basis points above the required minimum.

39
<PAGE>
YEAR 2000 COMPLIANCE

Significant uncertainty exists concerning the potential effects associated
with "Year 2000" issues. The Company formally initiated a project in December
1997 to ensure that its operational and financial systems will not be adversely
affected by Year 2000 software problems. The Company has formed a Year 2000
project team and the Board of Directors and management are supporting all
compliance efforts and allocating the necessary resources to ensure compliance.
An inventory of all systems and products that could be affected by the Year 2000
date change has been developed, verified and categorized as to its importance to
the Company. The software for the Company's systems is primarily provided
through service bureaus and software vendors. The Company is requiring its
software providers to demonstrate and represent that the products provided are
or will be Year 2000 compliant and has planned a program of testing compliance.
The Company has developed a contingency plan to address the failure of any
system during testing, and based on the results of such testing, is prepared to
switch software vendors if necessary and/or perform certain functions manually.
The Company believes it is in compliance with regulatory guidelines regarding
Year 2000 compliance, including the timetable for achieving compliance.
Management does not expect that the costs of bringing the Company's systems into
Year 2000 compliance will have a materially adverse effect on the Company's
financial condition, results of operations or liquidity. Nonetheless, the
Company's ability to predict the costs associated with Year 2000 compliance is
subject to some uncertainties, and the Company may incur additional unexpected
expenditures in connection with Year 2000 compliance, which expenditures could
be material. In addition, there can be no assurance that the Company's
operational and financial systems will not be adversely affected by Year 2000
software problems.

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

OVERVIEW

Net income was $2.9 million, $2.4 million and $2.0 million for the years
ended December 31, 1997, 1996 and 1995, respectively, and diluted net income per
common share was $1.00, $0.81 and $0.69 for these same periods. Earnings growth
from 1995 to 1996 and from 1996 to 1997 resulted principally from balance sheet
growth. The Company's return on average assets was 0.90%, 0.92% and 0.88% and
return on average common equity was 15.46%, 14.78% and 14.16% for the years
ended 1997, 1996 and 1995, respectively.

Total assets at December 31, 1997, 1996 and 1995 were $348.2 million,
$299.9 million and $228.2 million, respectively. Total deposits at December 31,
1997, 1996 and 1995 were $295.3 million, $274.5 million and $188.5 million,
respectively. Deposit increases were primarily attributable to the issuance of
consumer CDs having balances less than $100,000. Total loans were $178.3 million
at December 31, 1997, an increase of $44.6 million or 33.4% from $133.7 million
at the end of 1996. Total loans were $71.9 million at year end 1995. Loan growth
has occurred principally in the real estate and consumer portfolios as a result
of the Company's strategic initiatives. Stockholders' equity was $20.4 million,
$17.4 million and $15.0 million at December 31, 1997, 1996 and 1995,
respectively.

RESULTS OF OPERATIONS

NET INTEREST INCOME

1997 VERSUS 1996. Net interest income for 1997 was $9.4 million compared
with $8.1 million for 1996, an increase of $1.3 million or 15.8%. The
improvement in net interest income for 1997 was mainly due to an increase in
total interest-earning assets, specifically in the loan portfolio. During 1997,
the yield on interest-earning assets increased 10 basis points, from 7.47% in
1996 to 7.57% in 1997 primarily due to an increase in the volume of
higher-yielding loans. Total funding costs increased 32 basis points from 4.55%
in 1996 to 4.87% in 1997. This increase was due to the growth in consumer CDs
and short-term borrowings. For 1997, the net interest spread decreased 22 basis
points to 2.70% from 2.92% in 1996 and net interest margin on a tax-equivalent
basis decreased from 3.38% to 3.15%.

40
<PAGE>
1996 VERSUS 1995. Net interest income for 1996 was $8.1 million, an
increase of 20.8% over the 1995 level of $6.7 million. This increase was due to
an increase in total interest-earning assets, particularly in the loan
portfolio. For 1996 as a whole, the Company's funding costs decreased seven
basis points from 4.62% to 4.55% while asset yields increased 17 basis points
from 7.30% to 7.47%. For 1996, the net interest spread increased 24 basis points
to 2.92% from 2.68% in 1995 and net interest margin on a tax-equivalent basis
increased from 3.21% to 3.38%.

41
<PAGE>
The following table presents for the periods indicated the total dollar
amount of average balances, 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. Nonaccruing
loans have been included in the tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------ ------------------------------------ ------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE
OUTSTANDING INCOME/ YIELD/ OUTSTANDING INCOME/ YIELD/ OUTSTANDING
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE
------------ -------- -------- ------------ -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Total loans(1)..................... $145,680 $12,903 8.86% $ 96,667 $ 8,886 9.19% $ 68,559
Securities(2):
Taxable.......................... 143,087 8,993 6.28 139,144 8,871 6.38 138,030
Nontaxable....................... 8,092 425 5.25 7,017 365 5.20 5,222
Federal funds sold and other
temporary investments............ 7,440 727 9.78 301 50 16.61 299
------------ -------- --- ------------ -------- -------- ------------
Total interest-earning assets.... 304,299 23,048 7.57% 243,129 18,172 7.47% 212,110
-------- --- -------- --------
Less allowance for credit losses... (1,107) (738) (827)
------------ ------------ ------------
Total earning assets, net of
allowance........................ 303,192 242,391 211,283
Nonearning assets.................... 19,790 17,295 15,816
------------ ------------ ------------
Total assets..................... $322,982 $259,686 $227,099
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits... $ 43,138 $ 1,133 2.63% $ 48,351 $ 1,563 3.23% $ 50,546
Savings and money market
accounts......................... 71,970 3,285 4.56 43,188 1,478 3.42 55,327
Certificates of deposit............ 137,574 7,709 5.60 99,902 5,439 5.44 67,035
Other borrowings................... 27,844 1,542 5.54 29,903 1,592 5.32 17,332
------------ -------- --- ------------ -------- -------- ------------
Total interest-bearing
liabilities.................... 280,526 13,669 4.87% 221,344 10,072 4.55% 190,240
------------ -------- --- ------------ -------- -------- ------------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 22,607 21,564 22,336
Other liabilities.................. 981 621 334
------------ ------------ ------------
Total liabilities................ 304,114 243,529 212,910
Stockholders' equity................. 18,868 16,157 14,189
------------ ------------ ------------
Total liabilities and
stockholders' equity........... $322,982 $259,686 $227,099
============ ============ ============
Net interest rate spread............. 2.70% 2.92%
=== ========
Net interest income and margin (tax
equivalent basis)(3)............... $ 9,574 3.15% $ 8,206 3.38%
======== === ======== ========
</TABLE>
INTEREST AVERAGE
INCOME/ YIELD/
EXPENSE RATE
-------- --------
ASSETS
Interest-earning assets:
Total loans(1)..................... $ 6,385 9.31%
Securities(2):
Taxable.......................... 8,811 6.38
Nontaxable....................... 271 5.19
Federal funds sold and other
temporary investments............ 22 7.53
-------- ---
Total interest-earning assets.... 15,489 7.30%
-------- ---
Less allowance for credit losses...

Total earning assets, net of
allowance........................
Nonearning assets....................

Total assets.....................

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits... $ 1,899 3.76%
Savings and money market
accounts......................... 2,129 3.85
Certificates of deposit............ 3,713 5.54
Other borrowings................... 1,040 6.00
-------- ---
Total interest-bearing
liabilities.................... 8,781 4.62%
-------- ---
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.........................
Other liabilities..................

Total liabilities................
Stockholders' equity.................

Total liabilities and
stockholders' equity...........

Net interest rate spread............. 2.68%
===
Net interest income and margin (tax
equivalent basis)(3)............... $ 6,815 3.21%
======== ===

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

(1) Loan fees of $351,000, $274,000 and $99,000 are included in interest income
for the years ended December 31, 1997, 1996 and 1995, respectively.

(2) Yield on securities does not include unrealized gains or losses.

(3) The tax equivalent adjustment has been computed using an effective tax rate
of 27.2% and has increased interest income by $195,000, $106,000 and
$107,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

42
<PAGE>
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 related
to higher 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 to rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 VS 1996 1996 VS. 1995
------------------------------ ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------- -------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- --------- --------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans........................ $ 4,504 $ (487) $ 4,017 $ 2,617 $ (116) $ 2,501
Securities:
Taxable......................... 251 (129) 122 72 (12) 60
Nontaxable...................... 56 4 60 94 -- 94
Federal funds sold and other
temporary investments........... 1,186 (509) 677 -- 28 28
------- --------- --------- ------- --------- ---------
Total increase (decrease) in
interest income................ 5,997 (1,121) 4,876 2,783 (100) 2,683
------- --------- --------- ------- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits... (168) (262) (430) (83) (253) (336)
Savings and money market
accounts........................ 984 823 1,807 (467) (184) (651)
Certificates of deposit............ 2,049 221 2,270 1,821 (95) 1,726
Other borrowings................... (110) 60 (50) 754 (202) 552
------- --------- --------- ------- --------- ---------
Total increase (decrease) in
interest expense............... 2,755 842 3,597 2,025 (734) 1,291
------- --------- --------- ------- --------- ---------
Increase (decrease) in net interest
income.......................... $ 3,242 $ (1,963) $ 1,279 $ 758 $ 634 $ 1,392
======= ========= ========= ======= ========= =========
</TABLE>
PROVISION FOR CREDIT LOSSES

The 1997 provision for credit losses declined to $570,000 from $765,000 in
1996, a decrease of $195,000 or 25.5%. The reduced provision in 1997 reflected
improved asset quality as net charge-offs of loans continued at relatively low
levels totaling $257,000 or 0.18% of average total loans compared with $523,000
or 0.54% of average total loans in 1996. The provision for credit losses for
1996 increased $620,000 or 427.6% from the year ended 1995 due to substantial
loan growth of $61.9 million or 86.1%.

NONINTEREST INCOME

For 1997, noninterest income totaled $1.0 million, an increase of $220,000
or 27.2% compared with $811,000 in 1996. The increase was primarily due to
increased mortgage servicing fees, trust income and a net realized gain on sale
of available for sale securities and was partially offset by a decrease in
customer service fees. The Company began trust operations in 1997 after
purchasing the outstanding stock of Universal Trust Company on December 31,
1996.

Noninterest income for 1996 was $811,000, a $207,000 or 34.4% increase from
1995 resulting principally from increased customer service fees and mortgage
servicing fees.

43
<PAGE>
The following table presents for the periods indicated the major categories
of noninterest income:

YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Customer service fees................ $ 439 $ 471 $ 339
Mortgage servicing fees.............. 397 317 230
Income from trust operations......... 84 -- --
Net realized gains on sale of
available for sale securities...... 55 4 12
Other................................ 57 19 23
--------- --------- ---------
Total noninterest income........ $ 1,032 $ 811 $ 604
========= ========= =========

NONINTEREST EXPENSE

For the years ended 1997, 1996 and 1995, noninterest expense totaled $5.9
million, $4.7 million and $4.3 million, respectively. The Company's efficiency
ratio was 50.91% in 1997, 51.60% in 1996 and 58.04% in 1995. The following table
presents for the periods indicated the major categories of noninterest expense:

YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits....... $ 2,887 $ 2,413 $ 2,379
Net occupancy expense................ 655 606 592
Litigation settlements paid and
related legal expenses............. 38 -- --
Other professional fees.............. 644 505 381
Office expense....................... 382 292 225
Net (gain) loss and carrying costs of
other real estate.................. 97 2 (249)
Other................................ 1,166 899 1,008
--------- --------- ---------
Total noninterest expense....... $ 5,869 $ 4,717 $ 4,336
========= ========= =========

Salaries and employee benefits expense for 1997 totaled $2.9 million, an
increase of $474,000 or 19.6% over $2.4 million for 1996, due primarily to an
increase in the number of full-time equivalent employees, and salary increases
of approximately 4%. Other noninterest expense of $1.2 million increased
$267,000 or 29.7% compared with $899,000 in 1996. This increase was primarily
attributable to an increase in mortgage servicing amortization and office system
expense.

In 1996, salaries and employee benefits expense was $2.4 million,
approximately the same as 1995. Professional fees increased from $381,000 in
1995 to $505,000 in 1996, an increase of 32.5% primarily due to increased data
processing fees. Losses and carrying costs of other real estate was $2,000 in
1996 compared with income of $249,000 in 1995, primarily from operating income
on a foreclosed property sold in 1995.

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 income tax
component of the Texas franchise tax was zero in 1997, 1996 and 1995. In 1997,
income tax expense was $1.1 million, approximately the same as 1996. The 1996
amount was $220,000 or 26.8% higher than the 1995 amount of $821,000. The
effective tax rates in 1997, 1996 and 1995, respectively, were 26.6%, 30.4% and
29.0%.

44
<PAGE>
FINANCIAL CONDITION

LOAN PORTFOLIO

At December 31, 1997, total loans were $178.3 million, an increase of $44.6
million or 33.4% compared with total loans at December 31, 1996 of $133.7
million. The growth in the loan portfolio was due to strong loan demand,
especially in the commercial real estate and consumer areas. In addition, loans
to municipal entities increased as the Company emphasized its marketing efforts
to its traditional MUD depositors.

Total loans increased 86.1% during 1996 from $71.9 million at December 31,
1995 to $133.7 million at December 31, 1996. The loan growth during 1996
occurred in the real estate, construction and consumer loans portfolios. Real
estate single-family residential mortgages increased substantially from $14.1
million at December 31, 1995 to $39.0 million at year end 1996. Multi-family and
commercial real estate increased from $18.7 million at year end 1995 to $30.1
million at year end 1996. Interim construction loans increased from $12.8
million at year end 1995 to $22.5 million at year end 1996. Consumer loans also
had a substantial increase from $2.3 million at year end 1995 to $13.6 million
at year end 1996.

At December 31, 1997, total loans represented 60.4% of deposits and 51.2%
of total assets. Total loans as a percentage of deposits were 48.7% at December
31, 1996, compared with 38.1% at December 31, 1995.

The following table summarizes the loan portfolio of the Company by type of
loan:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------- ------------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity:
Commercial, financial and
industrial....................... $ 15,775 8.8% $ 19,037 14.2% $22,458 31.2% $21,472 31.5%
Real estate mortgage:
Interim construction............. 26,599 14.9 22,466 16.8 12,838 17.9 5,145 7.6
Multi-family and commercial...... 48,066 27.0 30,140 22.5 18,677 26.0 20,770 30.5
Single-family residential........ 45,333 25.4 38,990 29.2 14,074 19.6 12,605 18.5
Municipal.......................... 10,049 5.6 1,161 0.9 360 0.5 3,640 5.3
Consumer........................... 24,780 13.9 13,616 10.2 2,327 3.2 2,048 3.0
Small Business Administration,
government guaranteed............ 3,725 2.1 4,687 3.5 -- -- -- --
Other.............................. 1,647 1.0 233 0.2 39 0.1 648 1.0
-------- ------- -------- ------- ------- ------- ------- -------
Loans held to maturity............... 175,974 98.7 130,330 97.5 70,773 98.5 66,328 97.4
Loans held for sale.................. 2,359 1.3 3,394 2.5 1,094 1.5 1,771 2.6
-------- ------- -------- ------- ------- ------- ------- -------
Total loans...................... $178,333 100.0% $133,724 100.0% $71,867 100.0% $68,099 100.0%
======== ======= ======== ======= ======= ======= ======= =======
</TABLE>
1993
------------------
AMOUNT PERCENT
------- -------
Held to Maturity:
Commercial, financial and
industrial....................... $22,850 36.0%
Real estate mortgage:
Interim construction............. 7,323 11.5
Multi-family and commercial...... 13,188 20.8
Single-family residential........ 13,519 21.3
Municipal.......................... -- --
Consumer........................... 2,593 4.1
Small Business Administration,
government guaranteed............ -- --
Other.............................. 105 0.2
------- -------
Loans held to maturity............... 59,578 93.9
Loans held for sale.................. 3,871 6.1
------- -------
Total loans...................... $63,449 100.0%
======= =======

45
<PAGE>
The contractual maturity ranges of the commercial, financial and industrial
and real estate construction loan portfolios and the amount of such loans with
fixed interest rates and variable interest rates in each maturity range as of
December 31, 1997 are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and
industrial......................... $12,099 $ 3,676 $ -- $15,775
Real estate interim construction..... 22,887 3,712 -- 26,599
-------- ----------- ---------- -------
Total........................... $34,986 $ 7,388 $ -- $42,374
======== =========== ========== =======
Loans at fixed interest rates........ $12,952 $ 966 $ -- $13,918
Loans at variable interest rates..... 22,034 6,422 -- 28,456
-------- ----------- ---------- -------
Total........................... $34,986 $ 7,388 $ -- $42,374
======== =========== ========== =======
</TABLE>
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures." Under SFAS No. 114, as amended, a loan is considered impaired
based on current information and events, if it is probable that the Company will
be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. The measurement of
impaired loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or the loan's observable market
price or based on the fair value of the collateral if the loan is
collateral-dependent. Adoption of these pronouncements had no impact on the
Company's consolidated financial statements including the level of the allowance
for credit losses.

NONPERFORMING ASSETS

The Company's conservative lending approach, as well as a healthy local
economy, has resulted in strong asset quality. Nonperforming assets at December
31, 1997 were $2.2 million compared with $3.6 million at December 31, 1996 and
$1.6 million at December 31, 1995. The ratio of nonperforming assets to total
loans plus other real estate was 1.23%, 2.67% and 2.14% as of December 31, 1997,
1996 and 1995, respectively.

The following table presents information regarding nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans..................... $ 40 $ 105 $ -- $ 1,509 $ 50
90 days or more past due loans, not
on nonaccrual...................... 117 890 108 1 45
Restructured loans................... 473 490 44 160 100
Other real estate.................... 1,590 2,145 1,413 1,295 2,852
--------- --------- --------- --------- ---------
Total nonperforming assets...... $ 2,220 $ 3,630 $ 1,565 $ 2,965 $ 3,047
========= ========= ========= ========= =========
Nonperforming assets to total loans
and other real estate.............. 1.23% 2.67% 2.14% 4.27% 4.60%
</TABLE>
With respect to the above loans, interest income foregone on nonaccrual
loans, additional interest income that would have been earned on restructured
loans under their original terms and interest earned on restructured loans were
not material.

46
<PAGE>
ALLOWANCE FOR CREDIT LOSSES

For the year ended 1997, net charge-offs totaled $258,000 or 0.18% of
average total loans outstanding for the period, compared with $523,000 or 0.54%
in net charge-offs during 1996. During 1997, the Company recorded a provision
for credit losses of $570,000 compared with $765,000 for 1996. At December 31,
1997, the allowance totaled $1.2 million, or 0.69% of loans held to maturity.
The Company recorded a provision for credit losses of $765,000 during 1996
compared with a provision of $145,000 for 1995. At December 31, 1996, the
allowance aggregated $898,000, or 0.69% of loans held to maturity. At December
31, 1995 the allowance aggregated $656,000, or 0.93% of loans held to maturity.

The following table presents, for the periods indicated, an analysis of the
allowance for credit losses and other related data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for credit losses at
beginning of period................ $ 898 $ 656 $ 904 $ 773 $ 776
Provision for credit losses.......... 570 765 145 160 --
Charge-offs:
Commercial, financial and
industrial..................... (196) (533) (381) -- --
Consumer........................ (87) (7) (26) (37) (16)
Recoveries:
Commercial, financial and
industrial..................... 3 5 14 8 11
Real estate-mortgage............ 21 12 -- -- --
Consumer........................ 1 -- -- -- 2
---------- ---------- --------- --------- ---------
Net charge-offs...................... (258) (523) (393) (29) (3)
---------- ---------- --------- --------- ---------
Allowance for credit losses at end of
period............................. $ 1,210 $ 898 $ 656 $ 904 $ 773
========== ========== ========= ========= =========
Ratio of allowance for credit losses
to loans held to maturity.......... 0.69% 0.69% 0.93% 1.36% 1.30%
Ratio of net charge-offs to average
total loans........................ 0.18% 0.54% 0.57% 0.05% 0.01%
Ratio of allowance for credit losses
to nonperforming loans............. 192.06% 60.47% 431.58% 54.13% 396.41%
Average total loans outstanding...... $ 145,680 $ 96,667 $ 68,559 $ 60,198 $ 55,331
Total loans outstanding at end of
period............................. $ 178,333 $ 133,724 $ 71,867 $ 68,099 $ 63,449
</TABLE>
47
<PAGE>
The following tables describe the allocation of the allowance for credit
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------- ------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO LOANS TO
TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance of allowance for credit
losses applicable to:
Commercial, financial and
industrial........................ $ 24 8.8% $ 21 14.2% $ 51 31.2% $275 31.5%
Real estate mortgage:
Interim construction............. -- 14.9 -- 16.8 -- 17.9 -- 7.6
Multi-family..................... -- 27.0 -- 22.5 -- 26.0 -- 30.5
Single-family residential........ 12 25.4 5 29.2 -- 19.6 40 18.5
Municipal.......................... -- 5.6 -- 0.9 -- 0.5 -- 5.3
Consumer........................... 24 13.9 -- 10.2 -- 3.2 14 3.0
Small Business Administration,
government guaranteed............. -- 2.1 -- 3.5 -- -- -- --
Other.............................. -- 1.0 -- 0.2 -- 0.1 -- 1.0
Loans held for sale................ -- 1.3 -- 2.5 -- 1.5 -- 2.6
Unallocated........................ 1,150 872 605 575
------ ---------- ------ ---------- ------ ---------- ------ ----------
Total allowance for credit
losses.......................... $1,210 100.0% $898 100.0% $656 100.0% $904 100.0%
====== ========== ====== ========== ====== ========== ====== ==========
</TABLE>
1993
-------------------
PERCENT OF
LOANS TO
TOTAL
AMOUNT LOANS
------ ----------
Balance of allowance for credit
losses applicable to:
Commercial, financial and
industrial........................ $122 36.0%
Real estate mortgage:
Interim construction............. -- 11.5
Multi-family..................... -- 20.8
Single-family residential........ 41 21.3
Municipal.......................... -- --
Consumer........................... 25 4.1
Small Business Administration,
government guaranteed............. -- --
Other.............................. -- 0.2
Loans held for sale................ -- 6.1
Unallocated........................ 585
------ ----------
Total allowance for credit
losses.......................... $773 100.0%
====== ==========

48
<PAGE>
SECURITIES

The following table summarizes the amortized cost and fair value of
securities held by the Company as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Government and agency
securities......................... $ -- $ 1,002 $ 1,005 $ -- $ --
Mortgage-backed securities........... 122,297 128,939 136,564 137,324 139,313
Federal Home Loan Bank Stock, at
cost............................... 4,462 2,213 1,200 1,601 917
State and municipal securities....... 8,190 8,374 5,270 5,276 --
Other................................ 1,030 831 -- 3,362 1,265
---------- ---------- ---------- ---------- ----------
Total........................... $ 135,979 $ 141,359 $ 144,039 $ 147,563 $ 141,495
========== ========== ========== ========== ==========
</TABLE>
The following table summarizes the contractual maturity of securities
(including federal funds sold and other temporary investments) and their
weighted average yields. Weighted average yields of state and municipal
securities are computed on a tax-equivalent basis.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT WITHIN YEARS BUT
WITHIN WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL
---------------- --------------- --------------- ----------------- ---------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------- ----- ------ ----- ------ ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage-backed securities........... $ -- -- % $ -- -- % $ -- -- % $ 121,229 6.03 % $ 121,229
Federal Home Loan Bank Stock, at
cost............................... -- -- -- -- -- -- 4,462 6.16 4,462
State and municipal securities....... 1,900 6.97 5,375 7.60 915 8.06 -- -- 8,190
Other securities..................... -- -- -- -- -- -- 1,030 8.70 1,030
Federal funds sold and other
temporary investments.............. 18,490 8.74 -- -- -- -- -- -- 18,490
------- ----- ------ ----- ------ ----- --------- ----- ---------
Total............................ $20,390 8.58 % $5,375 7.60 % $915 8.06 % $ 126,721 6.05 % $ 153,401
======= ===== ====== ===== ====== ===== ========= ===== =========
</TABLE>
YIELD
-----
Mortgage-backed securities........... 6.03 %
Federal Home Loan Bank Stock, at
cost............................... 6.16
State and municipal securities....... 7.51
Other securities..................... 8.70
Federal funds sold and other
temporary investments.............. 8.74
-----
Total............................ 6.45 %
=====

The following table summarizes the carrying value by classification of
securities as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available for sale................... $ 43,130 $ 43,133 $ 43,450 $ 45,044 $ --
Held to maturity..................... 91,781 96,556 98,859 100,366 141,495
---------- ---------- ---------- ---------- ----------
Total........................... $ 134,911 $ 139,689 $ 142,309 $ 145,410 $ 141,495
========== ========== ========== ========== ==========
</TABLE>
At December 31, 1997 securities of $134.9 million had decreased $4.8
million from $139.7 million at December 31, 1996, as the Company used proceeds
from principal repayments and maturing investment securities to fund loan
growth. At December 31, 1997, securities represented 38.7% of total assets. At
December 31, 1997, approximately $123.4 million or 91.5% of the Company's
securities earned interest at floating rates and repriced within one year, and
accordingly were less susceptible to declines in value should interest rates
increase.

Securities decreased slightly from $142.3 million at December 31, 1995 to
$139.7 million at December 31, 1996. During 1996 there was limited investment
activity due to the focus on loan growth.

49
<PAGE>
The following table presents the amortized cost and fair value of
securities classified as available for sale at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
DECEMBER 31, 1997:
Mortgage-backed securities...... $ 38,706 $ 17 $(1,086) $ 37,637
Federal Home Loan Bank Stock, at
cost.......................... 4,462 -- -- 4,462
Other Securities................ 1,030 -- -- 1,030
---------- ----------- ----------- ---------
Total...................... $ 44,198 $ 17 $(1,086) $ 43,129
========== =========== =========== =========
DECEMBER 31, 1996:
Mortgage-backed securities...... $ 40,757 $ -- $(1,671) $ 39,086
Federal Home Loan Bank Stock, at
cost.......................... 2,213 -- -- 2,213
U.S. Government and agency
securities.................... 1,002 1 -- 1,003
Other securities................ 831 -- -- 831
---------- ----------- ----------- ---------
Total...................... $ 44,803 $ 1 $(1,671) $ 43,133
========== =========== =========== =========
DECEMBER 31, 1995:
Mortgage-backed securities...... $ 42,975 $ 2 $(1,737) $ 41,240
Federal Home Loan Bank Stock, at
cost.......................... 1,200 -- -- 1,200
U.S. Government and agency
securities.................... 1,005 5 -- 1,010
---------- ----------- ----------- ---------
Total...................... $ 45,180 $ 7 $(1,737) $ 43,450
========== =========== =========== =========
</TABLE>
The following table presents the amortized cost and fair value of
securities classified as held to maturity at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD TO MATURITY
DECEMBER 31, 1997:
Mortgage-backed securities...... $ 83,591 $ -- $(2,268) $ 81,323
State and municipal
securities.................... 8,190 143 -- 8,333
---------- ----------- ----------- ---------
Total...................... $ 91,781 $ 143 $(2,268) $ 89,656
========== =========== =========== =========
DECEMBER 31, 1996:
Mortgaged-backed securities..... $ 88,182 $ 75 $(3,201) $ 85,056
State and municipal
securities.................... 8,374 81 -- 8,455
---------- ----------- ----------- ---------
Total...................... $ 96,556 $ 156 $(3,201) $ 93,511
========== =========== =========== =========
DECEMBER 31, 1995:
Mortgaged-backed securities..... $ 93,589 $ 157 $(1,452) $ 92,294
State and municipal
securities.................... 5,270 87 (49) 5,308
---------- ----------- ----------- ---------
Total...................... $ 98,859 $ 244 $(1,501) $ 97,602
========== =========== =========== =========
</TABLE>
50
<PAGE>
DEPOSITS

Deposits at December 31, 1997 were $295.3 million, an increase of $20.8
million or 7.6% from $274.5 million at December 31, 1996. This growth was
primarily due to an increase in consumer certificates of deposits of less than
$100,000. Noninterest-bearing deposits of $24.8 million at December 31, 1997
increased $3.7 million, or 17.7% from $21.1 million at December 31, 1996. The
Company does not have any brokered deposits.

Noninterest-bearing deposits as of December 31, 1996 were $21.1 million
compared with $24.4 million at December 31, 1995. Interest-bearing deposits were
$253.4 million at December 31, 1996, up $89.3 million or 54.4% from $164.1
million at December 31, 1995. This growth in interest-bearing deposits was due
to the issuance of CDs to fund loan growth.

MUD deposits were $106.4 million, $113.5 million and $95.4 million as of
December 31, 1997, 1996 and 1995, respectively.

The daily average balances and weighted average rates paid on
interest-bearing deposits for each of the years ended December 31, 1997, 1996
and 1995 are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NOW.................................. $ 43,138 2.63% $ 48,351 3.23% $ 50,546 3.76%
Regular savings...................... 1,754 2.34 1,708 2.34 1,833 2.51
Money market accounts................ 70,216 4.62 41,480 3.47 53,494 3.89
Time deposits less than $100,000..... 83,485 5.76 51,708 5.64 21,758 5.57
Time deposits $100,000 and over...... 54,089 5.36 48,194 5.24 45,277 5.52
-------- ---- -------- ---- -------- ----
Total interest-bearing deposits...... 252,682 4.80 191,441 4.43 172,908 4.48
Noninterest-bearing deposits......... 22,607 -- 21,564 -- 22,336 --
-------- ---- -------- ---- -------- ----
Total deposits.................. $275,289 4.41% $213,005 3.98% $195,244 3.96%
======== ==== ======== ==== ======== ====
</TABLE>
The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater by time remaining until maturity:

DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Three months or less................. $ 24,204 $ 33,793 $ 25,420
Over three through six months........ 10,410 8,356 6,264
Over six through twelve months....... 12,013 15,592 2,200
Over twelve months................... 3,924 1,186 --
--------- --------- ---------
Total........................... $ 50,551 $ 58,927 $ 33,884
========= ========= =========

OTHER BORROWINGS

Information related to the Company's borrowings as of and for the periods
indicated is summarized below:

DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Federal Home Loan Bank............... $ 25,350 $ -- $ 23,100
Customer repurchase agreements....... 3,388 2,670 640
Note payable......................... 1,000 -- --
Treasury, tax and loan (TT&L) note
option............................. 1,750 4,272 434
--------- --------- ---------
Total........................... $ 31,488 $ 6,942 $ 24,174
========= ========= =========

51
<PAGE>
YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
FHLB Borrowings:
Maximum outstanding at any
month-end..................... $ 64,575 $ 43,684 $ 36,700
Daily average balance........... 32,637 24,132 11,323
Average interest rate........... 5.65% 4.98% 5.98%
Weighted average interest rate
at end of period.............. 4.99% -- 5.75%

The FHLB borrowings are secured by a blanket pledge of the Company's
single-family residential loan portfolio.

Customer repurchase agreements are collateralized by certain investment
securities.

In December 1997, the Company borrowed $1.0 million from a bank under a
line of credit maturing December 31, 1998. A portion of the proceeds from the
note was contributed to the Bank as additional capital and the remainder was
used to purchase treasury shares. The note bears interest at prime rate (8.5% at
December 31, 1997) payable quarterly. The Company pledged the common stock of
the Bank as collateral for the note.

The TT&L note is due on demand and bears interest at variable rates. The
TT&L note is secured by the Company's SBA loan portfolio.

52
<PAGE>
INTEREST RATE SENSITIVITY AND LIQUIDITY

The following table sets forth an interest rate sensitivity analysis for
the Company at December 31, 1997:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
-------------------------------------------------------------------
0-3 3-12 1-3 3-5 OVER 5
MONTHS MONTHS YEARS YEARS YEARS TOTAL
---------- ---------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities......................... $ 110,698 $ 1,855 $ 13,029 $ 5,442 $ 3,887 $ 134,911
Total loans........................ 58,000 50,672 27,677 34,284 7,700 178,333
Federal funds sold and other
temporary investments........... 18,490 -- -- -- -- 18,490
---------- ---------- --------- --------- --------- ----------
Total interest-earning assets... 187,188 52,527 40,706 39,726 11,587 331,734
---------- ---------- --------- --------- ---------
Less allowance for credit losses... (1,210)
----------
Total earning assets, net of
allowance....................... 330,524
Noninterest-earning assets........... 17,677
----------
Total assets.................... $ 348,201
==========
Interest-bearing liabilities:
Demand, money market and savings
deposits........................ 95,868 11,908 17,408 4,810 345 130,339
Certificates of deposit and other
time deposits................... 38,675 66,346 25,634 9,453 -- 140,108
Other borrowings................... 30,488 1,000 -- -- -- 31,488
---------- ---------- --------- --------- --------- ----------
Total interest-bearing
liabilities................... 165,031 79,254 43,042 14,263 345 301,935
---------- ---------- --------- --------- --------- ----------
Noninterest-bearing demand
deposits........................... 24,806
Other liabilities.................... 1,076
----------
Total liabilities............... 327,817
Stockholders' equity................. 20,384
----------
Total liabilities and
stockholders' equity.......... $ 348,201
==========
Period GAP........................... $ 22,157 $ (26,727) $ (2,336) $ 25,463 $ 11,242
Cumulative GAP....................... $ 22,157 $ (4,570) $ (6,906) $ 18,557 $ 29,799
Period GAP to total assets........... 6.36% (7.67)% (0.67)% 7.31% 3.23%
Cumulative GAP to total assets....... 6.36% (1.31)% (1.98)% 5.33% 8.56%
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Interest Rate Sensitivity and
Liquidity" for the six months ended June 30, 1998 and 1997 for a discussion of
the Company's policies regarding asset and liability risk management.

At December 31, 1997, it was estimated that the Company's MV would increase
1.12% in the event of a 200 basis point increase in market interest rates. The
Company's MV at the same date would increase 1.63% in the event of a 200 basis
point decrease in market interest rates.

53
<PAGE>
Presented below, as of December 31, 1997, is an analysis of the Company's
interest rate risk as measured by changes in MV for instantaneous and sustained
parallel shifts in market interest rates:
<TABLE>
<CAPTION>
MARKET VALUE AS A %
OF
PRESENT VALUE OF
ASSETS
$ CHANGE IN MV ---------------------
CHANGE IN RATES (IN THOUSANDS) % CHANGE IN MV MV RATIO CHANGE
- ---------------------------------------------- --------------- --------------- -------- ------
<S> <C> <C> <C> <C>
-200 bps $ 425 1.63% 7.48% 0.10%
0 bps 7.38% 0
+200 bps $ 292 1.12% 7.49% 0.11%
</TABLE>
CAPITAL RESOURCES

The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 1997 to the minimum
and well capitalized regulatory standards:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
ACTUAL RATIO AT FOR CAPITAL UNDER PROMPT CORRECTIVE
DECEMBER 31, 1997 ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------ -----------------------
<S> <C> <C> <C>
THE COMPANY
Leverage ratio....................... 6.07% 4.00%(1) N/A
Tier 1 risk-based capital ratio...... 11.17% 4.00% N/A
Risk-based capital ratio............. 11.61% 8.00% N/A
THE BANK
Leverage ratio....................... 6.34% 4.00%(2) 5.00%
Tier 1 risk-based capital ratio...... 11.67% 4.00% 6.00%
Risk-based capital ratio............. 12.10% 8.00% 10.00%
</TABLE>
- ------------

(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio of up to 100 basis points above the required minimum.

(2) The FDIC may require the Bank to maintain a leverage ratio of up to 100
basis points above the required minimum.

Stockholders' equity increased to $20.4 million at December 31, 1997 from
$17.4 million at December 31, 1996, an increase of $3.0 million or 17.2%. This
increase was primarily the result of net income. During 1996, stockholders'
equity increased by $2.4 million or 16.0% from $15.0 million at December 31,
1995.

54
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following is a list of all of the directors and executive officers of
the Company and the Bank, their respective positions with the Company and the
Bank and their ages.
<TABLE>
<CAPTION>
NAME POSITION AGE
- ------------------------------------- ------------------------------------------------------ ---
<S> <C>
Samuel A. Jones...................... Director of the Company and the Bank 47
David L. Lane........................ Vice Chairman of the Board of Directors of the Company 56
and the Bank
Joel M. Levy......................... Director of the Company and the Bank 68
James D. MacIntyre................... Executive Vice President and Chief Lending Officer of 48
the Bank
Harlon E. Martin, Jr................. Director of the Company and the Bank 50
Jack H. Mayfield, Jr................. Chairman of the Board of Directors of the Company and 60
the Bank
Walter G. Mayfield................... Director of the Company and the Bank 35
Madeline G. O'Brien.................. Director of the Company and the Bank 76
John E. Phillips..................... Director, President and Chief Executive Officer of the 49
Company and the Bank
Patrick C. Reed...................... Secretary and Chief Financial Officer of the Company; 49
Executive Vice President and Chief Financial Officer
of the Bank
Joseph E. Reid....................... Director of the Company and the Bank 69
Henry V. Seger....................... Director of the Company and the Bank 82
</TABLE>
SAMUEL A. JONES. Mr. Jones has been a director of the Company since its
inception and a director of the Bank since 1986. Mr. Jones is Chief Financial
Officer of Morton Cohn Investments. He received a Bachelor of Science degree
from Tulane University in 1973 and a Masters of Business Administration degree
from the University of Texas in 1975. Prior to Mr. Jones' affiliation with the
Bank and the Company, he served as a director of Charter National Bank in
Houston.

DAVID L. LANE. Mr. Lane has been a director and Vice Chairman of the
Company since its inception. He was the Founding Chairman of the Bank and has
served as a director of the Bank since 1983 and Vice Chairman of the Bank since
1984. Mr. Lane is the Chief Financial Officer for Wolff Companies, a real estate
management and development firm. He received a Bachelor of Science degree in
Economics from the Wharton School of the University of Pennsylvania in 1963 and
a Masters of Business Administration degree from Harvard Business School in
1965. Mr. Lane has a long history of civic involvement as a member of the Board
of Directors of organizations such as the Houston Ballet Foundation, the Wortham
Center Operating Company and the Association for Community Television.

JOEL M. LEVY. Mr. Levy has been a director of the Company since its
inception and a director of the Bank since 1992. He is Co-Chairman of the Board
of Rice Food Markets, Inc., a local grocery supermarket chain. Mr. Levy received
a Bachelor of Business Administration degree from the University of Texas in
1950. Prior to his affiliation with the Bank and the Company, Mr. Levy served as
a director of Post Oak Bank from 1969 to 1985, First National Bank of Bellaire
from 1985 to 1992 and Mayde Creek Bank, N.A. from 1988 to 1992. Mr. Levy is
involved with many civic organizations, including the Longhorn Foundation, the
Jewish Community Center and the University of Texas Health Science
Center-Houston.

JAMES D. MACINTYRE. Mr. MacIntyre joined the Bank in 1987 as Senior Vice
President and Chief Lending Officer, and was elected Executive Vice President of
the Company and the Bank in 1998. He received a Bachelor of Arts degree in
Economics from Trinity University in 1972 and a Masters of Business
Administration degree in Finance from The University of Texas in 1977. Mr.
MacIntyre serves on the Board of Directors of the Houston Inter-Faith Housing
Corporation, a non-profit organization that provides housing for elderly and low
income citizens.

55
<PAGE>
HARLON E. MARTIN, JR. Mr. Martin has been a director of the Company since
its inception and a director of the Bank since 1992. He is currently President
of H. E. Martin & Company, an investment banking firm. Mr. Martin is a director
of The Beard Company. Mr. Martin received a Bachelor of Business Administration
degree from the University of Texas in 1973.

JACK H. MAYFIELD, JR. Mr. Mayfield has been Chairman of the Board of the
Company since its inception and Chairman of the Board of the Bank since 1988. He
joined the Bank's Board of Directors in 1984. Mr. Mayfield is Chairman of the
Board and Chief Executive Officer of Goldston Oil Corporation, an oil and gas
exploration and production company. Mr. Mayfield received a Bachelor of Science
degree in Geology from the University of Oklahoma in 1960 and a Masters of
Science degree from the University of Texas in 1965. Prior to his affiliation
with the Bank and the Company, Mr. Mayfield served as a director of University
State Bank and Greenway Bank & Trust. Mr. Mayfield is a director of the Coastal
Conservation Association of Texas, the University of Texas/Houston Health
Science Center Development Board and the University of Texas Geology Foundation
Development Board. He also serves as a Trustee of the Kinkaid School Foundation
and the Coastal Conservation Association/Texas Foundation.

WALTER G. MAYFIELD. Mr. Mayfield has been a director of the Company since
its inception and the Bank since 1990. He is President of Goldston Oil
Corporation. Mr. Mayfield received a Bachelor of Science degree in Petroleum
Engineering from the University of Texas in 1985. Mr. Mayfield is a director of
the Coastal Conservation Association of Texas and the Alligator Head Club. Mr.
Mayfield is the son of Jack H. Mayfield, Jr.

MADELINE G. O'BRIEN. Ms. O'Brien has been a director of the Company since
its inception and a director of the Bank since 1990. Ms. O'Brien received a
Bachelor of Arts degree from College of St. Teresa in 1943. Ms. O'Brien was the
founder of Madeline O'Brien, Inc., currently Coldwell Banker Madeline O'Brien
Realtors. Her civic activities include the St. Joseph Hospital Foundation, St.
Pius X Foundation and End Hunger Network.

JOHN E. PHILLIPS. Mr. Phillips joined the Bank in January of 1987 as
President and Chief Executive Officer and a director and has been President and
Chief Executive Officer and a director of the Company since its inception. Mr.
Phillips began his banking career with Continental Illinois National Bank,
Chicago, Illinois, in 1972, where he worked in many areas of commercial lending
and management. His final position was as Vice President and Manager of a
Regional Banking Group. In June of 1985, Mr. Phillips joined BancTexas Houston,
N.A. as President. Mr. Phillips received a Bachelor of Science degree in 1971
and a Master of Business Administration degree in 1972 from the University of
Colorado. Mr. Phillips serves on the Board of Directors of Strake Jesuit College
Preparatory, on the Galveston Houston Catholic Diocese Development Board and on
the President's Advisory Council of St. Thomas University.

PATRICK C. REED. Mr. Reed has been Secretary of the Company since its
inception and a Senior Vice President, Chief Financial Officer and Secretary of
the Bank since 1993. He was elected an Executive Vice President and Chief
Financial Officer of the Company and the Bank in 1998. Mr. Reed began his career
at Allied Bancshares, Inc. in 1977 and served as Executive Vice President and
Chief Financial Officer of American Bank from 1988 to 1993. Mr. Reed received a
Bachelor of Business Administration degree from Georgia State University in 1971
and a Masters of Business Administration degree from the University of Kansas in
1976. Mr. Reed is a Certified Public Accountant.

JOSEPH E. REID. Mr. Reid has been a director of the Company since its
inception and a director of the Bank since 1984. Mr. Reid is an oil and gas
exploration and production consultant. Mr. Reid received a Bachelor of Science
degree in Petroleum Engineering and Geology from Louisiana State University in
1951 and a Masters of Business Administration degree from Harvard Business
School in 1956. Mr. Reid is a director of Western Gas Resources and of Cliffs
Drilling Company. Prior to Mr. Reid's affiliation with the Bank and the Company,
he served as a director of Greenway Bank & Trust and First City National Bank.

HENRY V. SEGER. Mr. Seger has been a director of the Company since its
inception and a director of the Bank since 1990. He received a Bachelor of Arts
degree from St. Edwards University and a Masters of Business Administration
degree from American College. Mr. Seger is a Vice President of Seger-Branda

56
<PAGE>
Financial Services. He serves on the Board of Directors of Strake Jesuit College
Preparatory, San Jose Charitable Clinic and St. Joseph Hospital Foundation.

Directors are elected for three year terms, classified into Classes I, II
and III. Messrs. Jones, Lane, Phillips and Seger are Class I directors with
terms of office expiring on the date of the Company's annual meeting of
stockholders in 1999; Messrs. Levy and Jack Mayfield and Ms. O'Brien are Class
II directors with terms of office expiring on the date of the Company's annual
meeting of stockholders in 2000; and Messrs. Martin, Walter Mayfield and Reid
are Class III directors with terms of office expiring on the date of the
Company's annual meeting of stockholders in 2001. Each officer of the Company is
elected by the Board of Directors of the Company and holds office until his
successor is duly elected and qualified or until his or her earlier death,
resignation or removal.

The Board of Directors has established Audit, Compensation and Budget
Committees. The Audit Committee reviews the general scope of the audit conducted
by the Company's independent auditors and matters relating to the Company's
internal control systems. In performing its function, the Audit Committee meets
separately with representatives of the Company's independent auditors and with
representatives of senior management. The Audit Committee is composed of Messrs.
Lane (Chairman), Jones, Levy, Martin and Walter Mayfield, all of whom are
outside directors.

The Compensation Committee is responsible for making recommendations to the
Board of Directors with respect to the compensation of the Company's executive
officers and is responsible for the establishment of policies dealing with
various compensation and employee benefit matters. The Compensation Committee
also administers the Company's stock option plans and makes recommendations to
the Board of Directors as to option grants to Company employees under such
plans. The Compensation Committee is comprised of Messrs. Reid (Chairman),
Jones, Lane, Jack Mayfield and Seger, all of whom are outside directors. Prior
to the formation of the Compensation Committee in 1997, matters related to
compensation, employee benefit matters and stock options were made by the
Compensation Committee of the Bank, which is composed of the same persons who
serve on the Company's Compensation Committee.

The Budget Committee reviews the annual budgets proposed by management and
is responsible for monitoring the Company's accomplishment of budgeted goals.
The Budget Committee consists of Messrs. Martin (Chairman), Lane, Jones, Levy
and Walter Mayfield.

EMPLOYMENT AGREEMENTS

John E. Phillips, James D. MacIntyre and Patrick C. Reed have entered into
employment agreements with the Company. Each agreement is for a term of two
years and automatically renews each year unless terminated in accordance with
its terms. The employment agreements provide that if the employee is terminated
without cause or certain changes in his status occur after a change in control
of the Company, the employee shall be entitled to receive from the Company a
lump sum payment equal to two years base salary. The employment agreements also
contain customary proscriptions against misuse of Company confidential
information and competition with the Company.

SALARY CONTINUATION AGREEMENTS

The Company has entered into agreements with certain of its officers,
including John E. Phillips, James D. MacIntyre and Patrick C. Reed, to provide
certain benefits to the officers' designated beneficiaries in the event that the
officers die prior to retirement and while employed by the Company. Under the
agreements with Messrs. MacIntyre and Reed and certain other officers, the
Company will pay the designated beneficiary an amount equal to one-half of the
officer's annual compensation for a period of ten years after the officer's
death. Under the agreement with Mr. Phillips, the Company will pay the
designated beneficiary $100,000 annually for a period of ten years after Mr.
Phillips' death. The agreements are automatically canceled if the officer
voluntarily or involuntarily leaves the employment of the Company. The Company
has purchased and paid for a life insurance policy on each officer to meet these
obligations.

57
<PAGE>
DIRECTOR COMPENSATION

Non-employee Directors of the Company receive an annual retainer of $4,800
plus $450 for each Board meeting attended and $200 for each committee meeting
attended. Non-employee Directors of the Bank receive an annual $4,800 retainer.

EXECUTIVE COMPENSATION AND OTHER INFORMATION

The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
President and Chief Executive Officer and the other executive officers of the
Company whose compensation exceeded $100,000 (determined as of the end of the
last fiscal year) for the fiscal year ended December 31, 1997:

SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(1)
- ------------------------------------- -------- ------- -------------- ---------------
<S> <C> <C> <C> <C>
John E. Phillips..................... $171,250 $60,500 $ 22,000 $ 6,000
President and Chief Executive
Officer of the Company and the Bank

James D. MacIntyre................... 103,580 16,500 -- 4,139
Executive Vice President of the
Company; Executive Vice President
and Chief Lending Officer of the
Bank

Patrick C. Reed...................... 103,054 16,500 -- 4,757
Executive Vice President, Secretary
and Chief Financial Officer of the
Company and the Bank
</TABLE>
- ------------

(1) Consists of contributions by the Company to the 401(k) Plan.

STOCK OPTION PLANS

The Company's Board of Directors and stockholders approved a new stock
option plan in 1998 (the "1998 Plan") to provide selected employees, directors
and other persons providing services to the Company an opportunity to purchase
shares of Company Common Stock. The 1998 Plan is intended to promote the success
and enhance the value of the Company by linking the personal interests of
participants to those of Company stockholders and by providing participants with
an incentive for outstanding performance. The 1998 Plan authorizes the issuance
of up to 420,000 shares of Common Stock under both "non-qualified" and
"incentive stock" options to employees and "non-qualified" stock options to
directors and other individuals who are not employees. Generally, under the 1998
Plan it is intended that the options will vest 60% at the end of the third year
following the date of grant and an additional 20% at the end of each of the two
following years; however, an individual option may vest as much as 20% at the
end of the first or second year following the date of grant if necessary to
maximize the "incentive" tax treatment to the optionee for the particular
option being granted. Options under the 1998 Plan generally must be exercised
within 10 years following the date of grant or no later than three months after
optionee's termination with the Company, if earlier. The 1998 Plan provides that
in the event of a change in control of the Company, all options previously
granted immediately vest and become exercisable.

Contemporaneously with the Offering, pursuant to the 1998 Plan, the Company
granted options to purchase 210,000 shares of Common Stock at the initial
offering price to certain officers, directors and employees. Of such options,
60,000 were granted to executive officers as follows: John E. Phillips (30,000),
James D. MacIntyre (15,000) and Patrick C. Reed (15,000). In addition, each of
the following directors were granted options to purchase 5,000 shares: Samuel A.
Jones, David L. Lane, Joel M. Levy, Harlon E. Martin, Jr., Jack H. Mayfield,
Jr., Walter G. Mayfield, Madeline G. O'Brien, Joseph E. Reid and Henry V.

58
<PAGE>
Seger. The Company has also granted options to purchase an aggregate of 105,000
shares to approximately 20 other officers and employees and an advisory
director.

On June 30, 1997, the Company granted 50,000 shares of Common Stock to John
E. Phillips in exchange for the cancellation of previously issued and
exercisable stock options. The Company has recorded the estimated fair value of
the stock issuance as unearned compensation. This amount is being amortized as
compensation expense over five years.

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". This statement established fair
value based accounting and reporting standards for all transactions in which a
company acquires goods or services by issuing its equity investments, which
includes stock-based compensation plans. Under SFAS 123, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Fair value of
stock options is determined using an option-pricing model. This statement
encourages companies to adopt as prescribed the fair value based method of
accounting to recognize compensation expense for employee stock compensation
plans. However, it does not require the fair value based method to be adopted
but a company must comply with the disclosure requirements set forth in the
statement. The Company has continued to apply accounting in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
("APB 25") and related Interpretations, and, accordingly, will provide the pro
forma disclosures of net income and earnings per share.

BENEFIT PLAN

The Company has established a contributory profit sharing plan pursuant to
Internal Revenue Code Section 401(k) covering substantially all employees (the
"Plan"). At least one year of service is required to be eligible for
employer-matching contributions. Each year the Company determines, in its
discretion, the amount of matching contributions. The Company has elected to
match up to 66 2/3% of the first 6% of the employee's salary. Contributions
totaling $28,000, $50,000, $37,000, and $30,000 were made for the six months
ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995,
respectively.

INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

Many of the directors and principal stockholders of the Company (I.E.,
those who own 10% or more of the Common Stock) and their associates, which
include corporations, partnerships and other organizations in which they are
officers or partners or in which they and their immediate families have at least
a 5% ownership interest, are customers of the Company. During 1997, the Company
made loans in the ordinary course of business to many of the directors and
principal stockholders of the Company and their associates, all of which were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with persons unaffiliated
with the Company and did not involve more than the normal risk of collectibility
or present other unfavorable features. Loans to directors and principal
stockholders of the Company are subject to limitations contained in the Federal
Reserve Act, the principal effect of which is to require that extensions of
credit by the Company to directors and principal stockholders satisfy the
foregoing standards. On June 30, 1998, all of such loans aggregated $3.9
million, which was approximately 17.3% of the Company's Tier 1 capital at such
date.

The Company expects to have such transactions or transactions on a similar
basis with its directors and principal stockholders and their associates in the
future.

59
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1998, and as adjusted to
reflect the sale of the Common Stock offered hereby by (i) each director and
executive officer of the Company, (ii) each person who is known by the Company
to own beneficially 5% or more of the Common Stock and (iii) all directors and
executive officers as a group. Unless otherwise indicated, each person has sole
voting and dispositive power over the shares indicated as owned by such person
and the address of each stockholder is the same as the address of the Company.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
NUMBER ------------------------------------
NAME OF SHARES BEFORE OFFERING AFTER OFFERING(1)
- ------------------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
Samuel A. Jones...................... 11,595(2) * *
Morton A. Cohn....................... 190,000(3) 6.74% 4.56%
David L. Lane........................ 50,000 1.77% 1.20%
Joel M. Levy......................... 21,345 * *
James D. MacIntyre................... 12,500 * *
Harlon E. Martin, Jr................. 8,810 * *
Jack H. Mayfield, Jr................. 857,410(4) 30.43% 20.57%
Walter G. Mayfield................... 180,735(5) 6.41% 4.34%
Madeline G. O'Brien.................. 12,875 * *
John E. Phillips..................... 51,180(6) 1.82% 1.23%
Patrick C. Reed...................... 500 * *
Joseph E. Reid....................... 50,000 1.77% 1.20%
Henry V. Seger....................... 49,730 1.76% *
Directors and Executive Officers as a
Group.............................. 1,256,035 44.57% 29.23%
</TABLE>
- ------------

* Indicates ownership which does not exceed 1.0%

(1) Assumes (i) the issuance of 1,350,000 shares in the Offering and (ii) the
sale of shares by the Selling Stockholders. See table under "Selling
Stockholders"for the number of shares to be sold by each Selling
Stockholder.

(2) Includes 120 shares held of record by Katherine Ann Jones, 120 shares held
of record by Robert Boyd Jones and 120 shares held of record by Scott
Alexander Jones.

(3) Mr. Cohn's address is 800 Bering Drive, Suite 210, Houston, Texas 77057.

(4) Includes of 111,560 shares held of record by the Lydia Mayfield Abbott
Irrevocable Trust of which Jack H. Mayfield, Jr. is the trustee, 26,810
shares held of record by Iris Goldston, Ltd., 62,500 shares held of record
by the Mayfield Charitable Trust #1 of which Jack H. Mayfield, Jr. is the
trustee, 62,500 shares held of record by the Mayfield Charitable Trust #2 of
which Jack H. Mayfield, Jr. is the trustee, 65,370 shares held of record by
Mayfield I, Ltd., 113,250 shares held of record by Jaw Co. for the benefit
of Jack H. Mayfield IRA, 243,275 shares held of record by the Mayfield
Family Trust of which Jack H. Mayfield, Jr. is the trustee, 121,500 shares
held of record by the Susan Mayfield 1997 Marital Trust of which Jack H.
Mayfield, Jr. is the trustee and 50,645 shares held of record by the Estate
of Mary Iris Goldston of which Jack H. Mayfield, Jr. is co-executor. Voting
and investment control of the 50,645 shares is shared with Walter G.
Mayfield.

(5) Includes 16,125 shares held of record by Arriba Corporation, of which Walter
G. Mayfield is the President and controlling shareholder and 50,645 shares
held of record by the Estate of Mary Iris Goldston of which Walter G.
Mayfield is co-executor. Voting and investment control of the 50,645 shares
is shared with Jack H. Mayfield, Jr.

(6) Includes 1,180 shares held of record by the Beatrice H. Mieth Trust of which
Mr. Phillips is the co-trustee and 50,000 shares subject to a Common Stock
Agreement dated June 30, 1997. The 50,000 shares subject to the Common Stock
Agreement have certain restrictions on transferability which expire ratably
over a five year period. As of June 30, 1998, restrictions on 20,000 shares
had expired.

60
<PAGE>
SELLING STOCKHOLDERS

A total of 84,875 shares of Common Stock are being sold in the Offering by
Selling Stockholders. The Company and each of the Selling Stockholders have
entered into a Purchase Agreement pursuant to which the Company and the Selling
Stockholders will indemnify the Underwriter from certain liabilities, including
liabilities under the Securities Act.

The following table sets forth certain information regarding the beneficial
ownership by the Selling Stockholders of the Company's Common Stock as of June
30, 1998, and as adjusted to reflect the sale of the Common Stock offered
hereby. Except as otherwise noted below and in the table under "Principal
Stockholders," each stockholder has sole voting and investment power with
respect to the shares beneficially owned. Henry V. Seger and Madeline G. O'Brien
have each been a director of the Company for more than three years. See
"Management -- Directors and Executive Officers of the Company."
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------------------------------------------------
SHARES OWNED
--------------------
NUMBER OF SHARES BEFORE AFTER PERCENT OWNED
NAME OF BENEFICIAL OWNERS(1) OFFERED OFFERING OFFERING AFTER OFFERING(2)
- ------------------------------------- ---------------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Bruce Anderson....................... 20,000 80,000 60,000 1.44%
Craig Anderson....................... 2,000 6,000 4,000 *
Kevin W. Anderson.................... 1,000 5,000 4,000 *
Neal B. Anderson..................... 2,000 6,000 4,000 *
Karen Martin......................... 2,000 6,000 4,000 *
Madeline G. O'Brien.................. 12,875 12,875 0 *
Henry V. Seger....................... 25,000 49,730 24,730 *
Michael A. Seger..................... 20,000 22,500 2,500 *
</TABLE>
- ------------

* Indicates ownership which does not exceed 1.0%

(1) See the table under "Principal Stockholders" for information regarding the
form of beneficial ownership.

(2) Assumes the issuance of 1,350,000 shares in the Offering by the Company.

SUPERVISION AND REGULATION

The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the FDIC and the banking system as a whole, and not for the
protection of the bank holding company stockholders or creditors. The banking
agencies have broad enforcement power over bank holding companies and banks
including the power to impose substantial fines and other penalties for
violations of laws and regulations.

The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.

THE COMPANY

The Company is a bank holding company registered under the BHCA, and it is
subject to supervision, regulation and examination by the Federal Reserve Board.
The BHCA and other federal laws subject bank holding companies to particular
restrictions on the types of activities in which they may engage, and to a range
of supervisory requirements and activities, including regulatory enforcement
actions for violations of laws and regulations.

REGULATORY RESTRICTIONS ON DIVIDENDS; SOURCE OF STRENGTH. It is the policy
of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not

61
<PAGE>
maintain a level of cash dividends that undermines the bank holding company's
ability to serve as a source of strength to its banking subsidiaries.

Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be inclined
to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.

In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment by the debtor holding
company to any of the federal banking agencies to maintain the capital of an
insured depository institution, and any claim for breach of such obligation will
generally have priority over most other unsecured claims.

ACTIVITIES "CLOSELY RELATED" TO BANKING. The BHCA prohibits a bank
holding company, with certain limited exceptions, from acquiring direct or
indirect ownership or control of any voting shares of any company which is not a
bank or from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve Board, by order or regulation, to be so closely
related to banking or managing or controlling banks, as to be a proper incident
thereto. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve Board
include consumer financial counseling, tax planning and tax preparation, futures
and options advisory services, check guaranty services, collection agency and
credit bureau services, and personal property appraisals. In approving
acquisitions by bank holding companies of companies engaged in banking-related
activities, the Federal Reserve Board considers a number of factors, and weighs
the expected benefits to the public (such as greater convenience and increased
competition or gains in efficiency) against the risks of possible adverse
effects (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices). The Federal
Reserve Board is also empowered to differentiate between activities commenced de
novo and activities commenced through acquisition of a going concern.

SECURITIES ACTIVITIES. The Federal Reserve Board has approved applications
by bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer receivable-related securities and one-to-four family
mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to use
such subsidiaries to underwrite and deal in corporate debt and equity
securities.

SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation. Depending upon the circumstances, the Federal Reserve Board could
take the position that paying a dividend would constitute an unsafe or unsound
banking practice.

The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their nonbanking subsidiaries which represent unsafe
and unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a

62
<PAGE>
knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1,000,000 for each day
the activity continues.

ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.

CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of June 30, 1998, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 9.35% and its ratio of total capital to total
risk-weighted assets was 10.13%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Capital
Resources."

In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
bank holding companies. The leverage ratio is a company's Tier 1 capital divided
by its average total consolidated assets. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis points
above the regulatory minimum. As of June 30, 1998, the Company's leverage ratio
was 5.13%.

The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve Board guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.

IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit
a capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically"
undercapitalized or fails to submit a capital restoration plan. For example, a
bank holding company controlling such an institution can be required to obtain
prior Federal Reserve Board approval of proposed dividends, or might be required
to consent to a consolidation or to divest the troubled institution or other
affiliates.

ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or ownership
or control of any voting shares of any bank, if after such acquisition it would
own or control, directly or indirectly, more than 5% of the voting shares of
such bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.

63
<PAGE>
CONTROL ACQUISITIONS. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve Board, the
acquisition of 10% of more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act, such
as the Company, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the Company.

In addition, any company is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquiror
that is a bank holding company) or more of the outstanding Common Stock of the
Company, or otherwise obtaining control or a "controlling influence" over the
Company.

THE BANK

The Bank is a Texas-chartered banking association, the deposits of which
are insured by the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF") of the FDIC. The Bank is not a member of the Federal
Reserve System; therefore, the Bank is subject to supervision and regulation by
the FDIC and the Texas Banking Department. Such supervision and regulation
subjects the Bank to special restrictions, requirements, potential enforcement
actions and periodic examination by the FDIC and the Texas Banking Department.
Because the Federal Reserve Board regulates the bank holding company parent of
the Bank, the Federal Reserve Board also has supervisory authority which
directly affects the Bank.

EQUIVALENCE TO NATIONAL BANK POWERS. The Texas Constitution, as amended in
1986, provides that a Texas-chartered bank has the same rights and privileges
that are or may be granted to national banks domiciled in Texas. To the extent
that the Texas laws and regulations may have allowed state-chartered banks to
engage in a broader range of activities than national banks, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") has operated to limit
this authority. FDICIA provides that no state bank or subsidiary thereof may
engage as principal in any activity not permitted for national banks, unless the
institution complies with applicable capital requirements and the FDIC
determines that the activity poses no significant risk to the insurance fund. In
general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of depository institutions.

BRANCHING. Texas law provides that a Texas-chartered bank can establish a
branch anywhere in Texas provided that the branch is approved in advance by the
Texas Banking Department. The branch must also be approved by the FDIC, which
considers a number of factors, including financial history, capital adequacy,
earnings prospects, character of management, needs of the community and
consistency with corporate powers.

RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. Transactions
between the Bank and its nonbanking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.

Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.

The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.

64
<PAGE>
RESTRICTIONS ON DISTRIBUTION OF SUBSIDIARY BANK DIVIDENDS AND
ASSETS. Dividends paid by the Bank have provided a substantial part of the
Company's operating funds and for the foreseeable future it is anticipated that
dividends paid by the Bank to the Company will continue to be the Company's
principal source of operating funds. Capital adequacy requirements serve to
limit the amount of dividends that may be paid by the Bank. Under federal law,
the Bank cannot pay a dividend if, after paying the dividend, the Bank will be
"undercapitalized." The FDIC may declare a dividend payment to be unsafe and
unsound even though the Bank would continue to meet its capital requirements
after the dividend.

Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.

EXAMINATIONS. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The Texas Banking Department also conducts examinations of state banks
but may accept the results of a federal examination in lieu of conducting an
independent examination.

AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by
the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. FDICIA requires that independent audit committees be formed,
consisting of outside directors only. The committees of such institutions must
include members with experience in banking or financial management, must have
access to outside counsel and must not include representatives of large
customers.

CAPITAL ADEQUACY REQUIREMENTS. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.

The FDIC's risk-based capital guidelines generally require state banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4% and a
ratio of total capital to total risk-weighted assets of 8%. The capital
categories have the same definitions for the Bank as for the Company. As of June
30, 1998, the Bank's ratio of Tier 1 capital to total risk-weighted assets was
11.21% and its ratio of total capital to total risk-weighted assets was 11.98%.
See "Management's Discussion and Analysis of Financial Condition and Result of
Operation of the Company -- Financial Condition -- Capital Resources."

The FDIC's leverage guidelines require state banks to maintain Tier 1
capital of no less than 5% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3% of average total
assets. The Texas Banking Department has issued a policy which generally
requires state chartered banks to maintain a leverage ratio (defined in
accordance with federal capital guidelines) of 6%. As of June 30, 1998, the
Bank's ratio of Tier 1 capital to average total assets (leverage ratio) was
6.15%. See "Management's Discussion and Analysis of Financial Condition and
Result of Operation of the Company -- Financial Condition -- Capital
Resources."

65
<PAGE>
CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized,"
"adequately capitalized," "under capitalized," "significantly under
capitalized" and "critically under capitalized." A "well capitalized" bank
has a total risk based capital ratio of 10% or higher; a Tier 1 risk based
capital ratio of 6% or higher; a leverage ratio of 5% or higher; and is not
subject to any written agreement, order or directive requiring it to maintain a
specific capital level for any capital measure. An "adequately capitalized"
bank has a total risk based capital ratio of 8% or higher; a Tier 1 risk based
capital ratio of 4% or higher; a leverage ratio of 4% or higher (3% or higher if
the bank was rated a Composite 1 in its most recent examination report and is
not experiencing significant growth); and does not meet the criteria for a well
capitalized bank. A bank is "under capitalized" if it fails to meet any one of
the ratios required to be adequately capitalized.

In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.

As an institution's capital decreases, the FDIC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management, and other restrictions. The FDIC has
only very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.

Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.

DEPOSIT INSURANCE ASSESSMENTS. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to the
regulators. In addition, the FDIC can impose special assessments in certain
instances.

After the one-time SAIF assessment in 1996, the assessment rate disparity
between BIF and SAIF members was eliminated. The current range of BIF and SAIF
assessments is between 0% and .27% of deposits.

The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.

On September 30, 1996, legislation was implemented that contained a
comprehensive approach to recapitalizing the SAIF and to assure the payment of
the Financing Corporation's ("FICO") bond obligations. Under this new act,
banks insured under the BIF are required to pay a portion of the interest due on
bonds that were issued by FICO to help shore up the ailing Federal Savings and
Loan Insurance Corporation in 1987. The BIF rate must equal one-fifth of the
SAIF rate through year-end 1999, or until the insurance funds are merged,
whichever occurs first. Thereafter BIF and SAIF payers will be assessed pro

66
<PAGE>
rata for the FICO bond obligations. With regard to the assessment for the FICO
obligation, the current BIF rate is .0126% of deposits and the SAIF rate is
.0630% of deposits.

ENFORCEMENT POWERS. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Company or its banking subsidiaries, as
well as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. The appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.

BROKERED DEPOSIT RESTRICTIONS. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept renew or roll over
brokered deposits.

CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee"
provision which generally makes commonly controlled insured depository
institutions liable to the FDIC for any losses incurred in connection with the
failure of a commonly controlled depository institution.

COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act of 1977
("CRA") and the regulations issued thereunder are intended to encourage banks
to help meet the credit needs of their service area, including low and moderate
income neighborhoods, consistent with the safe and sound operations of the
banks. These regulations also provide for regulatory assessment of a bank's
record in meeting the needs of its service area when considering applications to
establish branches, merger applications and applications to acquire the assets
and assume the liabilities of another bank. FIRREA requires federal banking
agencies to make public a rating of a bank's performance under the CRA. In the
case of a bank holding company, the CRA performance record of the banks involved
in the transaction are reviewed in connection with the filing of an application
to acquire ownership or control of shares or assets of a bank or to merge with
any other bank holding company. An unsatisfactory record can substantially delay
or block the transaction.

CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act and the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.

INSTABILITY OF REGULATORY STRUCTURE

Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and bank holding companies and
limit the investments that a depository institution may make with insured funds,
is from time to time introduced in Congress. Such legislation may change banking
statutes and the operating environment of the Company and its banking
subsidiaries in substantial and unpredictable ways. The Company cannot determine
the ultimate effect that potential legislation, if enacted, or implementing
regulations with respect thereto, would have upon the financial condition or
results of operations of the Company or its subsidiaries.

67
<PAGE>
EXPANDING ENFORCEMENT AUTHORITY

One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve Board and
FDIC are possessed of extensive authority to police unsafe or unsound practices
and violations of applicable laws and regulations by depository institutions and
their holding companies. For example, the FDIC may terminate the deposit
insurance of any institution which it determines has engaged in an unsafe or
unsound practice. The agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions, and publicly disclose such
actions. FDICIA, FIRREA and other laws have expanded the agencies' authority in
recent years, and the agencies have not yet fully tested the limits of their
powers.

EFFECT ON ECONOMIC ENVIRONMENT

The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.

Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of the Company and its subsidiaries
cannot be predicted.

DESCRIPTION OF SECURITIES OF THE COMPANY

AUTHORIZED CAPITAL STOCK

The authorized capital stock of the Company consists of (i) 20,000,000
shares of preferred stock, $1.00 per share par value ("Preferred Stock"),
issuable in series, none of which are issued and outstanding and (ii) 50,000,000
shares of Common Stock, $1.00 per share par value, of which 2,909,105 shares
were issued and 2,817,815 were outstanding as of June 30, 1998. The terms of any
new series of preferred stock may be fixed by the Board of Directors of the
Company within certain limits set by the Company's Articles of Incorporation.

The following discussion of the terms and provisions of the Company's
capital stock is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.

PREFERRED STOCK

The Company is authorized to issue 20,000,000 shares of Preferred Stock.
The Preferred Stock (or other securities convertible in whole or in part into
Preferred Stock) is available for issuance from time to time for various
purposes as determined by the Company's Board of Directors, including, without
limitation, making future acquisitions, raising additional equity capital and
financing. Subject to certain limits set by the Company's Articles of
Incorporation, the Preferred Stock (or such convertible securities) may be
issued on such terms and conditions, and at such times and in such situations,
as the Board of Directors in its sole discretion determines to be appropriate,
without any further approval or action by the stockholders (unless otherwise
required by laws, rules, regulations or agreements applicable to the Company).

68
<PAGE>
Moreover, except as otherwise limited by the Articles of Incorporation or
applicable laws, rules or regulations, the Board of Directors has the sole
authority to determine the relative rights and preferences of the Preferred
Stock and any series thereof without stockholder approval. The Company's
Articles of Incorporation require all shares of Preferred Stock to be identical,
except as to the following characteristics, which may vary between different
series of Preferred Stock:

(i) dividend rate, preference of dividend with respect to any
other class or series of stock, and cumulatively,
non-cumulatively or partial cumulatively of dividends;

(ii) redemption price and terms, including, to the extent permitted
by law, the manner in which shares are to be chosen for
redemption if less than all the shares of a series are to be
redeemed;

(iii) sinking fund provisions for the redemption or purchase of
shares;

(iv) the amount payable upon shares in the event of voluntary or
involuntary liquidation;

(v) the terms and conditions on which shares may be converted, if
the shares of any series are issued with the privilege of
conversion;

(vi) voting rights; and

(vii) such other powers, preferences and rights as the Board of
Directors shall determine.

The Board of Directors does not intend to seek stockholder approval prior
to any issuance of Preferred Stock or any series thereof, unless otherwise
required by law. Under the Texas Business Corporation Act ("TBCA"),
stockholder approval prior to the issuance of shares of Common Stock or
Preferred Stock is required in connection with certain mergers. Frequently,
opportunities arise that require prompt action, such as the possible acquisition
of a property or business or the private sale of securities, and it is the
belief of the Board of Directors that the delay necessary for stockholder
approval of a specific issuance could be to the detriment of the Company and its
stockholders. The Board of Directors does not intend to issue any shares of
Common Stock or Preferred Stock except on terms which the Board of Directors
deems to be in the best interests of the Company and its then existing
stockholders.

Although the Preferred Stock could be deemed to have an anti-takeover
effect, the Board of Directors is not aware of any takeover efforts. If a
hostile takeover situation should arise, shares of Preferred Stock could be
issued to purchasers sympathetic with the Company's management or others in such
a way as to render more difficult or to discourage a merger, tender offer, proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management.

The effects of the issuance of the Preferred Stock on the holders of Common
Stock could include, among other things, (i) reduction of the amount otherwise
available for payments of dividends on Common Stock if dividends are payable on
the series of Preferred Stock; (ii) restrictions on dividends on Common Stock if
dividends on the series of Preferred Stock are in arrears; (iii) dilution of the
voting power of Common Stock if the series of Preferred Stock has voting rights,
including a possible "veto" power if the series of Preferred Stock has class
voting rights; (iv) dilution of the equity interest of holders of Common Stock
if the series of Preferred Stock is convertible, and is converted, into Common
Stock; and (v) restrictions on the rights of holders of Common Stock to share in
the Company's assets upon liquidation until satisfaction of any liquidation
preference granted to the holders of the series of Preferred Stock. Holders of
Common Stock have no preemptive rights to purchase or otherwise acquire any
Preferred Stock that may be issued.

COMMON STOCK

The holders of the Common Stock are entitled to one vote for each share of
Common Stock owned. Except as expressly provided by law and except for any
voting rights which may be conferred by the Board of Directors on any shares of
Preferred Stock issued, all voting power is in the Common Stock. Holders of
Common Stock may not cumulate their votes for the election of directors. Holders
of Common Stock do not have preemptive rights to acquire any additional,
unissued or treasury shares of the Company, or securities

69
<PAGE>
of the Company convertible into or carrying a right to subscribe for or acquire
shares of the Company. Holders of Common Stock will be entitled to receive
dividends out of funds legally available therefor, if and when properly declared
by the Board of Directors. See "Risk Factors -- Dividend History and
Restrictions on Ability to Pay Dividends" and "Supervision and Regulation."

On the liquidation of the Company, the holders of Common Stock are entitled
to share pro rata in any distribution of the assets of the Company, after the
holders of shares of Preferred Stock have received the liquidation preference of
their shares plus any cumulated but unpaid dividends (whether or not earned or
declared), if any, and after all other indebtedness of the Company has been
retired.

TEXAS LAW AND CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS

Certain provisions of Texas law, the Company's Articles of Incorporation
and the Company's Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise and the removal
of incumbent officers and directors. These provisions are intended to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to negotiate first
with the Company.

The Company is subject to the provisions of the Texas Business Combination
Law (Articles 13.01 through 13.08 of the TBCA), which provides that a Texas
corporation such as the Company may not engage in certain business combinations,
including mergers, consolidations and asset sales, with a person, or an
affiliate or associate of such person, who is an "Affiliated Stockholder"
(generally defined as the holder of 20% or more of the corporation's voting
shares) for a period of three years from the date such person became an
Affiliated Stockholder unless: (i) the business combination or purchase or
acquisition of shares made by the Affiliated Stockholder was approved by the
board of directors of the corporation before the Affiliated Stockholder became
an Affiliated Stockholder or (ii) the business combination was approved by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
shares of the corporation not beneficially owned by the Affiliated Stockholder,
at a meeting of stockholders called for that purpose (and not by written
consent), not less than six months after the Affiliated Stockholder became an
Affiliated Stockholder. The Texas Business Combination Law is not applicable to:
(i) the business combination of a corporation: (a) where the corporation's
original charter or bylaws contain a provision expressly electing not to be
governed by the Texas Business Combination Law, (b) that adopts an amendment to
its charter or bylaws before December 31, 1997, expressly electing not to be
governed by the Texas Business Combination Law, or (c) that adopts an amendment
to its charter or bylaws after December 31, 1997, by the affirmative vote of the
holders, other than Affiliated Stockholders, of at least two-thirds of the
outstanding voting shares of the corporation, expressly electing not to be
governed by the Texas Business Combination Law; (ii) a business combination of a
corporation with an Affiliated Stockholder that became an Affiliated Stockholder
inadvertently, if the Affiliated Stockholder: (a) as soon as practicable divests
itself of enough shares to no longer be an Affiliated Stockholder and (b) would
not at any time within the three year period preceding the announcement of the
business combination have been an Affiliated Stockholder but for the inadvertent
acquisition; (iii) a business combination with an Affiliated Stockholder that
was the beneficial owner of 20% or more of the outstanding voting shares of the
corporation on December 31, 1996, and continuously until the announcement date
of the business combination; (iv) a business combination with an Affiliated
Stockholder who became an Affiliated Stockholder through a transfer of shares of
the corporation by will or intestate succession and continuously was such an
Affiliated Stockholder until the announcement date of the business combination;
and (v) a business combination of a corporation with a wholly owned subsidiary
if the subsidiary is not an affiliate or associate of the Affiliated Stockholder
other than by reason of the Affiliated Stockholder's beneficial ownership of the
voting shares of the corporation. Neither the Articles of Incorporation nor the
Bylaws of the Company contain any provision expressly providing that the Company
will not be subject to the Texas Business Combination Law. The Texas Business
Combination Law may have the effect of inhibiting a non-negotiated merger or
other business combination involving the Company, even if such event would be
beneficial to the Company's stockholders.

70
<PAGE>
The following discussion is a summary of certain material provisions of the
Company's Articles of Incorporation and the Company's Bylaws, copies of which
are filed as exhibits to the Registration Statement of which this Prospectus is
a part.

CLASSIFIED BOARD OF DIRECTORS. Under the Company's Bylaws, the Board of
Directors is classified into three classes, with the directors being elected for
staggered, three-year terms. The classification of the Company's Board of
Directors will have the effect of making it more difficult to change the
composition of the Board of Directors, because at least two annual meetings of
the stockholders would be required to change the control of the Board of
Directors rather than one. In addition, the Bylaws provide that vacancies on the
Board of Directors may be filled by the remaining directors.

ADVANCE NOTICE OF STOCKHOLDER PROPOSALS AND NOMINATIONS. The Company's
Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or bring other business
before an annual meeting of stockholders of the Company (the "Stockholder
Notice Procedure"). The Stockholder Notice Procedure provides that only persons
who are nominated by, or at the direction of, the Board, or by a stockholder who
has given timely written notice to the Secretary of the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company and that, at an annual meeting, only such business may
be conducted as has been brought before the meeting by, or at the direction of,
the Board of Directors or by a stockholder who has given timely written notice
to the Secretary of the Company of such stockholder's intention to bring such
business before such meeting.

Under the Stockholder Notice Procedure, for notice of stockholder
nominations or other business to be made at an annual meeting to be timely, such
notice must be received by the Company not less than 60 days prior to such
meeting. A stockholder's notice to the Company proposing to nominate a person
for election as a director or proposing other business must contain certain
information specified in the Bylaws, including the identity and address of the
nominating stockholder, a representation that the stockholder is a record holder
of stock of the Company entitled to vote at the meeting, and information
regarding each proposed nominee or each proposed matter of business that would
be required under the federal securities laws to be included in a proxy
statement soliciting proxies for the proposed nominee.

The Stockholder Notice Procedure may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its stockholders.

SPECIAL MEETINGS OF STOCKHOLDERS. Under the TBCA, unless a company's
articles of incorporation specify a higher percentage, special meetings of
stockholders can be called by stockholders only at the request of the holders of
not less than 10% of the outstanding shares of stock entitled to vote at the
meeting.

AMENDMENT OF BYLAWS. The Company's Bylaws provide that the Bylaws may be
amended only by the Board of Directors. Stockholders do not have the power to
amend the Company Bylaws.

71
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Purchase Agreement among the
Company, the Selling Stockholders and the Representatives on behalf of the
Underwriters, the Underwriters named below have agreed to purchase from the
Company and the Selling Stockholders 1,434,875 shares of Common Stock at the
initial public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus.

NAME NUMBER OF SHARES
- ------------------------------------- ----------------
Keefe, Bruyette & Woods, Inc.........
Legg Mason Wood Walker,
Incorporated.......................

The Purchase Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all such shares of the Common Stock if any of such shares are
purchased. The Underwriters are obligated to take and pay for all of the shares
of Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any are taken.

The Company has been advised by the Representatives that the Underwriters
propose to offer such shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.

Pursuant to the Purchase Agreement, the Company has granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 215,231 additional shares of Common Stock at
the public offering price, less the underwriting discounts and commissions set
forth on the cover page of this Prospectus, solely to cover over-allotments. To
the extent that the Underwriters exercise such option, the Underwriters will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares in
such table, and the Company will be obligated, pursuant to the option, to sell
such shares to the Underwriters.

The Company, each of its directors and executive officers, each of the
Selling Stockholders and certain other stockholders of the Company have agreed
not to sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representatives, except that the Company may issue shares of Common Stock
upon the exercise of currently outstanding options. See "Risk Factors -- Shares
Eligible for Future Sale."

The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.

Until the distribution of the Common Stock is completed, rules of the
Commission (as defined herein) may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriters may reduce the short position by purchasing shares of Common
Stock in the open market. The Underwriters may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.

72
<PAGE>
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Common Stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling concession
from the selling group members who sold those shares of Common Stock as part of
the Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.

Neither the Company nor the Representatives makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Representatives make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

The Underwriters and dealers may engage in passive market making
transactions in the shares of Common Stock in accordance with Rule 103 of
Regulation M promulgated by the Commission. In general, a passive market maker
may not bid for, or purchase, shares of Common Stock at a price that exceeds the
highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% of its average daily trading
volume in the Common Stock during a specified two month prior period, or 200
shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
Common Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.

Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock will
be determined by negotiations between the Company and the Representatives. Among
the factors to be considered in such negotiations are prevailing market and
general economic conditions, the market capitalizations, trading histories and
stages of development of other traded companies that the Company and the
Representatives believe to be comparable to the Company, the results of
operations of the Company in recent periods, the current financial position of
the Company, estimates of the business potential of the Company and the present
state of the Company's development and the availability for sale in the market
of a significant number of shares of Common Stock. Additionally, consideration
will be given to the general status of the securities market, the market
conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made.

Application has been made for quotation of the Common Stock on the
Nasdaq/National Market.

LEGAL MATTERS

The validity of the shares of Common Stock to be issued by the Company will
be passed upon by Bracewell & Patterson, L.L.P., Houston, Texas. Certain legal
matters with respect to the Common Stock offered hereby have been passed upon
for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York.

EXPERTS

The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31, 1997
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm, given upon their authority
as experts in accounting and auditing.

73
<PAGE>
AVAILABLE INFORMATION

The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act,
with respect to the offer and sale of Common Stock pursuant to this Prospectus.
This Prospectus, filed as a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement or the exhibits
and schedules thereto in accordance with the rules and regulations of the
Commission and reference is hereby made to such omitted information. Statements
made in this Prospectus concerning the contents of any contract, agreement or
other document filed as an exhibit to the Registration Statement are summaries
of the terms of such contracts, agreements or documents and are not necessarily
complete. Reference is made to each such exhibit for a more complete description
of the matters involved and such statements shall be deemed qualified in their
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto filed with the Commission may be inspected, without charge,
and copies may be obtained at prescribed rates, at the public reference facility
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. For further
information pertaining to the Common Stock offered by this Prospectus and the
Company, reference is made to the Registration Statement. The Registration
Statement and other information filed by the Company with the Commission are
also available at the Commission's World Wide Web site on the Internet at
http://www.sec.gov.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports containing unaudited financial statements for the first three
quarters of each fiscal year.

<PAGE>
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
RIVERWAY HOLDINGS, INC.

Independent Auditors' Report......... F-2

Consolidated Balance Sheets as of
June 30, 1998 (Unaudited) and
December 31, 1997 and 1996......... F-3

Consolidated Statements of Income for
the Six Months Ended June 30, 1998
(Unaudited) and June 30, 1997
(Unaudited) and for the Years Ended
December 31, 1997, 1996 and 1995... F-4

Consolidated Statement of
Stockholders' Equity for the Years
Ended December 31, 1995, 1996 and
1997 and for the Six Months Ended
June 30, 1998 (Unaudited).......... F-5

Consolidated Statements of Cash Flows
for the Six Months Ended June 30,
1998 (Unaudited) and June 30, 1997
(Unaudited) and for the Years Ended
December 31, 1997, 1996 and 1995... F-6

Notes to Consolidated Financial
Statements......................... F-7

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
of Riverway Holdings, Inc. and Subsidiaries
Houston, Texas

We have audited the accompanying consolidated balance sheets of Riverway
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Riverway Holdings, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Houston, Texas
February 6, 1998
(except for Note 22 as to
which the date is August 4, 1998)

F-2
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1998 1997 1996
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks................. $ 5,712,080 $ 6,045,159 $ 6,130,981
Federal funds sold and other temporary
investments........................... 12,022,517 18,489,932 10,793,407
----------- ------------- -------------
Cash and cash equivalents...... 17,734,597 24,535,091 16,924,388
Securities:
Available for sale, at fair value..... 86,411,483 43,129,305 43,132,785
Held to maturity, at amortized cost
(fair value of $84,610,366 at June
30, 1998, unaudited; $89,655,856 and
$93,510,942 in 1997 and 1996,
respectively)....................... 86,391,249 91,781,206 96,555,866
Loans held to maturity.................. 211,185,725 175,974,286 130,330,567
Loans held for sale..................... 20,125,990 2,358,932 3,393,682
Less allowance for credit losses........ (2,102,578) (1,210,296) (897,793)
----------- ------------- -------------
Net loans...................... 229,209,137 177,122,922 132,826,456
Premises and equipment, net............. 3,482,105 3,061,805 3,010,445
Accrued interest receivable............. 3,452,934 2,332,600 1,958,799
Other real estate, net.................. 1,215,000 1,590,000 2,144,542
Mortgage servicing rights, net.......... 2,252,186 1,774,725 1,276,735
Other assets............................ 3,785,783 2,873,586 2,069,546
----------- ------------- -------------
TOTAL.......................... $433,934,474 $ 348,201,240 $ 299,899,562
=========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing................. $26,105,939 $ 24,805,808 $ 21,080,012
Interest-bearing.................... 326,080,218 270,447,686 253,408,111
----------- ------------- -------------
Total deposits................. 352,186,157 295,253,494 274,488,123
Other borrowings and subordinated
debentures........................ 58,681,019 31,488,086 6,942,105
Accrued interest payable and other
liabilities....................... 1,462,618 1,075,705 1,026,534
----------- ------------- -------------
Total liabilities.............. 412,329,794 327,817,285 282,456,762
COMMITMENTS AND CONTINGENCIES (Notes 12
and 16)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value;
20,000,000 shares authorized; none
issued.............................. -- -- --
Common stock, $1 par value; 50,000,000
shares authorized; 2,909,105 shares
issued and 2,817,815 shares
outstanding at June 30, 1998
(unaudited) and December 31, 1997;
and 2,859,105 shares issued and
outstanding at December 31, 1996.... 2,909,105 2,909,105 2,859,105
Additional paid-in capital............ 11,951,363 11,951,363 11,841,363
Retained earnings..................... 7,920,279 6,810,898 3,893,946
Accumulated other comprehensive
income -- net unrealized loss on
available for sale securities, net
of tax of $294,418, $329,009 and
$519,085 at June 30, 1998
(unaudited) and December 31, 1997
and 1996, respectively.............. (650,909) (739,586) (1,151,614)
Unearned compensation................. (121,333) (144,000) --
Treasury stock, 91,290 shares at cost
at June 30, 1998 (unaudited) and
December 31, 1997................... (403,825) (403,825) --
----------- ------------- -------------
Total stockholders' equity..... 21,604,680 20,383,955 17,442,800
----------- ------------- -------------
TOTAL........................ $433,934,474 $ 348,201,240 $ 299,899,562
=========== ============= =============
</TABLE>
See notes to the consolidated financial statements.

F-3
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees............... $ 8,391,635 $ 5,817,141 $ 12,903,052 $ 8,886,595 $ 6,384,978
Securities.......................... 4,990,453 4,556,415 9,418,522 9,235,679 9,081,558
Federal funds sold and other
temporary investments............. 1,340,028 79,062 726,702 50,188 22,526
------------ ------------ ------------ ------------ ------------
Total interest income.......... 14,722,116 10,452,618 23,048,276 18,172,462 15,489,062
INTEREST EXPENSE:
Deposits............................ 7,759,164 5,903,093 12,126,958 8,479,872 7,741,022
Other borrowings and subordinated
debentures........................ 1,161,744 273,088 1,542,280 1,592,080 1,039,856
------------ ------------ ------------ ------------ ------------
Total interest expense......... 8,920,908 6,176,181 13,669,238 10,071,952 8,780,878
------------ ------------ ------------ ------------ ------------
NET INTEREST INCOME..................... 5,801,208 4,276,437 9,379,038 8,100,510 6,708,184
PROVISION FOR CREDIT LOSSES............. 1,000,000 308,000 570,000 765,000 145,000
------------ ------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES......................... 4,801,208 3,968,437 8,809,038 7,335,510 6,563,184
NONINTEREST INCOME:
Customer service fees............... 288,503 222,879 439,419 470,608 339,344
Mortgage servicing fees............. 257,098 179,049 396,791 317,278 230,388
Net realized gains on sales of
available for sale securities..... 1,951 60,779 54,810 4,158 12,390
Other............................... 63,606 48,082 140,736 19,259 21,704
------------ ------------ ------------ ------------ ------------
Total noninterest income....... 611,158 510,789 1,031,756 811,303 603,826
NONINTEREST EXPENSE:
Salaries and employee benefits...... 1,720,806 1,457,399 2,886,925 2,412,912 2,379,229
Net occupancy expense............... 390,556 314,094 655,288 605,901 591,562
Litigation settlements paid and
related legal expenses............ 295,613 1,904 37,605 -- --
Professional fees................... 400,150 299,202 644,040 505,497 381,140
Office expense...................... 222,083 186,019 381,902 291,559 224,710
Net (gain) loss and carrying costs
of other real estate.............. (7,202) 51,424 96,965 1,897 (248,561)
Other............................... 899,933 526,954 1,165,933 899,486 1,008,382
------------ ------------ ------------ ------------ ------------
Total noninterest expense...... 3,921,939 2,836,996 5,868,658 4,717,252 4,336,462
INCOME BEFORE INCOME TAXES.............. 1,490,427 1,642,230 3,972,136 3,429,561 2,830,548
PROVISION FOR INCOME TAXES.............. 381,046 434,501 1,055,184 1,041,400 821,209
------------ ------------ ------------ ------------ ------------
NET INCOME.............................. $ 1,109,381 $ 1,207,729 $ 2,916,952 $ 2,388,161 $ 2,009,339
============ ============ ============ ============ ============
NET INCOME PER COMMON SHARE:
Basic................................... $ 0.39 $ 0.42 $ 1.02 $ 0.84 $ 0.70
============ ============ ============ ============ ============
Diluted................................. $ 0.39 $ 0.41 $ 1.00 $ 0.81 $ 0.69
============ ============ ============ ============ ============
</TABLE>
See notes to the consolidated financial statements.

F-4
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME --
NET UNREALIZED
LOSS ON
COMMON STOCK ADDITIONAL AVAILABLE FOR
--------------------- PAID-IN RETAINED SALE UNEARNED
SHARES AMOUNT CAPITAL EARNINGS SECURITIES COMPENSATION
-------- --------- ----------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995........... 2,954,105 $2,954,105 $11,936,363 $(503,554) $(1,612,257) $ --
Net income......................... -- -- -- 2,009,339 -- --
Change in net unrealized loss on
available
for sale securities, net of
tax.............................. -- -- -- -- 407,321 --
Total comprehensive
income......................
Retirement of treasury stock....... (95,000) (95,000) (95,000) -- -- --
-------- --------- ----------- --------- -------------- -------------
BALANCE AT DECEMBER 31, 1995......... 2,859,105 2,859,105 11,841,363 1,505,785 (1,204,936) --
Net income......................... -- -- -- 2,388,161 -- --
Change in net unrealized loss on
available
sale securities, net of tax...... -- -- -- -- 53,322 --
Total comprehensive
income......................
-------- --------- ----------- --------- -------------- -------------
BALANCE AT DECEMBER 31, 1996......... 2,859,105 2,859,105 11,841,363 3,893,946 (1,151,614) --
Net income......................... -- -- -- 2,916,952 -- --
Change in net unrealized loss on
available
sale securities, net of tax...... -- -- -- -- 412,028 --
Total comprehensive
income......................
Restricted stock award............. 50,000 50,000 110,000 -- -- (160,000)
Amortization of unearned
compensation..................... -- -- -- -- -- 16,000
Purchase of treasury stock......... -- -- -- -- -- --
-------- --------- ----------- --------- -------------- -------------
BALANCE AT DECEMBER 31, 1997......... 2,909,105 2,909,105 11,951,363 6,810,898 (739,586) (144,000)
Net income (unaudited)............. -- -- -- 1,109,381 -- --
Change in net unrealized loss on
available
sale securities, net of tax and
reclassification adjustment
(unaudited)...................... -- -- -- -- 88,677 --
Total comprehensive income
(unaudited)...............
Amortization of unearned
compensation (unaudited)......... -- -- -- -- -- 22,667
-------- --------- ----------- --------- -------------- -------------
BALANCE AT JUNE 30, 1998
(Unaudited)........................ 2,909,105 $2,909,105 $11,951,363 $7,920,279 $ (650,909) $(121,333)
======== ========= =========== ========= ============== =============
</TABLE>
TREASURY
STOCK TOTAL
--------- ------------
BALANCE AT JANUARY 1, 1995........... $(190,000) $ 12,584,657
Net income......................... -- 2,009,339
Change in net unrealized loss on
available
for sale securities, net of
tax.............................. -- 407,321
------------
Total comprehensive
income...................... 2,416,660
------------
Retirement of treasury stock....... 190,000 --
--------- ------------
BALANCE AT DECEMBER 31, 1995......... -- 15,001,317
Net income......................... -- 2,388,161
Change in net unrealized loss on
available
sale securities, net of tax...... -- 53,322
------------
Total comprehensive
income...................... 2,441,483
--------- ------------
BALANCE AT DECEMBER 31, 1996......... -- 17,442,800
Net income......................... -- 2,916,952
Change in net unrealized loss on
available
sale securities, net of tax...... -- 412,028
------------
Total comprehensive
income...................... 3,328,980
------------
Restricted stock award............. -- --
Amortization of unearned
compensation..................... -- 16,000
Purchase of treasury stock......... (403,825) (403,825)
--------- ------------
BALANCE AT DECEMBER 31, 1997......... (403,825) 20,383,955
Net income (unaudited)............. -- 1,109,381
Change in net unrealized loss on
available
sale securities, net of tax and
reclassification adjustment
(unaudited)...................... -- 88,677
------------
Total comprehensive income
(unaudited)............... 1,198,058
------------
Amortization of unearned
compensation (unaudited)......... -- 22,667
--------- ------------
BALANCE AT JUNE 30, 1998
(Unaudited)........................ $(403,825) $ 21,604,680
========= ============

See notes to the consolidated financial statements.

F-5
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................... $ 1,109,381 $ 1,207,729 $ 2,916,952 $ 2,388,161 $ 2,009,339
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Provision for credit losses.... 1,000,000 308,000 570,000 765,000 145,000
Provision for depreciation and
amortization................. 167,882 141,785 288,958 289,553 369,671
Provision for revaluation and
writedowns of other real
estate....................... -- 50,071 336,820 -- (145,000)
Provision for deferred income
taxes........................ (100,726) 75,704 183,109 (207,270) (1,658)
Amortization (accretion) of
premiums and discounts on
securities, net.............. 54,879 (152,638) 434,812 166,708 (93,572)
Gain on sales of securities,
net.......................... (1,951) (60,779) (54,810) (4,158) (12,390)
Loss (gain) on sales of other
real estate and other
assets....................... 64,208 (43,981) (48,602) -- 73,212
Loss on disposal of
equipment.................... -- -- -- 2,266 --
Amortization of unearned
compensation................. 22,667 -- 16,000 -- --
Purchases of loans held for
sale......................... (41,314,924) (8,213,600) (21,700,750) (16,898,754) (12,119,200)
Proceeds from sales of loans
held for sale................ 23,547,866 5,897,159 22,735,500 14,598,619 12,796,148
Increase in accrued interest
receivable and other
assets....................... (1,977,484) (796,653) (1,535,202) (516,023) (842,949)
Increase in mortgage servicing
rights, net.................. (477,461) (172,834) (497,990) (187,162) (334,844)
Increase (decrease) in accrued
interest payable and other
liabilities.................. 386,913 (290,038) 49,171 321,758 36,381
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided
by operating
activities............... (17,518,750) (2,050,075) 3,693,968 718,698 1,880,138
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for
sale securities................... 10,078,174 19,169,702 36,554,634 8,153,577 43,005,732
Proceeds from maturities, calls and
principal paydowns of
securities........................ 20,904,889 13,965,687 24,538,154 8,886,031 7,763,568
Purchases of held to maturity
securities........................ -- -- (500,000) (2,226,478) (15,126,746)
Purchases of available for sale
securities........................ (68,793,856) (29,876,619) (55,570,370) (11,388,994) (31,818,566)
Net increase in loans held to
maturity.......................... (35,319,157) (3,371,730) (46,393,057) (60,811,676) (4,948,747)
Proceeds from sales of other real
estate............................ 310,792 454,865 720,165 -- 63,620
Purchases of premises and
equipment......................... (588,182) (117,357) (340,318) (332,889) (278,384)
Purchase of trust operations (net of
acquired cash of $241,935 in
1996)............................. -- -- -- (587,060) --
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided
by investing
activities............... (73,407,340) 224,548 (40,990,792) (58,307,489) (1,339,523)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in
deposits.......................... 56,932,663 (9,709,319) 20,765,371 86,020,550 (17,517,587)
Net increase (decrease) in other
borrowings and subordinated
debentures........................ 27,192,933 1,649,758 24,545,981 (17,231,587) 15,342,422
Purchase of treasury stock.......... -- -- (403,825) -- --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used
in) financing
activities............... 84,125,596 (8,059,561) 44,907,527 68,788,963 (2,175,165)
------------- ------------- ------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................... (6,800,494) (9,885,088) 7,610,703 11,200,172 (1,634,550)
CASH AND CASH EQUIVALENTS, beginning of
period................................ 24,535,091 16,924,388 16,924,388 5,724,216 7,358,766
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 17,734,597 $ 7,039,300 $ 24,535,091 $ 16,924,388 $ 5,724,216
============= ============= ============= ============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid....................... $ 8,769,236 $ 6,206,331 $ 13,648,909 $ 9,904,909 $ 8,771,753
Income taxes paid................... 733,000 635,000 1,225,000 1,226,000 818,000
Noncash investing and financing
activities:
Foreclosure and repossession of
collateral in satisfaction of
a loan....................... -- 341,884 491,841 731,471 2,000,000
Loans made to finance the sale
of other real estate......... -- -- -- -- 1,890,000
Restricted stock award......... -- 160,000 160,000 -- --
</TABLE>
See notes to the consolidated financial statements.

F-6
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
IS UNAUDITED)

1. ORGANIZATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES

ORGANIZATION -- Riverway Holdings, Inc. (the "Parent") is a commercial
bank holding company in Houston, Texas formed in 1995 to become the Parent of
Riverway Bank. The combination was effected through a one for one exchange of
2,954,105 common shares and accounted for in a manner similar to a pooling of
interests. The accompanying financial statements for 1995 reflect that the
companies were combined for the full year. The Parent wholly-owns Riverway Bank
("the Bank") through an intermediary bank holding company, Riverway Holdings
of Delaware, Inc.

NATURE OF OPERATIONS -- The Bank's operations consist primarily of
traditional banking services for large commercial enterprises and well-secured
borrowers. The Bank also specializes in services to municipalities in the
Houston area and provides custodial functions for certain FDIC and other insured
certificate of deposit accounts under the name of Riverway Trust. The Bank
wholly-owns Hydrox Holdings, Inc., which owns and operates certain other real
estate properties.

PRINCIPLES OF CONSOLIDATION -- These consolidated financial statements
include the accounts of the Parent and its subsidiaries (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation. The accounting and reporting policies of the
Company conform to generally accepted accounting principles ("GAAP") and the
prevailing practices within the banking industry.

INTERIM FINANCIAL INFORMATION -- Financial information as of June 30, 1998
and for the six months ended June 30, 1998 and June 30, 1997, included herein,
is unaudited. Such information includes all adjustments (consisting only of
normal recurring adjustments), which are, in the opinion of management,
necessary for a fair statement of the financial information in the interim
periods. The results of operations for the six months ended June 30, 1998 and
June 30, 1997 are not necessarily indicative of the results for the full fiscal
year.

A summary of significant accounting and reporting policies is as follows:

USE OF ESTIMATES -- The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

SECURITIES -- Securities that are expected to be held to maturity are
carried at cost, adjusted for the amortization of premiums and the accretion of
discounts. Management has the positive intent and the Company has the ability to
hold these assets as long-term investments until their maturities. Under certain
circumstances (including the deterioration of the issuer's creditworthiness or a
change in tax law or statutory or regulatory requirements), these securities may
be sold or transferred to another portfolio.

Securities, which are classified as available for sale, are carried at fair
value. Unrealized gains and losses are excluded from income and reported, net of
tax, as a separate component of stockholders' equity. Securities within the
available for sale portfolio may be used as part of the Company's
asset/liability strategy and may be sold in response to changes in interest rate
risk, prepayment risk or other similar economic factors.

Declines in the fair value of individual held to maturity and available for
sale securities below their cost that are other than temporary may result in
writedowns of the individual securities to their fair value. The related
writedowns would be included in income as realized losses.

F-7
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LOANS HELD TO MATURITY -- Loans held to maturity are stated at the
principal amount outstanding, net of fees. Income is recognized using the simple
interest method.

Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan -- Income Recognition and Disclosure." SFAS No. 114 applies to all
loans, with the exception of groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment. A loan is defined as impaired by SFAS
No. 114 if, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. Specifically, SFAS No.
114 requires that the allowance for credit losses related to impaired loans be
determined based on the difference between the carrying value of loans and the
present value of expected cash flows discounted at the loan's effective interest
rate or, as a practical expedient, the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.

As permitted by SFAS No. 118, interest revenue received on impaired loans
continues to be either applied against principal or realized as interest
revenue, according to management's judgment as to the collectibility of
principal. Adoption of these pronouncements had no impact on the Company's
consolidated financial statements including the level of the allowance for
credit losses.

LOANS HELD FOR SALE -- Loans held for sale consist of mortgage loans
purchased and intended for sale in the secondary market and are carried at the
lower of cost or estimated market value in the aggregate. Net unrealized losses
are recognized through a valuation allowance by charges to income. At June 30,
1998 (unaudited) and December 31, 1997 and 1996, the Company had no recorded
valuation allowance related to loans held for sale.

NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS -- Nonaccrual, past due and
restructured loans include loans which have been categorized by management as
nonaccrual because collection of interest is doubtful and loans which have been
restructured to provide a reduction in the interest rate or a deferral of
interest or principal payments. When the payment of principal or interest on a
loan is delinquent for 90 days, or earlier in some cases, the loan is placed on
nonaccrual status unless the loan is in the process of collection and the
underlying collateral fully supports the carrying value of the loan. If the
decision is made to continue accruing interest on the loan, periodic reviews are
made to confirm the accrual status of the loan. When a loan is placed on
nonaccrual status, interest which has been accrued but unpaid is charged to
operations to the extent such accrual relates to the current year. Interest
accrued but unpaid during prior periods is charged to the allowance for credit
losses. Generally, any payments received on nonaccrual loans are applied first
to outstanding loan balances and next to the recovery of charged-off loan
balances. Any excess is treated as recovery of lost interest.

Restructured loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.

ALLOWANCE FOR CREDIT LOSSES -- The allowance for credit losses is a
valuation allowance available for losses incurred on loans. All losses are
charged to the allowance for credit losses when the loss actually occurs or when
a determination is made that such loss is probable. Recoveries are credited to
the allowance at the time of recovery.

F-8
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Throughout the year, management estimates the probable level of losses to
determine whether the allowance for credit losses is adequate to absorb losses
in the existing portfolio. Based on these estimates, an amount is charged to the
provision for credit losses and credited to the allowance for credit losses in
order to adjust the allowance to a level determined to be adequate to absorb
losses.

Management's judgment as to the level of losses on existing loans involves
the consideration of current and anticipated economic conditions and their
potential effects on specific borrowers; an evaluation of the existing
relationships among loans, probable credit losses and the present level of the
allowance; results of examinations of the loan portfolio by regulatory agencies;
and management's internal review of the loan portfolio. In determining the
collectibility of certain loans, management also considers the fair value of any
underlying collateral. The amounts ultimately realized may differ from the
carrying value of these assets because of economic, operating or other
conditions beyond the Company's control.

Estimates of future credit losses involve judgment. While it is possible
that in the near term the Company may sustain losses which are substantial
relative to the allowance for credit losses, it is the judgment of management
that the allowance for credit losses reflected in the consolidated balance
sheets is adequate to absorb estimated losses which may exist in the current
loan portfolio.

PREMISES AND EQUIPMENT -- Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation expense is computed
principally using the straight-line method over the estimated useful lives of
the assets.

OTHER REAL ESTATE -- Real estate properties acquired through, or in lieu
of, loan foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations and changes in the valuation allowance are included
in the net gain/loss and carrying costs of other real estate.

MORTGAGE SERVICING RIGHTS -- Mortgage servicing rights ("MSRs") are
accounted for in accordance with SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." MSRs are
amortized in proportion to, and over the period of, the estimated net revenue
for servicing of the underlying mortgages. The Company periodically evaluates
MSRs for impairment based on the fair value of those rights. The fair value is
determined by discounting the estimated future cash flows using a discount rate
commensurate with the risks involved. This method of valuation incorporates
assumptions that market participants would use in their estimates of future
servicing income and expense, including assumptions about prepayment, default
and interest rates. For purposes of measuring impairment, the loans underlying
the MSRs are stratified on the basis of interest rate and type (conventional or
government). The amount of impairment is the amount by which the MSRs, net of
accumulated amortization, exceed their fair value.

INCOME TAXES -- The Parent and its subsidiaries file a consolidated tax
return. Each computes its tax on a separate-company basis, and the results are
combined for purposes of preparing the consolidated financial statements.
Deferred tax assets and liabilities are recognized for the estimated tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.

NET INCOME PER COMMON SHARE -- SFAS No. 128, "Earnings Per Share",
requires presentation of basic and diluted earnings per share. Basic earnings
per share is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the reporting period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Net income per common share for all periods presented has
been calculated in accordance with SFAS No. 128. Outstanding stock

F-9
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

options issued by the Company represent the only dilutive effect reflected in
diluted weighted average shares.

STOCK OPTIONS -- The Company has adopted only the disclosure requirements
of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company
applies Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees,"and related interpretations in accounting for its stock
options and has not recognized compensation expense for options granted.

CASH AND CASH EQUIVALENTS -- For purposes of the statements of cash flows,
cash and cash equivalents include cash and due from banks, federal funds sold,
interest-bearing deposits and other highly liquid investments purchased with a
maturity of three months or less. Generally, federal funds are sold for one-day
periods.

RECLASSIFICATIONS -- Certain reclassifications have been made to 1997, 1996
and 1995 balances to conform to the current presentation.

RECENT ACCOUNTING STANDARDS -- In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, establishes accounting and
reporting standards for derivative instruments and requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. This statement is effective for
periods beginning after June 15, 1999. Management believes the implementation of
this pronouncement will not have a material effect on the Company's financial
statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes new standards
for public companies to report information about their operating segments,
products and services, geographic areas and major customers. The statement is
effective for financial statements issued for periods beginning after December
15, 1997. Management is evaluating the impact of this pronouncement on the
Company's financial statements.

2. CASH AND CASH EQUIVALENTS

The Company is required by the Federal Reserve Bank to maintain average
reserve balances. "Cash and cash equivalents" in the consolidated balance
sheets include amounts so restricted of approximately $218,000, $18,000 and
$2,636,000 at June 30, 1998 (unaudited), December 31, 1997 and 1996,
respectively.

F-10
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. SECURITIES

The amortized cost and fair value of securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
JUNE 30, 1998 (UNAUDITED):
Mortgage-backed securities...... $ 45,526,174 $ 43,593 $ (993,116) $ 44,576,651
Federal Home Loan Bank stock, at
cost.......................... 2,090,100 -- -- 2,090,100
U.S. Government and agency
securities.................... 39,117,135 34,777 (34,680) 39,117,232
Other securities................ 623,401 4,099 -- 627,500
-------------- ---------- -------------- --------------
Total...................... $ 87,356,810 $ 82,469 $ (1,027,796) $ 86,411,483
============== ========== ============== ==============
DECEMBER 31, 1997:
Mortgage-backed securities...... $ 38,705,922 $ 17,700 $ (1,086,295) $ 37,637,327
Federal Home Loan Bank stock, at
cost.......................... 4,461,900 -- -- 4,461,900
Other securities................ 1,030,078 -- -- 1,030,078
-------------- ---------- -------------- --------------
Total...................... $ 44,197,900 $ 17,700 $ (1,086,295) $ 43,129,305
============== ========== ============== ==============
DECEMBER 31, 1996:
Mortgage-backed securities...... $ 40,757,078 $ -- $ (1,671,229) $ 39,085,849
Federal Home Loan Bank stock, at
cost.......................... 2,212,700 -- -- 2,212,700
U.S. Government and agency
securities.................... 1,002,275 530 -- 1,002,805
Other securities................ 831,431 -- -- 831,431
-------------- ---------- -------------- --------------
Total...................... $ 44,803,484 $ 530 $ (1,671,229) $ 43,132,785
============== ========== ============== ==============
HELD TO MATURITY
JUNE 30, 1998 (UNAUDITED):
Mortgage-backed securities...... $ 78,779,562 $ 121,490 $ (2,025,121) $ 76,875,931
State and municipal
securities.................... 7,611,687 125,767 (3,019) 7,734,435
-------------- ---------- -------------- --------------
Total...................... $ 86,391,249 $ 247,257 $ (2,028,140) $ 84,610,366
============== ========== ============== ==============
DECEMBER 31, 1997:
Mortgage-backed securities...... $ 83,591,022 $ -- $ (2,268,536) $ 81,322,486
State and municipal
securities.................... 8,190,184 143,186 -- 8,333,370
-------------- ---------- -------------- --------------
Total...................... $ 91,781,206 $ 143,186 $ (2,268,536) $ 89,655,856
============== ========== ============== ==============
DECEMBER 31, 1996:
Mortgage-backed securities...... $ 88,181,956 $ 74,791 $ (3,200,590) $ 85,056,157
State and municipal
securities.................... 8,373,910 80,875 -- 8,454,785
-------------- ---------- -------------- --------------
Total...................... $ 96,555,866 $ 155,666 $ (3,200,590) $ 93,510,942
============== ========== ============== ==============
</TABLE>
F-11
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The scheduled maturities of the securities portfolio at December 31, 1997
follows:
<TABLE>
<CAPTION>
HELD TO MATURITY SECURITIES AVAILABLE FOR SALE SECURITIES
------------------------------ ------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Due in one year or less................. $ 1,900,240 $ 1,907,015 $ -- $ --
Due from one to five years.............. 6,289,944 6,426,355 -- --
-------------- -------------- -------------- --------------
8,190,184 8,333,370 -- --
-------------- -------------- -------------- --------------
Mortgage-backed securities.............. 83,591,022 81,322,486 38,705,922 37,637,327
Federal Home Loan Bank Stock............ -- -- 4,461,900 4,461,900
Other securities........................ -- -- 1,030,078 1,030,078
-------------- -------------- -------------- --------------
$ 91,781,206 $ 89,655,856 $ 44,197,900 $ 43,129,305
============== ============== ============== ==============
</TABLE>
Proceeds from the sale of securities classified as available for sale
during the first six months of 1998 (unaudited) were $10,078,174. Gross gains of
$1,951 were realized on the sales. Proceeds from the sale of securities
classified as available for sale during 1997 were $36,554,634. Gross gains of
$66,417 and gross losses of $11,607 were realized on these sales. Proceeds from
the sale of securities classified as available for sale during the first six
months of 1997 (unaudited) were $19,169,702. Gross gains of $66,416 and gross
losses of $5,637 were realized on these sales. Proceeds from the sale of
securities classified as available for sale during 1996 were $8,153,577. Gross
gains of $4,158 were realized on these sales. Proceeds from the sale of
securities classified as available for sale during 1995 were $43,005,732. Gross
gains of $56,260 and gross losses of $43,870 were realized on these sales.

The Company does not own securities of any one issuer (other than the U.S.
government and its agencies) for which aggregate adjusted cost exceeded 10% of
stockholders' equity at June 30, 1998 (unaudited) or December 31, 1997.

Securities with amortized costs of approximately $108,419,000, $112,961,000
and $110,896,000 at June 30, 1998 (unaudited), December 31, 1997 and 1996
respectively, were pledged to secure public deposits, other borrowings and for
other purposes required or permitted by law.

Included in interest income on securities is approximately $207,000,
$214,000, $425,000, $365,000 and $271,000 on nontaxable securities for the six
months ended June 30, 1998 and 1997 (unaudited) and the years ended December 31,
1997, 1996 and 1995, respectively.

F-12
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. LOANS

The loan portfolio consists of various types of loans made principally to
borrowers located in Harris and Fort Bend Counties, Texas, and is classified by
major type as follows (in thousands):

DECEMBER 31,
JUNE 30, ----------------------
1998 1997 1996
------------ ---------- ----------
(UNAUDITED)
Held to maturity:
Commercial, financial and
industrial...................... $ 19,425 $ 15,775 $ 19,037
Commercial leases.................. 10,006 -- --
Real estate -- mortgage:
Interim construction............ 30,892 26,599 22,466
Multi-family and commercial..... 44,302 48,066 30,140
Single family residential....... 64,350 45,333 38,990
Municipal.......................... 5,862 10,049 1,161
Consumer........................... 31,553 24,780 13,616
Small Business Administration,
government
guaranteed...................... 3,506 3,725 4,687
Other.............................. 1,290 1,647 233
------------ ---------- ----------
Loans held to maturity............... 211,186 175,974 130,330
Loans held for sale.................. 20,126 2,359 3,394
------------ ---------- ----------
Total loans................ $231,312 $ 178,333 $ 133,724
============ ========== ==========

At June 30, 1998 (unaudited), December 31, 1997 and 1996, the recorded
investment in impaired loans was approximately $37,000, $513,000 and $595,000,
respectively, and required an allowance for credit losses of approximately
$11,000, $24,000 and $22,000, respectively. The average recorded investment in
impaired loans for the six months ended June 30, 1998 (unaudited) and the years
ended December 31, 1997 and 1996 was $38,000, $713,000 and $758,000,
respectively. Interest received on impaired loans during the periods was not
material.

As of June 30, 1998 (unaudited), December 31, 1997 and 1996, loans
outstanding to directors and their affiliates were $3,856,268, $2,942,840 and
$2,920,386, respectively. In the opinion of management, all transactions entered
into between the Company and such related parties have been and are, in the
ordinary course of business, made on the same terms and conditions as similar
transactions with unaffiliated persons. An analysis of activity with respect to
these related-party loans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
SIX MONTHS ENDED --------------------------
JUNE 30, 1998 1997 1996
----------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of period....... $ 2,942,840 $ 2,920,386 $ 2,817,264
New loans.......................... 1,961,042 1,291,413 905,826
Repayments......................... (1,047,614) (1,268,959) (802,704)
----------------- ------------ ------------
Balance at end of period............. $ 3,856,268 $ 2,942,840 $ 2,920,386
================= ============ ============
</TABLE>
F-13
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

The following table presents information relating to nonaccrual, past due
and restructured loans:

DECEMBER 31,
JUNE 30, ------------------------
1998 1997 1996
----------- ---------- ------------
(UNAUDITED)
Nonaccrual loans........................ $ 36,534 $ 39,843 $ 105,102
90 days or more past due loans, not on
nonaccrual............................ 139,857 117,268 890,480
Restructured loans...................... -- 473,461 490,199
----------- ---------- ------------
Total.............................. $ 176,391 $ 630,572 $ 1,485,781
=========== ========== ============

With respect to the above loans, interest income foregone on nonaccrual
loans, additional interest income that would have been earned on restructured
loans under their original terms and interest earned on restructured loans were
not material.

6. ALLOWANCE FOR CREDIT LOSSES

Activity in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $ 1,210,296 $ 897,793 $ 897,793 $ 655,979 $ 904,233
Provision charged to operations.... 1,000,000 308,000 570,000 765,000 145,000
Loans charged off.................. (114,565) (38,934) (282,857) (540,374) (407,172)
Loan recoveries.................... 6,847 23,667 25,360 17,188 13,918
------------ ------------ ------------ ---------- ----------
Balance at end of period................ $ 2,102,578 $ 1,190,526 $ 1,210,296 $ 897,793 $ 655,979
============ ============ ============ ========== ==========
</TABLE>
7. PREMISES AND EQUIPMENT

Premises and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------- USEFUL
1998 1997 1996 LIVES
----------- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Land.................................... $ 1,045,000 $ 1,045,000 $ 1,045,000
Building and improvements............... 2,501,766 2,399,422 2,285,648 7 - 30 years
Furniture, fixtures and equipment....... 2,185,514 1,706,509 1,677,282 3 - 10 years
----------- ------------ ------------
5,732,280 5,150,931 5,007,930
Less accumulated depreciation and
amortization.......................... (2,250,175) (2,089,126) (1,997,485)
----------- ------------ ------------
Premises and equipment, net............. $ 3,482,105 $ 3,061,805 $ 3,010,445
=========== ============ ============
</TABLE>
F-14
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. OTHER REAL ESTATE

Activity in the valuation allowance for other real estate is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $ 1,319,750 $ 1,373,000 $ 1,373,000 $ 1,373,000 $ 1,518,000
Reversal of allowance related to
sale of other real estate........ (243,750) (351,000) (390,070) -- --
Provision charged (credited) to
operations....................... -- 50,071 336,820 -- (145,000)
------------ ------------ ------------ ------------ ------------
Balance at end of period................ $ 1,076,000 $ 1,072,071 $ 1,319,750 $ 1,373,000 $ 1,373,000
============ ============ ============ ============ ============
</TABLE>
9. LOAN SERVICING

Activity in the Company's MSRs is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $ 1,774,725 $ 1,276,735 $ 1,276,735 $ 1,089,574 $ 951,787
Additions.......................... 599,198 249,834 666,990 308,161 237,787
Amortization....................... (121,737) (77,000) (169,000) (121,000) (100,000)
------------ ------------ ------------ ------------ ------------
Balance at end of period................ $ 2,252,186 $ 1,449,569 $ 1,774,725 $ 1,276,735 $ 1,089,574
============ ============ ============ ============ ============
</TABLE>
The single family loan servicing portfolio at June 30, 1998 (unaudited) and
December 31, 1997 and 1996 totaled $78,782,213, $68,719,115 and $43,445,167,
respectively.

Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $1,166,000,
$521,000 and $345,000 at June 30, 1998 (unaudited) and December 31, 1997 and
1996, respectively.

10. INTEREST-BEARING DEPOSITS

The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000 was approximately $55,743,000, $50,551,000 and
$58,927,000 at June 30, 1998 (unaudited), December 31, 1997 and 1996,
respectively. At December 31, 1997, the scheduled maturities of certificates of
deposit are as follows:

1998................................. $ 105,144,844
1999................................. 10,740,706
2000................................. 14,769,532
2001................................. 625,899
2002................................. 8,827,444
---------------
Total...................... $ 140,108,425
===============

Deposits of executive officers and directors were $19,247,500, $20,845,916
and $19,305,585 (including time deposits of $5,560,917, $6,216,406 and
$2,511,944) at June 30, 1998 (unaudited) and December 31, 1997 and 1996,
respectively.

The Company has no brokered deposits and there are no major concentrations
of deposits.

F-15
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. OTHER BORROWINGS AND SUBORDINATED DEBENTURES

Other borrowings and subordinated debentures comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1998 1997 1996
------------ -------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Federal Home Loan Bank borrowings.... $ 40,000,000 $ 25,350,000 $ --
Customer repurchase agreements....... 2,536,419 3,388,086 2,670,600
Note payable......................... 69,600 1,000,000 --
Treasury, tax and loan note option... 1,750,000 1,750,000 4,271,505
Subordinated debentures.............. 4,400,000 -- --
Reverse repurchase agreement......... 9,925,000 -- --
------------ -------------- ------------
Total........................... $ 58,681,019 $ 31,488,086 $ 6,942,105
============ ============== ============
</TABLE>
FEDERAL HOME LOAN BANK ("FHLB") BORROWINGS --
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------
1998 1997 1996
------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Maximum outstanding at any
month-end.......................... $ 40,200,100 $ 64,575,000 $ 43,684,000
Daily average balance................ 27,170,361 32,637,377 24,132,181
Average interest rate................ 5.03% 5.65% 4.98%
</TABLE>
The FHLB borrowings are secured by a blanket pledge of the Company's single
family residential loan portfolio. The FHLB borrowings are callable quarterly
and, if not called, begin to mature in 2007 and bear interest at a weighted
average rate of 4.90% at June 30, 1998 (unaudited).

CUSTOMER REPURCHASE AGREEMENTS --
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Fair value of collateral at
period-end............................ $ 6,051,486 $ 6,785,676 $ 2,900,666
Maximum outstanding at any month-end.... 14,436,016 5,847,093 2,670,600
Daily average balance................... 3,946,234 3,164,500 1,745,464
Average interest rate................... 5.21% 5.04% 4.13%
</TABLE>
Customer repurchase agreements are collateralized by certain securities.
Amounts outstanding at June 30, 1998 matured on July 1, 1998 and had an interest
rate of 5.08% (unaudited).

NOTE PAYABLE -- In December 1997, the Parent borrowed $1.0 million from a
bank under a line of credit maturing December 31, 1998. A portion of the
proceeds from the note was contributed to the Bank as additional capital and the
remainder was used to purchase treasury shares. The note bears interest at prime
rate (8.5% at December 31, 1997) payable quarterly. The Parent pledged the
common stock of the Bank as collateral for the note.

TREASURY, TAX AND LOAN ("TT&L") NOTE OPTION -- The TT&L note is due on
demand and bears interest at variable rates. The Company's Small Business
Administration loan portfolio is pledged as collateral for the TT&L note.

F-16
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVERSE REPURCHASE AGREEMENT --

SIX MONTHS
ENDED
JUNE 30,
1998
-----------
(UNAUDITED)
Fair value of collateral at
period-end............................ $10,056,250
Maximum outstanding at any month-end.... 19,775,000
Daily average balance................... 12,863,570
Average interest rate................... 3.49%

Borrowings under the reverse repurchase agreement totaled $9,925,000 at
June 30, 1998 (unaudited). The reverse repurchase agreement matures July 29,
1998 and bears interest at 3.49%. Proceeds of this borrowing were used to
purchase a 5-year U.S. Treasury security. The Company did not enter into any
reverse repurchase agreements in 1997 or 1996.

FEDERAL RESERVE BANK BORROWINGS -- The Company has pledged loans with a
carrying value of $6,122,000 at June 30, 1998 (unaudited) as security for
available borrowings from the Federal Reserve Bank. The Company had no
borrowings outstanding at June 30, 1998 (unaudited).

12. COMMITMENTS AND CONTINGENCIES

SALARY CONTINUATION PROGRAM -- The Company has entered into agreements with
certain of its officers to provide certain benefits to the officers' designated
beneficiaries in the event that the officers die prior to retirement and while
employed by the Company. Under each agreement, the Company will pay the
designated beneficiary a specified amount for a period of ten years after the
officer's death. The agreement is automatically canceled if the officer
voluntarily or involuntarily leaves the employment of the Company. The Company
has purchased life insurance policies on these officers, the death benefits of
which will meet these obligations.

LITIGATION -- The Company is party to various lawsuits arising in the
normal course of business. After reviewing these suits with outside counsel,
management considers that the aggregate liabilities, if any, will not be
material to the consolidated financial statements.

13. INCOME TAXES

The components of the provision for federal income taxes were as follows:

YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
Current expense..................... $ 872,075 $ 1,248,670 $ 822,867
Deferred expense (benefit).......... 183,109 (207,270) (1,658)
------------ ------------ -----------
Total.......................... $ 1,055,184 $ 1,041,400 $ 821,209
============ ============ ===========

F-17
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant assets and liabilities giving rise to deferred taxes were as
follows:

DECEMBER 31,
------------------------
1997 1996
---------- ------------
Deferred tax assets:
Unrealized loss on available for
sale securities.................. $ 381,012 $ 593,264
Other real estate acquired by
foreclosure...................... 365,667 470,220
Allowance for credit losses........ 95,284 123,824
Other.............................. 57,753 41,568
---------- ------------
Total deferred tax assets............... 899,716 1,228,876
---------- ------------
Deferred tax liabilities:
Depreciable assets................. 239,644 118,776
Purchased trust assets............. 40,688 156,504
FHLB dividends..................... 68,884 --
Other.............................. 20,857 28,592
---------- ------------
Total deferred tax liabilities.......... 370,073 303,872
---------- ------------
Net deferred tax asset.................. $ 529,643 $ 925,004
========== ============

The provisions for federal income taxes for the years ended December 31,
1997, 1996 and 1995 differed from the amounts computed by applying the federal
income tax statutory rate on operations as follows:

YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Tax calculated at statutory rate..... $ 1,350,526 $ 1,166,051 $ 962,386
Change resulting from:
Non-deductible meals and
entertainment................. 6,630 6,120 6,139
Tax exempt interest income...... (185,656) (132,445) (132,230)
Other, net...................... (116,316) 1,674 (15,086)
------------ ------------ ------------
Provision for income taxes. $ 1,055,184 $ 1,041,400 $ 821,209
============ ============ ============

14. REGULATORY MATTERS

The Parent and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Any institution that
fails to meet its minimum capital requirements is subject to actions by
regulators that could have a direct material effect on its financial statements.
Under the capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Parent and the Bank must meet specific capital
requirements based on the Parent's and the Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices.

To meet the capital adequacy requirements, the Parent and the Bank must
maintain minimum amounts and ratios as defined in the regulations. Management
believes that as of June 30, 1998, December 31, 1997 and 1996, the Parent and
the Bank met all capital adequacy requirements.

As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum capital amounts and ratios as set
forth in the table below. There have been no conditions or events since that
notification that management believes have changed the Bank's category.

F-18
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AS OF JUNE 30, 1998 (UNAUDITED):
Total Capital (to Risk Weighted
Assets)
Riverway Holdings, Inc.......... $24,106 10.13% $19,039 8.0%
Riverway Bank................... $28,516 11.98% $19,035 8.0% $23,793 10.0%
Tier I Capital (to Risk Weighted
Assets)
Riverway Holdings, Inc.......... $22,256 9.35% $ 9,520 4.0%
Riverway Bank................... $26,665 11.21% $ 9,517 4.0% $14,276 6.0%
Tier I Capital (to Total Assets)
Riverway Holdings, Inc.......... $22,256 5.13% $17,357 4.0%
Riverway Bank................... $26,665 6.15% $17,355 4.0% $21,694 5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted
Assets)
Riverway Holdings, Inc.......... $21,951 11.61% $15,129 8.0%
Riverway Bank................... $22,860 12.10% $15,118 8.0% $18,898 10.0%
Tier I Capital (to Risk Weighted
Assets)
Riverway Holdings, Inc.......... $21,124 11.17% $ 7,565 4.0%
Riverway Bank................... $22,052 11.67% $ 7,559 4.0% $11,338 6.0%
Tier I Capital (to Total Assets)
Riverway Holdings, Inc.......... $21,124 6.07% $13,917 4.0%
Riverway Bank................... $22,052 6.34% $13,908 4.0% $17,385 5.0%
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted
Assets)
Riverway Holdings, Inc.......... $18,660 12.29% $12,147 8.0%
Riverway Bank................... $19,409 12.77% $12,155 8.0% $15,193 10.0%
Tier I Capital (to Risk Weighted
Assets)
Riverway Holdings, Inc.......... $18,594 12.25% $ 6,073 4.0%
Riverway Bank................... $18,511 12.18% $ 6,077 4.0% $ 9,116 6.0%
Tier I Capital (to Total Assets)
Riverway Holdings, Inc.......... $18,594 6.22% $11,998 4.0%
Riverway Bank................... $18,511 6.17% $11,993 4.0% $14,992 5.0%
</TABLE>
The Parent and the Bank are subject to limitations on the amount of
dividends each may pay. At June 30, 1998 (unaudited), an aggregate of
approximately $4.9 million was available for payment of dividends by the Parent
and an aggregate of approximately $9.4 million was available for payment of
dividends by the Bank to the Parent. At December 31, 1997, an aggregate of
approximately $3.8 million was available for payment of dividends by the Parent
and an aggregate of approximately $4.7 million was available for payment of
dividends by the Bank to the Parent.

15. INTEREST RATE RISK

The Company is engaged in providing long-term, fixed rate real estate loans
and short-term commercial loans with interest rates that fluctuate with various
market indices. The commercial loans are primarily funded through short-term
demand deposits and longer-term certificates of deposit with fixed rates. The
real

F-19
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

estate loans are more sensitive to interest rate risk than the commercial loans
because of their fixed rates and longer maturities.

16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In the normal course of business the Company is a party to various
financial instruments with off-balance-sheet risk to meet the financial needs of
its customers. These financial instruments include standby letters of credit and
commitments to extend credit. Other financial instruments with off-balance-sheet
risk, specifically the interest rate swaps, are entered into to reduce the
Company's exposure to fluctuations in interest rate risks. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the consolidated balance sheets. The Company's
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-sheet
instruments.

The following is a summary of the various financial instruments entered
into by the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------
1998 1997 1996
----------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Financial instruments, the contract
amounts of which represent credit
risk:
Commitments to extend credit....... $46,821,137 $ 32,337,139 $ 16,180,000
Standby letters of credit.......... 161,200 87,000 107,500
Interest rate swaps (notional
amount).......................... -- -- 40,000,000
</TABLE>
COMMITMENTS TO EXTEND CREDIT -- Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being fully drawn upon, the total
commitment amounts disclosed above do not necessarily represent future cash
requirements.

The Company evaluates customer creditworthiness on a case-by-case basis.
The amount of collateral, if any, obtained by the Company upon extension of
credit, is based on management's credit evaluation of the customer.

STANDBY LETTERS OF CREDIT -- Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.

INTEREST RATE SWAPS -- In 1996, the Company had two offsetting swap
agreements outstanding. Both of these swap positions expired in 1997. The first
swap position was obtained in 1994 as a hedge of certain adjustable-rate
mortgage-backed securities. The offsetting swap was obtained in 1995 to remove
the effect of the hedged position.

17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

Disclosures of the estimated fair value amounts of financial instruments
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair value amounts.

F-20
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following methods and assumptions were used to estimate the fair values
for each class of financial instruments for which it is practicable to estimate
that value:

CASH AND CASH EQUIVALENTS -- For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.

SECURITIES -- For securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using a quoted market price for similar securities.

LOANS -- The fair value of loans held to maturity is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of loans held for sale is estimated using
outstanding commitment prices from investors or current investor yield
requirements.

ACCRUED INTEREST RECEIVABLE -- The fair value of accrued interest
receivable approximates carrying value.

MORTGAGE SERVICING RIGHTS -- See Note 1 for a description of the method
used to value mortgage servicing rights.

DEPOSIT LIABILITIES -- The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining
maturities. The fair value of accrued interest payable approximates carrying
value.

OTHER BORROWINGS AND SUBORDINATED DEBENTURES -- Rates currently available
to the Company for debt with similar terms and remaining maturities are used to
estimate the fair value of existing debt.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS -- The fair value of commitments to
extend credit and stand-by letters of credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreement and the present creditworthiness of the
counterparties. The fair value of the interest rate swap, which expired during
1997, was estimated using an options pricing model.

The estimated fair values of the Company's financial instruments are as
follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.......... $ 24,535 $ 24,535 $ 16,924 $ 16,924
Securities......................... 134,911 132,785 139,689 136,644
Loans.............................. 178,333 179,954 133,724 133,671
Accrued interest receivable........ 2,333 2,333 1,959 1,959
Mortgage servicing rights.......... 1,775 1,794 1,277 1,360
---------- ---------- ---------- ----------
Total......................... $ 341,887 $ 341,401 $ 293,573 $ 290,558
========== ========== ========== ==========
Financial liabilities:
Deposit liabilities................ $ 295,689 $ 295,984 $ 274,904 $ 275,009
Other borrowings and subordinated
debentures....................... 31,488 31,488 6,942 6,942
---------- ---------- ---------- ----------
Total......................... $ 327,177 $ 327,472 $ 281,846 $ 281,951
========== ========== ========== ==========
Off-balance-sheet items -- interest rate
swaps................................. $ 122
==========
</TABLE>
F-21
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of commitments to extend credit and standby letters of
credit were not material at December 31, 1997 and 1996.

The fair value estimates are based on pertinent information available to
management as of the dates indicated. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these
consolidated financial statements since those dates.

18. EMPLOYEE BENEFITS

SAVINGS PLAN -- The Company has a 401(k) plan (the "Plan") covering all
employees aged 21 and older with at least six months of service as defined by
the Plan. At least one year of service is required to be eligible for
employer-matching contributions. Determination of the matching percentage is
made by the Board of Directors and is entirely discretionary. The Company
presently matches participants' contributions up to 66.6% of the first 6% of the
employee's salary. Contributions totaling approximately $28,000, $26,000,
$50,000, $37,000 and $30,000 were made for the six months ended June 30, 1998
and 1997 (unaudited) and years ended December 31, 1997, 1996 and 1995,
respectively.

STOCK OPTIONS -- In January 1995, the Board of Directors (the "Board")
granted options to a senior executive to purchase 125,000 shares of the
Company's common stock at a weighted-average exercise price of $2.43 per share.
The exercise price of the options was equal to the estimated fair value of the
Company's common stock at the date of the grant. The options were exercisable on
the date of the grant and were canceled on June 30, 1997. Stock-based
compensation costs would have reduced net income and net income per common share
in 1995 by approximately $36,000 and $0.01 per share, respectively, if the fair
value of the options granted in that year had been recognized as compensation
expense.

RESTRICTED STOCK AWARD -- On June 30, 1997, the Company granted 50,000
shares of common stock to a senior executive in exchange for cancellation of
previously issued and exercisable stock options. The Company has recorded the
estimated fair value of the stock issuance as unearned compensation. This amount
is being amortized as compensation expense over five years.

19. NET INCOME PER COMMON SHARE

Net income per common share is calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income.............................. $ 1,109,381 $ 1,207,729 $ 2,916,952 $ 2,388,161 $ 2,009,339
Basic --
Weighted average shares
outstanding...................... 2,817,815 2,859,105 2,868,942 2,859,105 2,859,105
Diluted:
Weighted average shares
outstanding...................... 2,817,815 2,859,105 2,868,942 2,859,105 2,859,105
Effect of dilutive securities --
options.......................... -- 77,227 38,614 71,553 62,141
------------ ------------ ------------ ------------ ------------
Total......................... 2,817,815 2,936,332 2,907,556 2,930,658 2,921,246
============ ============ ============ ============ ============
Basic income per share.................. $ 0.39 $ 0.42 $ 1.02 $ 0.84 $ 0.70
============ ============ ============ ============ ============
Diluted income per share................ $ 0.39 $ 0.41 $ 1.00 $ 0.81 $ 0.69
============ ============ ============ ============ ============
</TABLE>
F-22
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The dilutive effect of the options was determined using the treasury stock
method. These options were canceled in June 1997 (see Note 18).

20. PURCHASE OF TRUST OPERATIONS

On December 31, 1996, the Company purchased the outstanding stock of
Universal Trust Company ("UTC"), a Texas trust company performing custodial
functions for certain FDIC and other insured certificate of deposit accounts. At
the acquisition date, UTC was custodian for assets totaling $236,013,000.
Separately, the Company purchased certain assets of High Yield, a former broker
customer of UTC.

The total purchase price in these acquisitions was approximately $829,000.
In addition to UTC's trust charter and fixed assets, the Company purchased the
rights to certain future revenues from UTC's and High Yield's previous
operations. The acquisitions were financed with available cash on-hand and did
not result in any goodwill.

The acquisitions were accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities acquired were recorded at
their fair values at the acquisition date. UTC's and High Yield's earnings prior
to the acquisition have been excluded from the consolidated statements of income
presented.

21. COMPREHENSIVE INCOME

SFAS No. 130, "Reporting Comprehensive Income" requires that all
components of comprehensive income and total comprehensive income be reported on
one of the following: (1) the statement of income, (2) the statement of
stockholders' equity, or (3) a separate statement of comprehensive income.
Comprehensive income is comprised of net income and all changes to stockholders'
equity, except those due to investments by owners (changes in paid-in capital)
and distributions to owners (dividends). The Company adopted this statement
effective January 1, 1998 and has elected to report comprehensive income in the
consolidated statements of stockholders' equity.

Other comprehensive income consists of unrealized gains and losses on
available for sale securities. For the six months ended June 30, 1998, the
change in net unrealized loss on available for sale securities is reported in
the consolidated statement of stockholders' equity net of the reclassification
adjustment for gains and losses included in net income as follows:

(UNAUDITED)
------------
Change in net unrealized loss arising
during period, net of tax.......... $ 89,965
Less: reclassification adjustment for
gains included in net income....... (1,288)
------------
Change in net unrealized loss........ $ 88,677
============

22. SUBSEQUENT EVENTS

In March 1998, the Company issued $4.4 million of 10% subordinated
debentures maturing in 2003. Proceeds totaling approximately $3.4 million were
contributed to the Bank as additional capital and the remainder was used to
repay a portion of the Company's indebtedness under the note payable.

In August 1998, the Company increased the number of authorized shares of
common stock from 5,000,000 to 50,000,000 and the number of authorized shares of
preferred stock from 1,000,000 to 20,000,000 and effected a five for one common
stock split in the form of a common stock dividend (the "Stock Split"). All
share and per share information for common stock has been restated to reflect
the Stock Split.

The Board and shareholders approved a new stock option plan in August 1998
(the "1998 Plan") which authorizes the issuance of up to 420,000 shares of
Common Stock under both "non-qualified" and

F-23
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"incentive stock" options to employees and "non-qualified" stock options to
directors and other individuals who are not employees. Generally, under the 1998
Plan it is intended that the options will vest 60% at the end of the third year
following the date of grant and an additional 20% at the end of each of the two
following years; however, an individual option may vest as much as 20% at the
end of the first or second year following the date of grant if necessary to
maximize the "incentive" tax treatment to the optionee for the particular
option being granted. Options under the 1998 Plan generally must be exercised
within ten years following the date of grant or no later than three months after
optionee's termination with the Company, if earlier. The 1998 Plan provides that
in the event of a change in control of the Company, all options granted
immediately vest and become exercisable.

23. PARENT COMPANY ONLY FINANCIAL INFORMATION

RIVERWAY HOLDINGS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
JUNE 30, --------------------
1998 1997 1996
----------- --------- ---------
(UNAUDITED)

ASSETS
Cash.................................... $-- $ 22 $ 14
Investment in subsidiaries.............. 26,017 21,316 17,363
Other assets............................ 163 46 66
----------- --------- ---------
Total......................... $26,180 $ 21,384 $ 17,443
=========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other borrowings and subordinated
debentures............................ $ 4,470 $ 1,000 $ --
Other liabilities....................... 105 -- --
----------- --------- ---------
Total liabilities.................. 4,575 1,000 --
Preferred stock......................... -- -- --
Common stock............................ 2,909 2,909 2,859
Additional paid-in capital.............. 11,952 11,952 11,842
Retained earnings....................... 7,920 6,811 3,894
Accumulated other comprehensive
income -- net unrealized
loss on available for sale securities,
net of tax............................ (651) (740) (1,152)
Unearned compensation................... (121) (144) --
Treasury stock.......................... (404) (404) --
----------- --------- ---------
Total stockholders' equity......... 21,605 20,384 17,443
----------- --------- ---------
Total......................... $26,180 $ 21,384 $ 17,443
=========== ========= =========

F-24
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RIVERWAY HOLDINGS, INC.
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES................... $ 175 $ 10 $ 35 $ 26 $ 14
--------- --------- --------- --------- ---------
OPERATING LOSS....................... (175) (10) (35) (26) (14)
INCOME TAX BENEFIT................... 72 3 11 9 5
--------- --------- --------- --------- ---------
INCOME BEFORE EQUITY IN EARNINGS OF
SUBSIDIARIES....................... (103) (7) (24) (17) (9)
EQUITY IN EARNINGS OF SUBSIDIARIES... 1,212 1,215 2,941 2,405 2,018
--------- --------- --------- --------- ---------
NET INCOME........................... $ 1,109 $ 1,208 $ 2,917 $ 2,388 $ 2,009
========= ========= ========= ========= =========
</TABLE>
F-25
<PAGE>
RIVERWAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RIVERWAY HOLDINGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 1,109 $ 1,208 $ 2,917 $ 2,388 $ 2,009
Adjustments to reconcile net income
to net cash
(used in) provided by operating
activities:
Equity in earnings of
subsidiaries.................... (1,212) (1,215) (2,941) (2,405) (2,018)
Amortization of unearned
compensation.................. 23 -- 16 -- --
(Increase) decrease in other
assets........................ (117) 5 20 9 (74)
Increase in other liabilities... 105 -- -- -- --
--------- --------- --------- --------- ---------
Net cash (used in) provided
by operating
activities.............. (92) (2) 12 (8) (83)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividend from subsidiaries......... -- -- -- 22 83
Capital contribution to
subsidiaries.................... (3,400) -- (600) -- --
--------- --------- --------- --------- ---------
Net cash (used in) provided
by investing
activities.............. (3,400) -- (600) 22 83
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in other borrowings
and subordinated debentures..... 3,470 -- 1,000 -- --
Purchase of treasury stock......... -- -- (404) -- --
--------- --------- --------- --------- ---------
Net cash provided by
financing activities.... 3,470 -- 596 -- --
--------- --------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... (22) (2) 8 14 --
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 22 14 14 -- --
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ -- $ 12 $ 22 $ 14 $ --
========= ========= ========= ========= =========
</TABLE>
F-26
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

PAGE
----
Prospectus Summary................... 3
Summary Consolidated Financial
Data............................... 6
Risk Factors......................... 8
The Company.......................... 12
Use of Proceeds...................... 16
Dividend Policy...................... 17
Dilution............................. 17
Capitalization....................... 18
Nature of the Trading Market and
Market Prices...................... 19
Selected Consolidated Financial
Data............................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Management........................... 55
Principal Stockholders............... 60
Selling Stockholders................. 61
Supervision and Regulation........... 61
Description of Securities of the
Company........................... 68
Underwriting......................... 72
Legal Matters........................ 73
Experts.............................. 73
Available Information................ 74
Table of Contents to Financial
Statements........................ F-1

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

UNTIL , (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

1,434,875 SHARES

LOGO

RIVERWAY HOLDINGS, INC.

COMMON STOCK

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

PROSPECTUS
------------------------------

KEEFE, BRUYETTE & WOODS, INC.

LEGG MASON WOOD WALKER
INCORPORATED

, 1998
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The estimated fees and expenses incurred by the Registrant in connection
with this Offering are as follows:

Securities and Exchange Commission
registration fee................... $ 6,844
National Association of Securities
Dealers, Inc. filing fee........... $ *
Printing and engraving expenses...... $ *
Legal fees and expenses of counsel
for the Registrant................. $ *
Accounting fees and expenses......... $ *
Blue sky filing fees and expenses
(including legal fees and
expenses).......................... $ *
Transfer Agent fees.................. $ *
Miscellaneous........................ $ *
---------
Total................................ $ *
=========

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

* To be supplied by Amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Registrant's Articles of Incorporation and Bylaws require the
Registrant to indemnify officers and directors of the Registrant to the fullest
extent permitted by Article 2.02-1 of the Business Corporation Act of the State
of Texas (the "TBCA"). The Articles of Incorporation and Bylaws of the
Registrant are filed as Exhibit 3.1 and 3.2 to the Registration Statement.
Generally, Article 2.02-1 of the TBCA permits a corporation to indemnify a
person who was, is, or is threatened to be made a named defendant or respondent
in a proceeding because the person was or is a director or officer if it is
determined that such person (i) conducted himself in good faith, (ii) reasonably
believed (a) in the case of conduct in his official capacity as a director or
officer of the corporation, that his conduct was in the corporation's best
interests, and/or (b) in other cases, that his conduct was at least not opposed
to the corporation's best interests, and (iii) in the case of any criminal
proceeding, had no reasonable cause to believe that his conduct was unlawful. In
addition, the TBCA requires a corporation to indemnify a director or officer for
any action that such director or officer is wholly successfully in defending on
the merits.

The Registrant's Articles of Incorporation provide that a director of the
Registrant will not be liable to the corporation for monetary damages for an act
or omission in the director's capacity as a director, except to the extent not
permitted by law. Texas law does not permit exculpation of liability in the case
of (i) a breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) an act or omission not in good faith that involves
intentional misconduct or a knowing violation of the law, (iii) a transaction
from which a director received an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's office, (iv) an
act or omission for which the liability of the director is expressly provided by
statute, or (v) an act related to an unlawful stock repurchase or dividend.

Pursuant to the Purchase Agreement, a form of which is filed as Exhibit 1.1
to this Registration Statement, the Underwriters have agreed to indemnify the
directors, officers and controlling persons of the Registrant against certain
civil liabilities that may be incurred in connection with this Offering,
including certain liabilities under the Securities Act.

The Registrant may provide liability insurance for each director and
officer for certain losses arising from claims or changes made against them
while acting in their capabilities as directors or officers of Registrant,
whether or not Registrant would have the power to indemnify such person against
such liability, as permitted by law.

II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On June 30, 1997, the Company granted 50,000 shares of Common Stock to John
E. Phillips in exchange for cancellation of previously issued and exercisable
stock options to purchase 125,000 shares of Common Stock at an exercise price of
$2.24 to $2.53 per share. The Company recorded the estimated fair value of the
stock issuance as unearned compensation.

On March 31, 1998, the Company issued $4,400,000 in aggregate principal
amount of 10% Subordinated Debentures due 2003 for cash.

Each sale was made pursuant to the registration exemption provided by
Section 3(a)(11) of the Securities Act of 1933, as amended.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

The following documents are filed as exhibits to this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
*1 -- Form of Purchase Agreement by and among the Underwriter, the Selling Stockholders and the
Company.
3.1 -- Amended Articles of Incorporation of the Company.
3.2 -- Amended and Restated Bylaws of the Company.
*4 -- Form of Certificate representing shares of Common Stock.
*5 -- Opinion of Bracewell & Patterson, L.L.P. as to the legality of the securities being
registered.
10.1 -- Common Stock Agreement dated June 30, 1997.
10.2 -- 1998 Stock Incentive Plan.
*10.3 -- Employment Agreements.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of Deloitte & Touche LLP.
*23.2 -- Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit 5
to this Registration Statement)
27 -- Financial Data Schedule.
</TABLE>
- ------------

* To be supplied by amendment.

(b) Financial Statement Schedules

None.

All other schedules for which provision is made in Regulation S-X of the
Commission are not required under the related instructions or are inapplicable
and, therefore, have been omitted.

ITEM 17. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes to provide the
Underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officer and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its

II-2
<PAGE>
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497)(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE>
SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
RIVERWAY HOLDINGS, INC., HAS DULY CAUSED THIS REGISTRATION STATEMENT OR
AMENDMENT THERETO TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HOUSTON AND STATE OF TEXAS ON AUGUST 11, 1998.

RIVERWAY HOLDINGS, INC.
By: /s/ JOHN E. PHILLIPS
JOHN E. PHILLIPS
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON , 1998.
<TABLE>
<CAPTION>
SIGNATURE POSITIONS
- -------------------------------------------------------------------------------------------
<C> <S>
/s/JOHN E. PHILLIPS President (principal executive
JOHN E. PHILLIPS officer)
/s/PATRICK C. REED Chief Financial Officer (principal
PATRICK C. REED financial officer and principal
accounting officer)
/s/SAMUEL A. JONES Director
SAMUEL A. JONES
/s/DAVID L. LANE Director
DAVID L. LANE
/s/JOEL M. LEVY Director
JOEL M. LEVY
/s/HARLON E. MARTIN, JR. Director
HARLON E. MARTIN, JR.
/s/JACK H. MAYFIELD, JR. Director
JACK H. MAYFIELD, JR.
/s/WALTER G. MAYFIELD Director
WALTER G. MAYFIELD
/s/MADELINE G. O'BRIEN Director
MADELINE G. O'BRIEN
/s/JOSEPH E. REID Director
JOSEPH E. REID
/s/HENRY V. SEGER Director
HENRY V. SEGER
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
- ------------------------ ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
*1 -- Form of Purchase Agreement by and among the Underwriter, the Selling Stockholders and the
Company.

3.1 -- Amended Articles of Incorporation of the Company.

3.2 -- Amended and Restated Bylaws of the Company.

*4 -- Form of Certificate representing shares of Common Stock.

*5 -- Opinion of Bracewell & Patterson, L.L.P. as to the legality of the securities being
registered.

10.1 -- Common Stock Agreement dated June 30, 1997.

10.2 -- 1998 Stock Incentive Plan.

*10.3 -- Employment Agreements.

21 -- Subsidiaries of the Registrant.

23.1 -- Consent of Deloitte & Touche LLP.

*23.2 -- Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit 5
to this Registration Statement)

27 -- Financial Data Schedule.
</TABLE>
- ------------

* To be supplied by amendment.

EXHIBIT 3.1

ARTICLES OF INCORPORATION
OF
RIVERWAY HOLDINGS, INC.

The Articles of Incorporation and all amendments and supplements thereto
are hereby superceded by the following restated Articles of Incorporation which
accurately copy the entire text thereof and as amended as above set forth.

ARTICLE I.

The name of the Corporation is Riverway Holdings, Inc.

ARTICLE II.

The period of duration of the Corporation is perpetual.

ARTICLE III.

The purpose for which the Corporation is organized is the transaction of
any or all lawful business.

ARTICLE IV.

Section A. AUTHORIZED SHARES. The aggregate number of all classes of stock
which the Corporation has authority to issue is 6,000,000 shares divided into
(A) one class of 5,000,000 shares of Common Stock with a par value of $1.00 per
share, and (B) one class of 1,000,000 shares of Preferred Stock with a par value
of $1.00 per share, which may be divided into and issued in series as set forth
in this Article 4.
<PAGE>
Section B. AUTHORIZATION OF DIRECTORS TO DETERMINE CERTAIN RIGHTS OF
PREFERRED STOCK. The Board of Directors is authorized, from time to time, to
divide the Preferred Stock into series, to designate each series, to fix and
determine separately for each series any one or more of the following relative
rights and preferences, and to issue shares of any series then or previously
designated, fixed and determined:

1. the rate of dividend;

2. cumulativity of dividends;

3. the price at and the terms and conditions on which shares may be
redeemed;

4. the amount payable upon shares in event of involuntary liquidation;

5. the amount payable upon shares in event of voluntary liquidation;

6. sinking fund provisions (if any) for the redemption or purchase of
shares;

7. the terms and conditions on which shares may be converted if the shares
of any series are issued with the privilege of conversion; and

8. voting rights (including the number of votes per share, the matters on
which the shares can vote, and the contingencies which make the voting rights
effective).

Section C. PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF ALL CLASSES OF
CAPITAL STOCK.

1. GENERAL. All shares of Common Stock shall have rights identical to
those of all other such shares. Except as they may vary among series established
pursuant to Section 4.2 of this Article 4, all shares of Preferred Stock shall
have preferences, limitations, and relative rights identical to those of all
other such shares. Except as otherwise expressly provided by law, shares of
Preferred Stock

-2-
<PAGE>
shall have only the preferences and relative rights expressly stated in this
Article 4.

2. DIVIDENDS.

a. AMOUNT; TIME. Each series of Preferred Stock at the time
outstanding shall be entitled to receive, when and as declared by the Board of
Directors, out of any funds legally available therefor, dividends at the rate
fixed by the Board of Directors pursuant to Section 4.2 of this Article 4, and
no more.
b. CUMULATIVITY. Dividends on Preferred Stock may be cumulative,
noncumulative or partially cumulative as determined by the Board of Directors
pursuant to Section 4.2 of this Article 4. Any such cumulations of dividends
shall not bear interest.

c. PRIORITY OVER COMMON STOCK; RESTRICTION ON PURCHASES OF COMMON
STOCK. No dividend shall be declared or paid on Common Stock, and no Common
Stock shall be purchased by the Corporation, unless full dividends on
outstanding Preferred Stock for all past dividend periods and for the current
dividend period shall have been declared and paid.

d. PARITY AMONG SERIES. No dividend shall be declared on any series
of Preferred Stock (a) for any dividend period unless all dividends cumulated
for all prior dividend periods shall have been declared or shall then be
declared at the same time upon all series of Preferred Stock then outstanding on
which cumulative dividends are authorized by the Board of Directors pursuant to
Section 4.2 of this Article 4, and (b) unless a dividend for the same period
shall be declared at the same time upon all series of Preferred Stock then
outstanding.

3. LIQUIDATION PREFERENCE. In the event of dissolution, liquidation, or
winding up of the

-3-
<PAGE>
Corporation (whether voluntary or involuntary), and before any distribution to
the holders of Common Stock, the holders of each series of Preferred Stock then
outstanding shall be entitled to receive the amount fixed by the Board of
Directors pursuant to Section 4.2 of this Article 4 plus a sum equal to all
cumulated but unpaid dividends (whether or not earned or declared), if any, to
the date fixed for distribution, and no more. All remaining assets shall be
distributed pro rata among the holders of Common Stock. If the assets
distributable among the holders of Preferred Stock are insufficient to permit
full payment to them, the entire assets shall be distributed among the holders
of the Preferred Stock in proportion to their respective liquidation
preferences. Neither the consolidation, merger, or reorganization of the
Corporation with any other corporation or corporations, nor the sale of all or
substantially all the assets of the Corporation, nor the purchase or redemption
by the Corporation of any of its outstanding shares shall be deemed to be a
dissolution, liquidation, or winding up within the meaning of this paragraph.

4. REDEMPTION.

a. RIGHT; METHOD. All or any part of any one or more series of
Preferred Stock may be redeemed at any time or times at the option of the
Corporation, by resolution of the Board of Directors, in accordance with the
terms and conditions of this Article 4 and those fixed by the Board of Directors
pursuant to Section 4.2 of this Article 4. The Corporation may redeem shares of
any one or more series without redeeming shares of any other series. If less
than all the shares of any series are to be redeemed, the shares of the series
to be redeemed shall be selected ratably or by lot or by any other equitable
method determined by the Board of Directors.

-4-
<PAGE>
b. NOTICE. Notice shall be given to the holders of shares to be
redeemed, either personally or by mail, not less than twenty nor more than fifty
days before the date fixed for redemption.

c. PAYMENT. Holders of redeemed shares shall be paid in cash the
amount fixed by the Board of Directors pursuant to Section 4.2 of this Article 4
plus a sum equal to all cumulated but unpaid dividends (whether or not earned or
declared), if any, to the date fixed for redemption, and no more.

d. PROVISION FOR PAYMENT. On or before the date fixed for
redemption, the Corporation may provide for payment of a sum sufficient to
redeem the shares called for redemption either (a) by setting aside the sum,
separate from its other funds, in trust for the benefit of the holders of the
shares to be redeemed, or (b) by depositing such sum in a bank or trust company
(either one in Texas having capital and surplus of at least $10,000,000
according to its latest statement of condition, or one anywhere in the United
States duly appointed and acting as transfer agent of the Corporation) as a
trust fund, with irrevocable instructions and authority to the bank or trust
company to give or complete the notice of redemption and to pay to the holders
of the shares to be redeemed, on or after the date fixed for redemption, the
redemption price on surrender of their respective share certificates. The
holders of shares to be redeemed may be evidenced by a list certified by the
Corporation (by its president or a vice president and by its secretary or an
assistant secretary) or by its transfer agent. If the Corporation so provides
for payment, then from and after the date fixed for redemption (a) the shares
shall be deemed to be redeemed, (b) dividends thereon shall cease to

-5-
<PAGE>
accrue, (c) such setting aside or deposit shall be deemed to constitute full
payment for the shares, (d) the shares shall no longer be deemed to be
outstanding, (e) the holders thereof shall cease to be shareholders with respect
to such shares, and (f) the holders shall have no rights with respect thereto
except the right to receive (without interest) their proportionate shares of the
funds so set aside or deposited upon surrender of their respective certificates,
and any right to convert such shares which may exist. Any interest accrued on
funds so set aside or deposited shall belong to the Corporation. If the holders
of the shares do not, within six years after such deposit, claim any amount so
deposited for redemption thereof, the bank or trust company shall upon demand
pay over to the Corporation the balance of the funds so deposited, and the bank
or trust company shall thereupon be relieved of all responsibility to such
holders.

e. STATUS OF REDEEMED SHARES. Shares of Preferred Stock which are
redeemed shall be cancelled and shall be restored to the status of authorized
but unissued shares.

5. PURCHASE. Except as specified in Section 4.3(B)(3) of this Article 4,
nothing herein shall limit the right of the Corporation to purchase any of its
outstanding shares in accordance with law, by public or private transaction.

6. VOTING. Except as (i) otherwise set forth in this Article 4, (ii) fixed
by the Board of Directors pursuant to Section 4.2 of this Article 4, and (iii)
otherwise expressly provided by law, all voting power shall be in the Common
Stock and none in the Preferred Stock. Except as fixed by the Board of Directors
pursuant to Section 4.2 of this Article 4, and except as otherwise expressly
provided by law, where one or more series of Preferred Stock have voting power,
all series of

-6-
<PAGE>
Preferred Stock having such power shall vote as a single class.

7. DENIAL OF PREEMPTIVE RIGHTS AND CUMULATIVE VOTING. No shareholder or
any other person shall have any preemptive right whatsoever, and cumulative
voting shall not be permitted.

ARTICLE V.

The Corporation will not commence business until it has received for the
issuance of its shares consideration of the value of at least $1,000.

ARTICLE VI.

Without necessity for action by its shareholders, the Corporation may
purchase, directly or indirectly, its own shares to the extent of the aggregate
of unrestricted capital surplus available therefor and unrestricted reduction
surplus available therefor.

ARTICLE VII.

Section A. VOTING REQUIREMENT. Notwithstanding any provision of the Texas
Business Corporation Act which requires the vote or concurrence of the holders
of more than a majority of the shares of the Corporation entitled to vote to
take an action, the vote or concurrence of the holders of a majority of the
shares of the Corporation entitled to vote shall be sufficient to take such
action.

Section B. QUORUM REQUIREMENT. The holders of at least a majority of the
shares of the Corporation entitled to vote, represented in person or by proxy,
shall constitute a quorum at any meeting of shareholders of the Corporation.

Section C. INTERESTED TRANSACTIONS. No contract or other transaction
between the Corporation

-7-
<PAGE>
and one or more of its directors, officers or securityholders or between the
Corporation and another corporation, partnership, joint venture, trust or other
enterprise of which one or more of the Corporation's directors, officers or
securityholders are members, officers, securityholders, directors or employees
or in which they are otherwise interested, directly or indirectly, shall be
invalid solely because of such relationship, or solely because such a director,
officer or securityholder is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or other
transaction, or solely because his or their votes are counted for such purpose,
if (A) the material facts as to his relationship or interest and as to the
contract or other transaction are known or disclosed to the Board of Directors
or committee thereof, and such board or committee in good faith authorizes the
contract or other transaction by the affirmative vote of a majority of the
disinterested directors even though the disinterested directors be less than a
quorum, or (B) the material facts as to his relationship or interest and as to
the contract or other transaction are known or disclosed to the shareholders
entitled to vote thereon, and the contract or other trans- action is approved in
good faith by vote of the shareholders, or (C) the contract or other transaction
is fair as to the Corporation as of the time it is entered into.

ARTICLE VIII.

Section A. INDEMNIFICATION. As permitted by Section G of Article 2.02-1 of the
Texas

-8-
<PAGE>
Business Corporation Act as in effect on the date of the filing of these
Articles of Incorporation with the Secretary of State of the State of Texas
("Indemnification Article"), the Corporation hereby:

1. makes mandatory the indemnification permitted under Section B of the
Indemnification Article as contemplated by Section G thereof;

2. makes mandatory its payment or reimbursement of the reasonable expenses
incurred by a director who was, is, or is threatened to be made a named
defendant or respondent in a proceeding upon such director's compliance with the
requirements of Section K of the Indemnification Article; and

3. extends the mandatory indemnification referred to in Section 8.1 (a)
above and the mandatory payment or reimbursement of expenses referred to in
Section 8.1 (b) above (i) to all officers of the Corporation and (ii) to all
persons who are or were serving at the request of the Corporation as a director,
officer, partner or trustee of another foreign or domestic corporation,
partnership, joint venture, trust or employee benefit plan, to the same extent
that the Corporation is obligated to indemnify and pay or reimburse expenses to
directors.

Section B. INSURANCE. The Corporation may purchase and maintain insurance
or another arrangement on behalf of any person who is or was a director,
officer, employee, or agent of the Corporation, or who is or was serving at the
request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise, against any liability asserted
against him and incurred by him in such a capacity or arising

-9-
<PAGE>
out of his status as such a person, whether or not the Corporation would have
the power to indemnify him against that liability under the Indemnification
Article.

Section C. NON-EXCLUSIVITY. The provisions of Sections 8.1 and 8.2 of this
Article 8 shall not be deemed exclusive of any other rights to which any such
director, officer or other person may be entitled under any other agreement,
pursuant to a vote of directors or any committee thereof or a vote of
shareholders, as a matter of law or otherwise, either as to action in his
official capacity or as to action in another capacity while holding such office,
and shall continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person. No person shall be entitled to indemnification pursuant to this Article
8 in relation to any matter as to which indemnification shall not be permitted
by law.

ARTICLE IX.

In performing his duties, a director of the Corporation shall be entitled
to rely on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented by (A)
one or more officers or employees of the Corporation whom the director
reasonably believes to be reliable and competent in the matters presented, (B)
counsel, public accountants or other persons as to matters which the director
reasonably believes to be within such person's professional or expert
competence, or (C) a committee of the Board of Directors upon which he does not
serve, duly designated in accordance with a provision of the by-laws, as to
matters within its designated authority, which committee the director deems to
merit confidence, but he shall not be considered to be acting in good faith if
he has knowledge concerning the matter in question

-10-
<PAGE>
that would cause such reliance to be unwarranted. A person who so performs his
duties shall have no liability to the Corporation (whether asserted directly or
derivatively) by reason of being or having been a director of the Corporation.

No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for an act or omission in the director's
capacity as a director, except to the extent that the foregoing exemption from
liability is not permitted under the applicable provision of the Texas
Miscellaneous Corporation Laws Act (or any successor or replacement statute) as
the same now exists or may hereafter be amended.

Any repeal or modification of the foregoing paragraph shall not adversely
affect any right or protection of a director of the Corporation existing at the
time of such repeal or modification.

ARTICLE X.

The address of the registered office of the Corporation is Five Riverway,
Houston, Texas 77056, and the name of the registered agent of the Corporation at
such address is John E. Phillips.

ARTICLE XI.

The Board of Directors shall consist of ten (10) members who shall serve
as directors until

-11-
<PAGE>
the first annual meeting of shareholders or until their successors shall have
been elected and qualified, and whose names and addresses are as follows:

NAME ADDRESS
- ---- -------

Samuel A. Jones 800 Bering Drive
Suite 210
Houston, Texas 77057

David L. Lane Twenty Briar Hollow Lane
Houston, Texas 77027

Joel M. Levy 5333 Gulfton
Houston, Texas 77081

Harlon E. Martin, Jr. 11200 Westheimer
Suite 905
Houston, Texas 77042

Jack H. Mayfield, Jr. 6371 Richmond Avenue
Houston, Texas 77057

Walter G. Mayfield 6371 Richmond Avenue
Houston, Texas 77057

Madeline G. O'Brien 1400 Post Oak Boulevard
Suite 100
Houston, Texas 77056

John E. Phillips Five Riverway
Houston, Texas 77056

Joseph E. Reid 651 Shady Hollow
Houston, Texas 77056

Henry V. Seger 770 South Post Oak Lane
Suite 500
Houston, Texas 77056

-12-
<PAGE>
IN WITNESS WHEREOF, I have set my hand this 12th day of January, 1995.

__________________________________________
John E. Phillips
President

Sworn to on __________________, by the above named officer.

__________________________________________
Notary Public in and for the State of Texas

Print Name:_______________________________

My Commission Expires:____________________

-13-
<PAGE>
ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION
OF
RIVERWAY HOLDINGS, INC.

Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation hereby adopts the following
Articles of Amendment to its Articles of Incorporation

ARTICLE ONE

The name of the corporation is Riverway Holdings, Inc.

ARTICLE TWO

The following amendment to the Articles of Incorporation were adopted by
the shareholders of the corporation on August 4, 1998. The amendment alters or
changes the Restated Articles of Incorporation.

Article IV was amended to increase the number of authorized shares of
common stock to 50 million shares and to increase the number of authorized
shares of preferred stock to 20 million shares, issuable in series as determined
by the Board of Directors. The amendment alters or changes Article IV of the
amended Articles of Incorporation and the full text of Article IV is as follows:

ARTICLE IV

Section 4.1. AUTHORIZED SHARES. The aggregate number of all classes of
stock which the Corporation has authority to issue is 70,000,000 shares divided
into (A) one class of 50,000,000 shares of Common Stock with a par value of
$1.00 per share, and (B) one class of 20,000,000 shares of Preferred Stock with
a par value of $1.00 per share, which may be divided into and issued in series
as set forth in this Article IV.

Section 4.2. AUTHORIZATION OF DIRECTORS TO DETERMINE CERTAIN RIGHTS OF
PREFERRED STOCK. The shares of Preferred Stock may be divided into and issued in
series. The Board of Directors shall have the authority to establish series of
unissued shares of Preferred Stock by fixing and determining the relative rights
and preferences of the shares of any series so established, and to increase or
decrease the number of shares within each such series; provided, however, that
the Board of Directors may not decrease the number of shares within a series of
Preferred Stock to less than the number of shares within such series that are
then issued. The Preferred Stock of each such series shall have such
designations, preferences, limitations, or relative rights, including voting
rights, as
<PAGE>
shall be set forth in the resolution or resolutions establishing such series
adopted by the Board of Directors, including, but without limiting the
generality of the foregoing, the following:

(A) The distinctive designation of, and the number of shares of
Preferred Stock that shall constitute, such series, which number (except
where otherwise provided by the Board of Directors in the resolution
establishing such series) may be increased or decreased (but not below the
number of shares of such series then outstanding) from time to time by
like action of the Board of Directors;

(B) The rights in respect of dividends, if any, of such series of
Preferred Stock, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes or any
other series of the same or other class or classes of capital stock of the
Corporation and whether such dividends shall be cumulative or
noncumulative;

(C) The right, if any, of the holders of such series of Preferred
Stock to convert the same into, or exchange the same for, shares of any
other class or classes or of any other series of the same or any other
class or classes of capital stock, obligations, indebtedness, rights to
purchase securities or other securities of the Corporation or other
entities, domestic or foreign, or for other property or for any
combination of the foregoing, and the terms and conditions of such
conversion or exchange;

(D) Whether or not shares of such series of Preferred Stock shall be
subject to redemption, and the redemption price or prices and the time or
times at which, and the terms and conditions on which, shares of such
series of Preferred Stock may be redeemed;

(E) The rights, if any, of the holders of such series of Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation or in the event of any merger or
consolidation of or sale of assets by the Corporation;

(F) The terms of any sinking fund or redemption or repurchase or
purchase account, if any, to be provided for shares of such series of
Preferred Stock;

(G) The voting powers, if any, of the holders of any series of
Preferred Stock generally or with respect to any particular matter, which
may be less than, equal to or greater than one vote per share, and which
may, without limiting the generality of the foregoing, include the right,
voting as a series of Preferred Stock as a class, to elect one or more
directors of the Corporation generally or under such specific
circumstances and on such conditions, as shall be provided in the
resolution or resolutions of the Board of Directors adopted pursuant
hereto, including, without limitation, in the event there shall have been
a

-2-
<PAGE>
default in the payment of dividends on or redemption of any one or more
series of Preferred Stock; and

(H) Such other powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, as the Board of Directors shall determine.

Section 4.3. PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF ALL CLASSES
OF CAPITAL STOCK.

(A) GENERAL. All shares of Common Stock shall have rights identical
to those of all other such shares. Except as they may vary among series
established pursuant to Section 4.2 of this Article IV, all shares of
Preferred Stock shall have preferences, limitations, and relative rights
identical to those of all other such shares.

(B) LIQUIDATION PREFERENCE. In the event of dissolution,
liquidation, or winding up of the Corporation (whether voluntary or
involuntary), after payment or provision for payment of debts but before
any distribution to the holders of Common Stock, the holders of each
series of Preferred Stock then outstanding shall be entitled to receive
the amount fixed by the Board of Directors pursuant to Section 4.2 of this
Article IV and no more. All remaining assets shall be distributed pro rata
among the holders of Common Stock. If the assets distributable among the
holders of Preferred Stock are insufficient to permit full payment to
them, the entire assets shall be distributed among the holders of the
Preferred Stock in proportion to their respective liquidation preferences
unless otherwise provided by the Board of Directors pursuant to Section
4.2 of this Article IV. Neither the consolidation, merger, or
reorganization of the Corporation with any other corporation or
corporations, nor the sale of all or substantially all the assets of the
Corporation, nor the purchase or redemption by the Corporation of any of
its outstanding shares shall be deemed to be a dissolution, liquidation,
or winding up within the meaning of this paragraph.

(1) RIGHT; METHOD. All or any part of any one or more series
of Preferred Stock may be redeemed at any time or times at the option of
the Corporation, by resolution of the Board of Directors, in accordance
with the terms and conditions of this Article IV and those fixed by the
Board of Directors pursuant to Section 4.2 of this Article IV. The
Corporation may redeem shares of any one or more series without redeeming
shares of any other series. If less than all the shares of any series are
to be redeemed, the shares of the series to be redeemed shall be selected
ratably or by lot or by any other equitable method determined by the Board
of Directors.

-3-
<PAGE>
(2) NOTICE. Notice shall be given to the holders of shares to
be redeemed, either personally or by mail, not less than twenty nor more
than fifty days before the date fixed for redemption.

(3) PAYMENT. Holders of redeemed shares shall be paid in cash
the amount fixed by the Board of Directors pursuant to Section 4.2 of this
Article IV.

(4) PROVISION FOR PAYMENT. On or before the date fixed for
redemption, the Corporation may provide for payment of a sum sufficient to
redeem the shares called for redemption either (a) by setting aside the
sum, separate from its other funds, in trust for the benefit of the
holders of the shares to be redeemed, or (b) by depositing such sum in a
bank or trust company (either one in Texas having capital and surplus of
at least $10,000,000 according to its latest statement of condition, or
one anywhere in the United States duly appointed and acting as transfer
agent of the Corporation) as a trust fund, with irrevocable instructions
and authority to the bank or trust company to give or complete the notice
of redemption and to pay to the holders of the shares to be redeemed, on
or after the date fixed for redemption, the redemption price on surrender
of their respective share certificates. The holders of shares to be
redeemed may be evidenced by a list certified by the Corporation (by its
president or a vice president and by its secretary or an assistant
secretary) or by its transfer agent. If the Corporation so provides for
payment, then from and after the date fixed for redemption (a) the shares
shall be deemed to be redeemed, (b) dividends thereon shall cease to
accrue, (c) such setting aside or deposit shall be deemed to constitute
full payment for the shares, (d) the shares shall no longer be deemed to
be outstanding, (e) the holders thereof shall cease to be shareholders
with respect to such shares, and (f) the holders shall have no rights with
respect thereto except the right to receive (without interest) their
proportionate shares of the funds so set aside or deposited upon surrender
of their respective certificates, and any right to convert such shares
which may exist. Any interest accrued on funds so set aside or deposited
shall belong to the Corporation. If the holders of the shares do not,
within six years after such deposit, claim any amount so deposited for
redemption thereof, the bank or trust company shall upon demand pay over
to the Corporation the balance of the funds so deposited, and the bank or
trust company shall thereupon be relieved of all responsibility to such
holders.

(5) STATUS OF REDEEMED SHARES. Shares of Preferred Stock which
are redeemed shall be canceled and shall be restored to the status of
authorized but unissued shares.

(D) PURCHASE. Except as fixed by the Board of Directors pursuant to
Section 4.2 of this Article IV or as otherwise expressly provided by law,
nothing herein shall limit the

-4-
<PAGE>
right of the Corporation to purchase any of its outstanding shares in
accordance with law, by public or private transaction.

ARTICLE THREE

The number of shares of the corporation outstanding at the time of such
adoption was 563,563; and the number of shares entitled to vote thereon was
563,563.

ARTICLE FOUR

The number of shares voted for the amendment to change Article IV was
450,754, the number of shares voted against such amendment was 1,000 and the
number of shares abstaining was 500.

Dated: August 5, 1998

RIVERWAY HOLDINGS, INC.

By:_____________________________
John E. Phillips
President

-5-

EXHIBIT 3.2

AMENDED AND RESTATED BYLAWS

RIVERWAY HOLDINGS, INC.
A TEXAS CORPORATION

DATE OF ADOPTION
JUNE 18, 1998
<PAGE>
AMENDED AND RESTATED BY-LAWS OF

RIVERWAY HOLDINGS, INC.

ARTICLE I

OFFICES AND AGENT

The Corporation may have such offices, either within or without the State
of Texas, as the Board of Directors may designate or as the business of the
Corporation may require from time to time.

The registered office of the Corporation required by the Texas Business
Corporation Act to be maintained in the State of Texas may be, but need not be,
identical with the principal office in the State of Texas, as designated by the
Board of Directors. The address of the registered office or the identity of the
registered agent may be changed from time to time by the Board of Directors.

The address of the initial registered office of the Corporation is Five
Riverway, Houston, Texas 77056 and the name of the initial registered agent of
the Corporation at such address is John E. Phillips.

ARTICLE II

SHAREHOLDERS

SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders shall be
held on such date in each year and at such time and place as may be determined
by the Board of Directors, for the purpose of electing directors and for the
transaction of such other business as may come before the meeting. If the day
fixed for the annual meeting shall be a legal holiday in the State of Texas,
such meeting shall be held on the next succeeding business day. If the election
of directors shall not be held on the day designated for any annual meeting of
the shareholders or at any adjournment thereof, the Board of Directors shall
cause the election to be held at a special meeting of the shareholders as soon
thereafter as may be convenient.

SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders, for any
purpose or purposes, may be called by the Chairman of the Board, the President
or by the Board of Directors,
<PAGE>
and shall be called by the President at the request of the holders of not less
than one-third of all the outstanding shares of the Corporation entitled to vote
at the meeting.

SECTION 3. PLACE OF MEETING. The Board of Directors may designate any
place, either within or without the State of Texas, as the place of meeting for
any annual or special meeting called by the Board of Directors. If no
designation is made, or if a special meeting be called otherwise than by the
Board of Directors, the place of meeting shall be the registered office of the
Corporation in the State of Texas.

SECTION 4. NOTICE OF MEETING. Written or printed notice stating the place,
day and hour of the meeting and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
nor more than fifty days before the date of the meeting, either personally or by
mail, by or at the direction of the Chairman of the Board, the President, or the
Secretary, or the officer or persons calling the meeting, to each shareholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail, addressed to the
shareholder at his address as it appears on the stock transfer books of the
Corporation, with postage thereon prepaid. Attendance by a shareholder, whether
in person or by proxy, at a shareholder's meeting shall constitute a waiver of
notice of such meeting of which he has had no notice.

SECTION 5. CLOSING OF TRANSFER BOOKS AND FIXING OF RECORD DATE. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors of the
Corporation may provide that the stock transfer books shall be closed for a
stated period not to exceed fifty days. If the stock transfer books shall be
closed for the purpose of determining shareholders entitled to notice of or to
vote at a meeting of shareholders, such books shall be closed for at least ten
days immediately preceding such meeting. In lieu of closing the stock transfer
books, the Board of Directors may, by resolution, fix in advance a date as the
record date for any such determination of shareholders, such date in any case to
be not more than fifty days and, in case of a meeting of shareholders, not less
than ten days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Di rectors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided in
this section, such determination shall apply to any

-2-
<PAGE>
adjournment thereof except where the determination has been made through the
closing of the stock transfer books and the stated period of closing has
expired.

SECTION 6. VOTING LISTS. The officer or agent having charge of the stock
transfer books of the Corporation shall make, at least ten days before each
meeting of shareholders, a complete list of the shareholders entitled to vote at
such meeting, or any adjournment thereof, arranged in alphabetical order, with
the address and the number of shares held by each, which list, for a period of
ten days prior to such meeting, shall be kept on file at the registered office
of the Corporation, and shall be subject to inspection by any shareholder at any
time during usual business hours. Such list shall also be produced and opened at
the time and place of the meeting and shall be subject to the inspection by any
shareholder during the whole time of the meeting. The original stock transfer
book shall be prima facie evidence as to who are the shareholders entitled to
examine such list or transfer books or to vote at any meeting of shareholders.

SECTION 7. QUORUM. A majority of the outstanding shares of the Corporation
entitled to vote, and represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders unless a lesser number is specified in the
Articles of Incorporation of the Corporation ("Quorum"). If less than a Quorum
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a Quorum shall be present or represented, any business may be
transacted which might have been transacted as originally notified. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a Quorum.

SECTION 8. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Such proxy shall be filed with the Secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid after
eleven months from the date of its execution, unless otherwise provided in the
proxy. Each proxy shall be revocable unless expressly provided therein to be
irrevocable.

SECTION 9. VOTING OF SHARES. Unless otherwise expressly provided in the
Articles of Incorporation of the Corporation, each outstanding share entitled to
vote shall be entitled to one vote on each matter submitted to a vote at a
meeting of shareholders.

SECTION 10. NOTIFICATIONS OF NOMINATIONS AND PROPOSED BUSINESS. Subject to
the rights of holders of any class of capital stock of the Corporation (other
than the common stock), nominations for the election of directors and proposals
for business to be brought before any shareholders' meeting may be made by the
Board of Directors or by any shareholder entitled to vote in the election of
directors generally. However, any such shareholder may nominate one or more

-3-
<PAGE>
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such shareholder has given timely notice in
proper written form of his intent to make such nomination or nominations or to
propose such business. To be timely, a shareholder's notice must be delivered to
or mailed and received by the Secretary of the Corporation not later than sixty
(60) days prior to such meeting. To be in proper written form, a shareholder's
notice to the Secretary shall set forth:

(i) the name and address of the shareholder who intends to make the
nominations or propose the business and, in the case of nominations for
the election of directors, of the person or persons to be nominated;

(ii) a representation that the shareholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice or propose the
business specified in the notice;

(iii) if applicable, a description of all arrangements or
understandings between the shareholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder;

(iv) such other information regarding each nominee or each matter of
business to be proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated or the
matter been proposed by the Board of Directors; and

(v) if applicable, the consent of each nominee to serve as director
of the Corporation if so elected.

A nomination of any person or proposal of any business not made in
compliance with the foregoing procedures shall not be eligible to be voted upon
by the shareholders at the meeting.

-4-
<PAGE>
ARTICLE III

BOARD OF DIRECTORS

SECTION 1. POWER; NUMBER; TERM OF OFFICE. The business and affairs of the
Corporation shall be managed by its Board of Directors except as the Board of
Directors shall delegate the power to so manage to the Executive Committee or
other committee.

The number of directors composing the initial Board of Directors shall be
ten. Upon resolution by the Board of Directors the number of directors may be
increased or decreased, but no decrease shall have the effect of shortening the
term of any incumbent director. Each director shall hold office for the term for
which such director is elected, and until such director's successor shall have
been elected and qualified or until such director's earlier death, resignation
or removal.

A director need not be a resident of the State of Texas or a shareholder
of the Corporation.

SECTION 2. CLASSIFIED BOARD. The directors of the Corporation shall be
divided into three classes, with respect to the time that they severally hold
office, as nearly equal in number as possible, with the initial term of office
of the first class of directors (the "Class I Directors") to expire at the 1999
annual meeting of holders of capital stock of the Corporation, the initial term
of office of the second class of directors (the "Class II Directors") to expire
at the 2000 annual meeting of holders of capital stock of the Corporation and
the initial term of office of the third class of directors (the "Class III
Directors") to expire at the 2001 annual meeting of holders of capital stock of
the Corporation. Directors elected to succeed those directors whose terms have
thereupon expired shall be elected for a term of office to expire at the third
succeeding annual meeting of holders of capital stock of the Corporation after
their election. If the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain or attain, if possible,
the equality of the number of directors in each class, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
If such equality is not possible, the increase or decrease shall be apportioned
among the classes in such a way that the difference in the number of directors
in any two classes shall not exceed one.

SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without notice other than this by-law immediately after, and at
the same place as, the annual meeting of shareholders. The Board of Directors
may provide, by resolution, the time and place, either within or without the
State of Texas, for the holding of additional regular meetings without notice
other than such resolution.

-5-
<PAGE>
SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the President
or any two directors. The person or persons authorized to call special meetings
of the Board of Directors may fix any place, either within or without the State
of Texas, as the place for holding any special meeting called by them.

SECTION 5. NOTICE. Notice of any special meeting shall be given at least
two days prior thereto by written notice delivered personally or mailed to each
director at his business address, or by telegram, telex, telecopy or similar
means of visual data transmission. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail so addressed, with postage
thereon prepaid. If notice be given by telegram, telex, telecopy or similar
means of visual data transmission, such notice shall be deemed to be delivered
when transmitted for delivery to the recipient. Any director may waive notice of
any meeting. The attendance of a director at a meeting shall constitute a waiver
of notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because that
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of any regular or special meeting of the Board of
Directors need be specified in the notice, or waiver of notice of such meeting.

SECTION 6. QUORUM. A majority of the number of directors fixed in
accordance with Section 2 of this Article III shall constitute a quorum for the
transaction of business at any meeting of the Board of Directors, but if less
than such majority is present at a meeting, a majority of the directors present
may adjourn the meeting from time to time without further notice.

SECTION 7. MANNER OF ACTING.

(a) ACTIONS AT A MEETING. Except as provided in Paragraph (b) of
this Section 7, the act of the majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.

(b) ACTIONS WITHOUT A MEETING. Any action required or permitted to
be taken at a meeting of the Board of Directors or the Executive Committee or
any other committee may be taken without a meeting, if a consent in writing,
setting forth the action so taken, is signed by all of the members of the Board
of Directors, Executive Committee or other committee, as the case may be. Such
consent shall have the same force and effect as a unanimous vote at a meeting.
Such writing, which may be in counterparts, shall be manually executed if
practicable; provided, however, that if circumstances so require, effect shall
be given to written consent transmitted by telegraph, telex, telecopy, or
similar means of visual data transmission.

-6-
<PAGE>
(c) TELEPHONE MEETINGS. Meetings of the Board of Directors of the
Corporation may be conducted by means of conference telephone or similar
communications equipment whereby all persons participating in the meeting can
hear and speak to each other.

SECTION 8. VACANCIES. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of (a) the holders of a majority of the
outstanding shares entitled to vote thereon at an annual or special meeting of
shareholders called for that purpose, or (b) a majority of the remaining
directors though less than a quorum of the Board of Directors. A person elected
to fill a vacancy shall be elected for the unexpired term of his predecessor in
office.

A vacancy shall be deemed to exist by reason of the death or resignation
of the person elected, or upon the failure of shareholders to elect directors to
fill the unexpired term of directors removed in accordance with the provisions
of Section 9 of this Article III.

A directorship to be filled by reason of an increase in the number of
directors may be filled (a) by the affirmative vote of the holders of a majority
of the outstanding shares entitled to vote thereon at an annual or special
meeting of shareholders called for that purpose or (b) by the board of directors
for a term of office continuing only until the next election of one or more
directors by the shareholders; provided, that the board of directors may not
fill more than two such directorships during the period between any two
successive annual meetings of shareholders.

SECTION 9. REMOVAL. At any meeting of shareholders called expressly for
the purpose of removal, any director or the entire Board of Directors may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote at an election of directors. Removal of directors
with or without cause may also be accomplished by unanimous written consent of
the shareholders without a meeting. In case the entire board or any one or more
of the directors are so removed, new directors may be elected at the same
meeting, or by the same written consent, for the unexpired term of the director
or directors so removed. Failure to elect directors to fill the unexpired term
of the directors so removed shall be deemed to create a vacancy or vacancies in
the Board of Directors.

SECTION 10. COMPENSATION. By resolution of the Board of Directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors, and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.

SECTION 11. PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board of Directors in which action on any corporate
matter is taken shall be presumed

-7-
<PAGE>
to have assented to the action taken unless his dissent shall be entered in the
minutes of the meeting, or unless he shall file his written dissent to such
action with the person acting as Secretary of the meeting before the adjournment
thereof, or shall forward such dissent by registered mail to the Secretary of
the Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.

SECTION 12. EXECUTIVE AND OTHER COMMITTEES. There may be established an
Executive Committee, and one or more other committees, composed of one or more
directors designated by resolution adopted by a majority of the full number of
directors of the Board of Directors as fixed in accordance with Section 2 of
this Article III. The Executive Committee or such other committees may meet at
stated times, or on notice to all members by any one member. Vacancies in the
membership of the Executive Committee or such other committees shall be filled
by a majority vote of the full number of directors on the Board of Directors at
a regular meeting or at a special meeting called for that purpose. During the
intervals between meetings of the Board, the Executive Committee, if it shall
have been established, may advise and aid the officers of the Corporation in all
matters concerning its interest and the management of its business, and shall
generally perform such duties and exercise such powers as may be directed or
delegated by the Board of Directors from time to time. The Board of Directors
may delegate to the Executive Committee or such other committees the authority
to exercise all the powers of the Board of Directors, including the power to
declare dividends or to authorize the issuance of shares of the Corporation,
except where action of the full Board of Directors is required by the Texas
Business Corporation Act. The designation of and delegation of power to the
Executive Committee shall not operate to relieve the Board of Directors, or any
members thereof, of any responsibility imposed upon it or him by law.

ARTICLE IV

OFFICERS

SECTION 1. NUMBER. The officers of the Corporation shall be a Chairman of
the Board, a Vice Chairman of the Board, a President, one or more
Vice-Presidents (the number thereof to be determined by the Board of Directors),
a Secretary, and a Treasurer, each of whom shall be elected by the Board of
Directors. Such other officers and assistant officers as may be deemed necessary
may be elected or appointed by the Board of Directors. Any two or more offices
may be held by the same person.

SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation
shall be elected annually by the Board of Directors at the regular meeting of
the Board of Directors held after each annual meeting of the shareholders. If
the election of officers shall not be held at such meeting, such

-8-
<PAGE>
election shall be held as soon thereafter as may be convenient. Each officer
shall hold office until his successor shall have been duly elected and shall
have been qualified, or until his death, or until he shall resign or shall have
been removed in the manner hereinafter provided.

SECTION 3. REMOVAL. Any officer may be removed by the Board of Directors
whenever in its judgment the best interests of the Corporation would be served
thereby, but such removal shall be without prejudice to the contract rights, if
any, of the person so removed.

SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors for the unexpired portion of the term.

SECTION 5. CHAIRMAN OF THE BOARD. The Chairman of the Board shall, when
present, preside at all meetings of the Board of Directors and shareholders, and
shall have and may exercise such powers as are from time to time assigned to him
by the Board of Directors.

SECTION 6. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board
shall have and may exercise such powers as are from time to time assigned to him
by the Board of Directors.

SECTION 7. PRESIDENT. The President shall be the principal executive
officer of the Corporation and, subject to the control of the Board of
Directors, shall in general supervise and control all of the business and
affairs of the Corporation. He shall, when present and in the absence of the
Chairman of the Board, preside at all meetings of the shareholders and of the
Board of Directors. He shall perform all duties incident to the office of
President and such other duties as may be prescribed by the Board of Directors
from time to time.

SECTION 8. THE VICE PRESIDENTS. In the absence of the President or in the
event of his death, inability or refusal to act, the Vice President (or should
there be more than one Vice President, the Vice Presidents in the order
designated at the time of their election, or in the absence of any designation
then in the order of their election) shall perform the duties of President, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the President. He shall perform such other duties as from time
to time may be assigned to him by the President or the Board of Directors.

SECTION 9. THE SECRETARY. The Secretary shall: (a) keep the minutes of the
shareholders' and the Board of Directors' meetings in one or more books provided
for that purpose; (b) see that all notices are duly given in accordance with the
provisions of these by-laws, or as required by law; (c) be custodian of the
corporate records and of the seal of the Corporation, and see that the seal of
the Corporation is affixed to all documents as may be necessary or appropriate;
(d) keep a register of the

-9-
<PAGE>
post office address of each shareholder which shall be furnished to the
Secretary by such shareholder; (e) have general charge of the stock transfer
books of the Corporation; and (f) in general, perform all duties incident to the
office of Secretary, and such other duties as from time to time may be
designated to him by the President or the Board of Directors.

SECTION 10. THE TREASURER. If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his duties in such
sum, and with such surety or sureties, as the Board of Directors shall
determine. He shall: (a) have charge and custody of, and be responsible for, all
funds and securities of the Corporation from any source whatsoever, and deposit
all such moneys in the name of the Corporation in such banks, trust companies,
or other depositories as shall be selected by the Board of Directors; and (b) in
general perform all of the duties incident to the office of Treasurer and such
other duties as from time to time may be assigned to him by the President or by
the Board of Directors.

SECTION 11. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant
Secretaries when authorized by the Board of Directors may sign with the
President, or a Vice President, certificates for shares of the Corporation the
issuance of which shall have been authorized by a reso lution of the Board of
Directors. The Assistant Treasurers shall, respectively, if required by the
Board of Directors, give bonds for the faithful discharge of their duties in
such sums and with such sureties as the Board of Directors shall determine. The
Assistant Secretaries and Assistant Treasurers, in general, shall perform such
duties as shall be assigned to them by the Secretary or the Treasurer,
respectively, or by the President or the Board of Directors.

SECTION 12. SALARIES. The salaries, if any, of the officers shall be fixed
from time to time by the Board of Directors and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the Corporation.

ARTICLE V

CERTIFICATES FOR SHARES, TRANSFER AND REPLACEMENT

SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of
the Corporation shall be in such form as shall be determined by the Board of
Directors. Such certificates shall be signed by the President or a Vice
President, and by the Secretary or an Assistant Secretary. If such certificates
are signed or countersigned by a transfer agent or registrar, other than the
Corporation, such signature of the President or a Vice President and Secretary
or Assistant Secretary, and the seal of the Corporation, or any of them, may be
executed in facsimile, engraved or printed. If any officer who has signed or
whose facsimile signature has been placed on any certificate shall have ceased

-10-
<PAGE>
to be such officer before the certificate is issued, it may be issued by the
Corporation with the same effect as if the officer has not ceased to be such at
the date of issue. All certificates for shares shall be consecutively numbered
or otherwise identified. The name and address of the person to whom the shares
represented thereby are issued with the number of shares and date of issue,
shall be en tered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be cancelled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and cancelled, except that in case
of a lost, stolen or destroyed certificate a new one may be issued therefor
provided in Section 3 of this Article V.

SECTION 2. TRANSFER OF SHARES. Transfer of shares of the Corporation shall
be made only on the stock transfer books of the Corporation by the holder of
record thereof, or by his legal representative, who shall furnish proper
evidence of authority to transfer, or by his attorney thereunto authorized by
power of attorney, duly executed and filed with the Secretary of the
Corporation, and on surrender for cancellation of the certificate for such
shares. The person in whose name shares stand on the books of the Corporation
shall be deemed by the Corporation to be the owner thereof for all purposes.

SECTION 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation shall
issue a new certificate in place of any certificate for shares previously issued
if the registered owner of the certificate: (a) makes proof in affidavit form
that it has been lost, destroyed or wrongfully taken; (b) requests the issuance
of a new certificate before the Corporation has notice that the certificate has
been acquired by a purchaser for value in good faith and without notice of an
adverse claim; (c) gives a bond in such form, and with such surety or sureties,
with fixed or open penalty, as the Corporation may direct, to indemnify the
Corporation (and its transfer agent and registrar, if any) against any claim
that may be made on account of the alleged loss, destruction or theft of the
certificate; and (d) satisfies any other reasonable requirements imposed by the
Corporation. When a certificate has been lost, apparently destroyed or
wrongfully taken, and the holder of record fails to notify the Corpora tion
within a reasonable time after he has notice of it, and the Corporation
registers a transfer of the shares represented by the certificate before
receiving such notification, the holder of record is precluded from making any
claim against the Corporation for the transfer or for a new certificate.

ARTICLE VI

FISCAL YEAR

The Board of Directors shall, by resolution, fix the fiscal year of the
Corporation.

-11-
<PAGE>
ARTICLE VII

DIVIDENDS

The Board of Directors or the Executive Committee, if so authorized by a
resolution of the Board of Directors, may from time to time declare that the
Corporation may pay dividends on its outstanding shares in the manner provided
by law.

ARTICLE VIII

SEAL

The Board of Directors shall provide a corporate seal, which shall be
square in form with a double lined border and an oak leaf, and shall have
inscribed thereon the name of the Corporation.

ARTICLE IX

WAIVER OF NOTICE

Whenever any notice is required to be given to any shareholder or director
of the Corporation under the provisions of these by-laws, the Articles of
Incorporation or the Texas Business Corporation Act, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice.

ARTICLE X

PROCEDURE

Meetings of the shareholders and of the Board of Directors shall be
conducted in accordance with the procedure as contained in Robert's Rules of
Order, to the extent applicable.

-12-
<PAGE>
ARTICLE XI

PARTICIPATION OF DIRECTORS AND
OFFICERS IN RELATED BUSINESS

Unless otherwise provided by contract, officers and directors of this
Corporation may hold positions as officers and directors of other corporations,
in related businesses, and their efforts to advance the interest of those
corporations will not create a breach of fiduciary duty to this Corporation in
the absence of bad faith.

ARTICLE XII

AMENDMENTS

The power to alter, amend, or repeal the By-Laws or adopt new By-Laws
shall be vested in the Board of Directors.

-13-

EXHIBIT 10.1

COMMON STOCK AGREEMENT

This Common Stock Agreement ("Agreement") is between Riverway Holdings,
Inc., a Texas corporation (the "Company") and John E. Phillips, a resident of
Harris County, Texas ("Phillips").

W I T N E S S E T H:

WHEREAS, the Board of Directors of the Company had previously granted
Phillips options ("Options") to acquire, in the aggregate, 25,000 shares of
common stock, $1.00 par value ("Common Stock") of the Company at an average
price of approximately $12.10, with such Options to expire on June 30, 1997; and

WHEREAS, by a corporate resolution dated June 6, 1997, the Board of
Directors of the Company has decided to grant Phillips, in exchange for his
Options, 10,000 shares of Common Stock (the "Stock");

NOW, THEREFORE, for and in consideration of these premises it is
agreed as follows:

1. GRANT AND EXCHANGE. Subject to the terms and conditions contained
herein, the Company hereby grants Phillips 10,000 shares of the Stock in
exchange for Phillips' Options, which Options are hereby canceled.

2. RIGHTS AND RESTRICTIONS. As of the date hereof, Phillips shall be
entitled to vote, receive dividends with respect to and enjoy all other rights
and suffer all other obligations related to ownership of the Stock except that
the Stock may not be sold, transferred, assigned, pledged, hypothecated or
otherwise disposed of except as provided in this Agreement. Phillips shall be
entitled to unrestricted ownership of 2,000 shares of the Stock as of June 30,
1997 ("Issuance Date"). The other 8,000 shares of the Stock shall be subject to
the above mentioned restrictions on transferability, provided that on each
subsequent anniversary of the Issuance Date, the restriction on transferability
with respect to an additional 2,000 shares shall be removed until the
restrictions with respect to the final 2,000 shares are removed on the fourth
anniversary of the Issuance Date.

3. ISSUANCE OF CERTIFICATES; LEGENDS. The shares of the Stock issued to
Phillips pursuant to this Agreement shall be evidenced by five separate stock
certificates, each issued in the amount of 2,000 shares. The first certificate
shall be issued without a restrictive legend. The other four certificates shall
bear the following restrictive legend, with the date

-1-
<PAGE>
in each legend reflecting the actual date that the restriction on
transferability set forth above is to be removed:

THE SHARES OF COMMON STOCK REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY SET FORTH IN A COMMON STOCK AGREEMENT DATED JUNE 30,
1997, A COPY OF WHICH IS AVAILABLE AT RIVERWAY BANK. EXCEPT AS PROVIDED IN
THE COMMON STOCK AGREEMENT, THE SHARES REPRESENTED BY THIS CERTIFICATE MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED OR OTHERWISE
DISPOSED OF UNTIL JUNE 30, ____.

4. EXTRAORDINARY CORPORATE TRANSACTIONS. In the event of any merger,
consolidation, acquisition, reorganization or similar occurrence in which the
Company will not be a surviving entity, it is the intent of the Company and
Phillips to have the restrictions on transferability set forth herein apply to
any new shares of stock or other securities received in exchange for the shares
of the Stock. In the event of the dissolution or liquidation of the Company or
similar occurrence, the shares of the Stock shall become freely transferable.

5. COMPLIANCE WITH SECURITIES LAWS. Prior to the issuance of a
certificate(s) for shares of the Stock, Phillips shall enter into such written
representations, warranties and agreements as the Board may reasonably request
in order to comply with applicable securi ties laws or with this Agreement. In
addition to the foregoing, Phillips hereby represents and warrants to the
Company as follows:

(a) Phillips acknowledges that the shares of the Stock constitute
securities under the Securities Act of 1933, as amended and the securities laws
of the State of Texas (the "Acts").

(b) Phillips acknowledges that the shares of the Stock have not been
registered under the Acts in reliance on available exemptions from the
registration requirements thereof.

-2-
<PAGE>
(c) Phillips represents and warrants that he has such knowledge and
experience in financial, business and taxation matters generally and specific
knowledge regarding the Company and its subsidiaries that he is capable of
evaluating the merits and risks of his acquisition of the shares of Stock.

(d) Phillips has been advised by the Company that registration under
the Acts or exemptions from the registration requirements thereof will be
required for any subsequent sale or other distribution of the shares of the
Stock issued pursuant to this Agreement.

6. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement constitutes
the entire agreement between the parties hereto pertaining to the grant and
exchange and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, and there are no
warranties, representations or other agreements between the parties in
connection with the subject matter hereof except as set forth specifically
herein or contemplated hereby. No supplement, modification or waiver of this
Agreement shall be binding unless executed in writing by the party to be bound
thereby. The failure of a party to exercise any right or remedy shall not be
deemed or constitute a waiver of such right or remedy in the future. No waiver
of any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provision hereof (regardless of whether similar), nor shall
any such waiver constitute a continuing waiver unless otherwise expressly
provided.

7. SEVERABILITY. If any provision of the Agreement is rendered or declared
illegal or unenforceable by reason of any existing or subsequently enacted
legislation or by decree of a court of last resort, the parties hereto shall
promptly meet and negotiate substitute provisions for those rendered or declared
illegal or unenforceable, but all of the remaining provisions of this Agreement
shall remain in full force and effect.

8. EXECUTION. This Agreement may be executed in multiple counterparts each
of which shall be deemed an original and all of which shall constitute one
instrument.

9. GOVERNING LAW. The provisions of this Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Texas
(excluding any con flicts-of-law rule or principle that might refer same to the
laws of another jurisdiction),

-3-
<PAGE>
except to the extent that same are mandatorily subject to the laws of another
jurisdiction pursuant to the laws of such other jurisdiction.

IN WITNESS WHEREOF, this Agreement has been executed as of the 30th day of
June, 1997.

RIVERWAY HOLDINGS, INC.

By:______________________________
Name: Jack H. Mayfield, Jr.
Title:Chairman of the Board

By:______________________________
Name: John E. Phillips

Address: ________________________

________________________

-4-

EXHIBIT 10.2

RIVERWAY HOLDINGS, INC.

1998 STOCK INCENTIVE PLAN

I. PURPOSE

The purpose of the RIVERWAY HOLDINGS, INC. 1998 STOCK INCENTIVE PLAN (the
"PLAN") is to provide a means through which RIVERWAY HOLDINGS, INC., a Texas
corporation (the "COMPANY"), and its subsidiaries, may attract able persons to
enter the employ of the Company and to provide a means whereby those employees
upon whom the responsibilities of the successful administration and management
of the Company rest, and whose present and potential contributions to the
welfare of the Company are of importance, can acquire and maintain stock
ownership, thereby strengthening their concern for the welfare of the Company
and their desire to remain in its employ. A further purpose of the Plan is to
provide employees, directors and other individuals with additional incentive and
reward opportunities designed to enhance the profitable growth of the Company.
Accordingly, the Plan provides for granting Incentive Stock Options,
Non-qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards,
Performance Awards, Phantom Stock Awards, or any combination of the foregoing,
as is best suited to the circumstances of the particular Holder as provided
herein.

II. DEFINITIONS

The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:

(a) "AFFILIATES" means any "parent corporation" of the Company and any
"subsidiary" of the Company within the meaning of Code Sections 424(e) and (f),
respectively.

(b) "AWARD" means, individually or collectively, any Option, Restricted
Stock Award, Phantom Stock Award, Performance Award or Stock Appreciation Right.

(d) "CHANGE OF CONTROL" means the occurrence of any of the following
events: (i) the Company shall not be the surviving entity in any merger,
consolidation or other reorganization (or survives only as a subsidiary of an
entity other than a previously wholly-owned subsidiary of the Company), (ii) the
Company's subsidiary bank is merged or consolidated into, or otherwise acquired
by, an entity other than a wholly-owned subsidiary of the Company, (iii) the
Company sells, leases or exchanges all or substantially all of its assets to any
other person or entity (other than a
<PAGE>
wholly-owned subsidiary of the Company), (iv) the Company is to be dissolved and
liquidated, (v) any person or entity, including a "group" as contemplated by
Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control
(including, without limitation, power to vote or control the voting) of more
than 50% of the outstanding shares of the Company's voting stock (based upon
voting power), or (vi) as a result of or in connection with a contested election
of directors, the persons who were directors of the Company before such election
shall cease to constitute a majority of the Board.

(e) "CHANGE OF CONTROL VALUE" shall mean (i) the per share price offered
to shareholders of the Company in any such merger, consolidation,
reorganization, sale of assets or dissolution transaction, (ii) the price per
share offered to shareholders of the Company in any tender offer or exchange
offer whereby a Change of Control takes place, or (iii) if such Change of
Control occurs other than pursuant to a tender or exchange offer, the Fair
Market Value per share of the shares into which Awards are exercisable, as
determined by the Committee, whichever is applicable. In the event that the
consideration offered to shareholders of the Company consists of anything other
than cash, the Committee shall determine the fair cash equivalent of the portion
of the consideration offered which is other than cash.

(f) "CODE" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any amendments
or successor provisions to any section and any regulations under such section.

(g) "COMMITTEE" means the Compensation Committee of the Board which shall
be (i) constituted so as to permit the Plan to comply with Rule 16b-3 and (ii)
constituted solely of "outside directors," within the meaning of section 162(m)
of the Code and applicable interpretive authority thereunder.

(h) "COMPANY" means Riverway Holdings, Inc. and any of its Affiliates.

(i) "DIRECTOR" means an individual elected to the Board by the
shareholders of the Company or by the Board under applicable corporate law who
is serving on the Board on the date the Plan is adopted by the Board or is
elected to the Board after such date.

(j) An "EMPLOYEE" means any person (including an officer or a Director) in
an employment relationship with the Company or any parent or subsidiary
corporation (as defined in
section 424 of the Code).

(k) "1934 ACT" means the Securities Exchange Act of 1934, as amended.

-2-
<PAGE>
(l) "FAIR MARKET VALUE" means, as of any specified date, the mean of the
high and low sales prices of the Stock (i) reported by the any interdealer
quotation system on which the Stock is quoted on that date or (ii) if the Stock
is listed on a national stock exchange, reported on the stock exchange composite
tape on that date; or, in either case, if no prices are reported on that date,
on the last preceding date on which such prices of the Stock are so reported. If
the Stock is traded over the counter at the time a determination of its fair
market value is required to be made hereunder, its fair market value shall be
deemed to be equal to the average between the reported high and low or closing
bid and asked prices of Stock on the most recent date on which Stock was
publicly traded. In the event Stock is not publicly traded at the time a
determination of its value is required to be made hereunder, the determination
of its fair market value shall be made by the Committee in such manner as it
deems appropriate.

(m) "HOLDER" means an employee, director or other individual who has been
granted an Award.

(n) "INCENTIVE STOCK OPTION" means an incentive stock option within the
meaning of section 422(b) of the Code, commonly known as "qualified" stock
options.

(o) "NONQUALIFIED STOCK OPTION" means an option granted under Paragraph
VII of the Plan to purchase Stock which does not constitute an Incentive Stock
Option.

(p) "OPTION" means an Award granted under Paragraph VII of the Plan and
includes both Incentive Stock Options to purchase Stock and Nonqualified Stock
Options to purchase Stock.

(q) "OPTION AGREEMENT" means a written agreement between the Company and a
Holder with respect to an Option.

(r) "PERFORMANCE AWARD" means an Award granted under Paragraph X of the
Plan.

(s) "PERFORMANCE AWARD AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Performance Award.

(t) "PHANTOM STOCK AWARD" means an Award granted under Paragraph XI of the
Plan.

(u) "PHANTOM STOCK AWARD AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Phantom Stock Award.

(v) "PLAN" means the Riverway Holdings, Inc. 1998 Stock Incentive
Plan, as amended from time to time.

-3-
<PAGE>
(w) "RESTRICTED STOCK AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Restricted Stock Award.

(x) "RESTRICTED STOCK AWARD" means an Award granted under Paragraph IX of
the Plan.

(y) "RULE 16B-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as
such may be amended from time to time, and any successor rule, regulation or
statute fulfilling the same or a similar function.

(z) "SPREAD" means, in the case of a Stock Appreciation Right, an amount
equal to the excess, if any, of the Fair Market Value of a share of Stock on the
date such right is exercised over the exercise price of such Stock Appreciation
Right.

(aa) "STOCK" means the common stock, $1.00 par value, of the Company.

(bb) "STOCK APPRECIATION RIGHT" means an Award granted under
Paragraph VIII of the Plan.

(cc) "STOCK APPRECIATION RIGHTS AGREEMENT" means a written agreement
between the Company and a Holder with respect to an Award of Stock Appreciation
Rights.

III. EFFECTIVE DATE AND DURATION OF THE PLAN

The Plan shall be effective upon the date of its adoption by the Board,
provided that the Plan is approved by the shareholders of the Company within
twelve months thereafter. No further Awards may be granted under the Plan after
the expiration of ten years from the date of its adoption by the Board. The Plan
shall remain in effect until all Awards granted under the Plan have been
satisfied or expired.

IV. ADMINISTRATION

(a) COMMITTEE. The Plan shall be administered by the Committee.

(b) POWERS. Subject to the provisions of the Plan, the Committee shall
have sole authority, in its discretion, to recommend to the Board of Directors
of the Company which employees, directors or other individuals shall receive an
Award, the time or times when such Award shall be made, whether an Incentive
Stock Option, Nonqualified Option or Stock Appreciation Right shall be granted,
the number of shares of Stock which may be issued under each Option, Stock
Appreciation Right or Restricted Stock Award, and the value of each Performance
Award and

-4-
<PAGE>
Phantom Stock Award. In making such recommendations the Committee may take into
account the nature of the services rendered by the respective employees,
directors or other individuals, their present and potential contributions to the
Company's success and such other factors as the Committee in its discretion
shall deem relevant. All final decisions regarding the granting of Awards shall
be made by the Board of Directors of the Company.

(c) ADDITIONAL POWERS. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the express
provisions of the Plan, the Committee is authorized to construe the Plan and the
respective agreements executed thereunder, to prescribe such rules and
regulations relating to the Plan as it may deem advisable to carry out the Plan,
and to determine the terms, restrictions and provisions of each Award, including
such terms, restrictions and provisions as shall be requisite in the judgment of
the Committee to cause designated Options to qualify as Incentive Stock Options,
and to make all other determinations necessary or advisable for administering
the Plan. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in any agreement relating to an Award in the manner
and to the extent it shall deem expedient to carry it into effect. All final
determinations on the matters referred to in this Article IV shall be made by
the Board of Directors of the Company.

V. GRANT OF OPTIONS, STOCK APPRECIATION RIGHTS,
RESTRICTED STOCK AWARDS, PERFORMANCE AWARDS
AND PHANTOM STOCK AWARDS; SHARES SUBJECT TO THE PLAN

(a) STOCK GRANT AND AWARD LIMITS. The Committee may from time to time
grant Awards to one or more employees, directors or other individuals determined
by it to be eligible for participation in the Plan in accordance with the
provisions of Paragraph VI. Subject to Paragraph XII, the aggregate number of
shares of Stock that may be issued under the Plan shall not exceed 420,000
shares. Shares of Stock shall be deemed to have been issued under the Plan only
to the extent actually issued and delivered pursuant to an Award. To the extent
that an Award lapses or the rights of its Holder terminate or the Award is paid
in cash, any shares of Stock subject to such Award shall again be available for
the grant of an Award. To the extent that an Award lapses or the rights of its
Holder terminate, any shares of Stock subject to such Award shall again be
available for the grant of an Award. Separate stock certificates shall be issued
by the Company for those shares acquired pursuant the exercise of an Incentive
Stock Option and for those shares acquired pursuant to the exercise of a
Nonqualified Stock Option.

(b) STOCK OFFERED. The stock to be offered pursuant to the grant of an
Award may be authorized but unissued Stock or Stock previously issued and
outstanding and reacquired by the Company.

-5-
<PAGE>
VI. ELIGIBILITY

Awards may be granted to employees of the Company, directors of the
Company or other individuals whose contributions to the welfare of the Company
are of importance. An Award may be granted on more than one occasion to the same
person, and, subject to the limitations set forth in the Plan, such Award may
include an Incentive Stock Option or a Nonqualified Stock Option, a Stock
Appreciation Right, a Restricted Stock Award, a Performance Award, a Phantom
Stock Award or any combination thereof.

VII. STOCK OPTIONS

(a) OPTION PERIOD. The term of each Option shall be as specified by
the Committee at the date of grant.

(b) LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in
whole or in such installments and at such times as determined by the Committee.

(c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the extent that the
aggregate Fair Market Value (determined at the time the respective Incentive
Stock Option is granted) of Stock with respect to which Incentive Stock Options
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be
treated as Nonqualified Stock Options as determined by the Committee. The
Committee shall determine, in accordance with applicable provisions of the Code,
Treasury Regulations and other administrative pronouncements, which of an
optionee's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the optionee of such determination
as soon as practicable after such determination. No Incentive Stock Option shall
be granted to an individual if, at the time the Option is granted, such
individual owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of its parent or subsidiary
corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at
the time such Option is granted the option price is at least 110% of the Fair
Market Value of the Stock subject to the Option and (ii) such Option by its
terms is not exercisable after the expiration of five years from the date of
grant.

(d) OPTION AGREEMENT. Each Option shall be evidenced by an Option
Agreement in such form and containing such provisions not inconsistent with the
provisions of the Plan as the Committee from time to time shall approve,
including, without limitation, provisions to qualify an Incentive Stock Option
under section 422 of the Code. An Option Agreement may provide for the payment
of the option price, in whole or in part, by the delivery of a number of shares
of Stock (plus

-6-
<PAGE>
cash if necessary) having a Fair Market Value equal to such option price. Each
Option Agreement shall provide that the Option may not be exercised earlier than
six months from the date of grant and shall specify the effect of termination of
employment on the exercisability of the Option. Moreover, an Option Agreement
may provide for a "cashless exercise" of the Option by establishing procedures
whereby the Holder, by a properly-executed written notice, directs (i) an
immediate market sale or margin loan respecting all or a part of the shares of
Stock to which he is entitled upon exercise pursuant to an extension of credit
by the Company to the Holder of the option price, (ii) the delivery of the
shares of Stock from the Company directly to a brokerage firm and (iii) the
delivery of the option price from the sale or margin loan proceeds from the
brokerage firm directly to the Company. Such Option Agreement may also include,
without limitation, provisions relating to (i) vesting of Options, subject to
the provisions hereof accelerating such vesting on a Change of Control, (ii) tax
matters (including provisions (y) permitting the delivery of additional shares
of Stock or the withholding of shares of Stock from those acquired upon exercise
to satisfy federal or state income tax withholding requirements and (z) dealing
with any other applicable employee wage withholding requirements), and (iii) any
other matters not inconsistent with the terms and provisions of this Plan that
the Committee shall in its sole discretion determine. The terms and conditions
of the respective Option Agreements need not be identical.

(e) OPTION PRICE AND PAYMENT. The price at which a share of Stock may be
purchased upon exercise of an Option shall be determined by the Committee, but
(i) such purchase price shall not be less than the Fair Market Value of Stock
subject to an Incentive Stock Option on the date the Incentive Stock Option is
granted and (ii) such purchase price shall be subject to adjustment as provided
in Paragraph XII. The Option or portion thereof may be exercised by delivery of
an irrevocable notice of exercise to the Company. The purchase price of the
Option or portion thereof shall be paid in full in the manner prescribed by the
Committee.

(f) SHAREHOLDER RIGHTS AND PRIVILEGES. The Holder shall be entitled to all
the privileges and rights of a shareholder only with respect to such shares of
Stock as have been purchased under the Option and for which certificates of
stock have been registered in the Holder's name.

(g) OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
CORPORATIONS. Options and Stock Appreciation Rights may be granted under the
Plan from time to time in substitution for stock options held by individuals
employed by corporations who become employees as a result of a merger or
consolidation of the employing corporation with the Company or any subsidiary,
or the acquisition by the Company or a subsidiary of the assets of the employing
corporation, or the acquisition by the Company or a subsidiary of stock of the
employing corporation with the result that such employing corporation becomes a
subsidiary.

-7-
<PAGE>
VIII. STOCK APPRECIATION RIGHTS

(a) STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is the right to
receive an amount equal to the Spread with respect to a share of Stock upon the
exercise of such Stock Appreciation Right. Stock Appreciation Rights may be
granted in connection with the grant of an Option, in which case the Option
Agreement will provide that exercise of Stock Appreciation Rights will result in
the surrender of the right to purchase the shares under the Option as to which
the Stock Appreciation Rights were exercised. Alternatively, Stock Appreciation
Rights may be granted independently of Options in which case each Award of Stock
Appreciation Rights shall be evidenced by a Stock Appreciation Rights Agreement
which shall contain such terms and conditions as may be approved by the
Committee. The Spread with respect to a Stock Appreciation Right may be payable
either in cash, shares of Stock with a Fair Market Value equal to the Spread or
in a combination of cash and shares of Stock. With respect to Stock Appreciation
Rights that are subject to Section 16 of the 1934 Act, however, the Committee
shall, except as provided in Paragraph XII(c), retain sole discretion (i) to
determine the form in which payment of the Stock Appreciation Right will be made
(I.E., cash, securities or any combination thereof) or (ii) to approve an
election by a Holder to receive cash in full or partial settlement of Stock
Appreciation Rights. Each Stock Appreciation Rights Agreement shall provide that
the Stock Appreciation Rights may not be exercised earlier than six months from
the date of grant and shall specify the effect of termination of employment on
the exercisability of the Stock Appreciation Rights.

(b) OTHER TERMS AND CONDITIONS. At the time of such Award, the Committee,
may in its sole discretion, prescribe additional terms, conditions or
restrictions relating to Stock Appreciation Rights, including, but not limited
to rules pertaining to termination of employment (by retirement, disability,
death or otherwise) of a Holder prior to the expiration of such Stock
Appreciation Rights. Such additional terms, conditions or restrictions shall be
set forth in the Stock Appreciation Rights Agreement made in conjunction with
the Award. Such Stock Appreciation Rights Agreements may also include, without
limitation, provisions relating to (i) vesting of Awards, subject to the
provisions hereof accelerating vesting on a Change of Control,(ii) tax matters
(including provisions covering applicable wage withholding requirements), and
(iii) any other matters not inconsistent with the terms and provisions of this
Plan, that the Committee shall in its sole discretion determine. The terms and
conditions of the respective Stock Appreciation Rights Agreements need not be
identical.

(c) EXERCISE PRICE. The exercise price of each Stock Appreciation Right
shall be determined by the Committee, but such exercise price (i) shall not be
less than the Fair Market Value of a share of Stock on the date the Stock
Appreciation Right is granted (or such greater exercise price as may be required
if such Stock Appreciation Right is granted in connection with an Incentive
Stock Option that must have an exercise price equal to 110% of the Fair Market
Value of the Stock on the

-8-
<PAGE>
date of grant pursuant to Paragraph VII(c)), and (ii) shall be subject to
adjustment as provided in Paragraph XII.

(d) EXERCISE PERIOD. The term of each Stock Appreciation Right shall be as
specified by the Committee at the date of grant.

(e) LIMITATIONS ON EXERCISE OF STOCK APPRECIATION RIGHT. A Stock
Appreciation Right shall be exercisable in whole or in such installments and at
such times as determined by the Committee.

IX. RESTRICTED STOCK AWARDS

(a) FORFEITURE RESTRICTIONS TO BE ESTABLISHED BY THE COMMITTEE. Shares of
Stock that are the subject of a Restricted Stock Award shall be subject to
restrictions on disposition by the Holder and an obligation of the Holder to
forfeit and surrender the shares to the Company under certain circumstances (the
"FORFEITURE RESTRICTIONS"). The Forfeiture Restrictions shall be determined by
the Committee in its sole discretion, and the Committee may provide that the
Forfeiture Restrictions shall lapse upon (i) the attainment of targets
established by the Committee that are based on (1) the price of a share of
Stock, (2) the Company's earnings per share, (3) the Company's revenue, (4) the
revenue of a business unit of the Company designated by the Committee, (5) the
return on shareholders' equity achieved by the Company, or (6) the Company's
pre-tax cash flow from operations, (ii) the Holder's continued employment with
the Company for a specified period of time, or (iii) a combination of any two or
more of the factors listed in clauses (i) and (ii) of this sentence. Each
Restricted Stock Award may have different Forfeiture Restrictions, in the
discretion of the Committee. The Forfeiture Restrictions applicable to a
particular Restricted Stock Award shall not be changed except as permitted by
Paragraph IX(b) or Paragraph XII.

(b) OTHER TERMS AND CONDITIONS. Stock awarded pursuant to a Restricted
Stock Award shall be represented by a stock certificate registered in the name
of the Holder of such Restricted Stock Award. The Holder shall have the right to
receive dividends with respect to Stock subject to a Restricted Stock Award, to
vote Stock subject thereto and to enjoy all other shareholder rights, except
that (i) the Holder shall not be entitled to delivery of the stock certificate
until the Forfeiture Restrictions shall have expired, (ii) the Company shall
retain custody of the Stock until the Forfeiture Restrictions shall have
expired, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate
or otherwise dispose of the Stock until the Forfeiture Restrictions shall have
expired, and (iv) a breach of the terms and conditions established by the
Committee pursuant to the Restricted Stock Agreement, shall cause a forfeiture
of the Restricted Stock Award. At the time of such Award, the Committee may, in
its sole discretion, prescribe additional terms, conditions or restrictions
relating to Restricted Stock Awards, including, but not limited to, rules
pertaining to the termination of

-9-
<PAGE>
employment (by retirement, disability, death or otherwise) of a Holder prior to
expiration of the Forfeiture Restrictions. Such additional terms, conditions or
restrictions shall be set forth in a Restricted Stock Agreement made in
conjunction with the Award. Such Restricted Stock Agreement may also include,
without limitation, provisions relating to (i) subject to the provisions hereof
accelerating vesting on a Change of Control, vesting of Awards, (ii) tax matters
(including provisions (y) covering any applicable employee wage withholding
requirements and (z) prohibiting an election by the Holder under section 83(b)
of the Code), and (iii) any other matters not inconsistent with the terms and
provisions of this Plan that the Committee shall in its sole discretion
determine. The terms and conditions of the respective Restricted Stock
Agreements need not be identical.

(c) PAYMENT FOR RESTRICTED STOCK. The Committee shall determine the amount
and form of any payment for Stock received pursuant to a Restricted Stock Award,
provided that in the absence of such a determination, a Holder shall not be
required to make any payment for Stock received pursuant to a Restricted Stock
Award, except to the extent otherwise required by law.

(d) AGREEMENTS. At the time any Award is made under this Paragraph IX, the
Company and the Holder shall enter into a Restricted Stock Agreement setting
forth each of the matters as the Committee may determine to be appropriate. The
terms and provisions of the respective Restricted Stock Agreements need not be
identical.

X. PERFORMANCE AWARDS

(a) PERFORMANCE PERIOD. The Committee shall establish, with respect
to and at the time of each Performance Award, a performance period over which
the performance of the Holder shall be measured.

(b) PERFORMANCE AWARDS. Each Performance Award shall have a maximum value
established by the Committee at the time of such Award.

(c) PERFORMANCE MEASURES. A Performance Award shall be awarded to an
employee, director or other individual contingent upon future performance of the
employee, director or other individual, the Company or any subsidiary, division
or department thereof by or in which is he employed during the performance
period. The Committee shall establish the performance measures applicable to
such performance prior to the beginning of the performance period but subject to
such later revisions as the Committee shall deem appropriate to reflect
significant, unforeseen events or changes.

-10-
<PAGE>
(d) AWARDS CRITERIA. In determining the value of Performance Awards, the
Committee shall take into account a Holder's responsibility level,
contributions, performance, potential, other Awards and such other
considerations as it deems appropriate.

(e) PAYMENT. Following the end of the performance period, the Holder of a
Performance Award shall be entitled to receive payment of an amount, not
exceeding the maximum value of the Performance Award, based on the achievement
of the performance measures for such performance period, as determined by the
Committee. Payment of a Performance Award may be made in cash, Stock or a
combination thereof, as determined by the Committee. Payment shall be made in a
lump sum or in installments as prescribed by the Committee. Any payment to be
made in Stock shall be based on the Fair Market Value of the Stock on the
payment date. If a payment of cash is to be made on a deferred basis, the
Committee shall establish whether interest shall be credited, the rate thereof
and any other terms and conditions applicable thereto.

(f) TERMINATION OF EMPLOYMENT. A Performance Award shall terminate if the
Holder does not remain continuously in the employ of the Company at all times
during the applicable performance period, except as may be determined by the
Committee or as may otherwise be provided in the Award at the time granted.

(g) AGREEMENTS. At the time any Award is made under this Paragraph X, the
Company and the Holder shall enter into a Performance Award Agreement setting
forth each of the matters contemplated hereby, and, in addition such matters as
are set forth in Paragraph IX(b) as the Committee may determine to be
appropriate. The terms and provisions of the respective agreements need not be
identical.

XI. PHANTOM STOCK AWARDS

(a) PHANTOM STOCK AWARDS. Phantom Stock Awards are rights to receive
shares of Stock (or cash in an amount equal to the Fair Market Value thereof),
or rights to receive an amount equal to any appreciation in the Fair Market
Value of Stock (or portion thereof) over a specified period of time, which vest
over a period of time or upon the occurrence of an event (including without
limitation a Change of Control) as established by the Committee, without payment
of any amounts by the Holder thereof (except to the extent otherwise required by
law) or satisfaction of any performance criteria or objectives. Each Phantom
Stock Award shall have a maximum value established by the Committee at the time
of such Award.

(b) AWARD PERIOD. The Committee shall establish, with respect to and at
the time of each Phantom Stock Award, a period over which or the event upon
which the Award shall vest with respect to the Holder.

-11-
<PAGE>
(c) AWARDS CRITERIA. In determining the value of Phantom Stock Awards, the
Committee shall take into account a Holder's responsibility level,
contributions, performance, potential, other Awards and such other
considerations as it deems appropriate.

(d) PAYMENT. Following the end of the vesting period for a Phantom Stock
Award, the Holder of a Phantom Stock Award shall be entitled to receive payment
of an amount, not exceeding the maximum value of the Phantom Stock Award, based
on the then vested value of the Award. Payment of a Phantom Stock Award may be
made in cash, Stock or a combination thereof as determine by the Committee.
Payment shall be made in a lump sum or in installments as prescribed by the
Committee in its sole discretion. Any payment to be made in Stock shall be based
on the Fair Market Value of the Stock on the payment date. Cash dividend
equivalents may be paid during or after the vesting period with respect to a
Phantom Stock Award, as determined by the Committee. If a payment of cash is to
be made on a deferred basis, the Committee shall establish whether interest
shall be credited, the rate thereof and any other terms and conditions
applicable thereto.

(e) TERMINATION OF EMPLOYMENT. A Phantom Stock Award shall terminate if
the Holder does not remain continuously in the employ of the Company at all
times during the applicable vesting period, except as may be otherwise
determined by the Committee or as set forth in the Award at the time of grant.

(f) AGREEMENTS. At the time any Award is made under this Paragraph XI, the
Company and the Holder shall enter into a Phantom Stock Award Agreement setting
forth each of the matters contemplated hereby and, in addition such matters as
are set forth in Paragraph IX(b) as the Committee may determine to be
appropriate. The terms and provisions of the respective agreements need not be
identical.

XII. RECAPITALIZATION OR REORGANIZATION

(a) The shares with respect to which Awards may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Award theretofore granted, the Company shall effect a subdivision or
consolidation by the Company, the number of shares of Stock with respect to
which such Award may thereafter be exercised or satisfied, as applicable, (i) in
the event of an increase in the number of outstanding shares shall be
proportionately increased, and the purchase price per share shall be
proportionately reduced, and (ii) in the event of a reduction in the number of
outstanding shares shall be proportionately reduced, and the purchase price per
share shall be proportionately increased.

(b) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise or satisfaction, as applicable, of an
Award theretofore granted the Holder shall be

-12-
<PAGE>
entitled to (or entitled to purchase, if applicable) under such Award, in lieu
of the number of shares of Stock then covered by such Award, the number and
class of shares of stock and securities to which the Holder would have been
entitled pursuant to the terms of the recapitalization if, immediately prior to
such recapitalization, the Holder had been the holder of record of the number of
shares of Stock then covered by such Award.

(c) In the event of a Change of Control, all outstanding Awards shall
immediately vest and become exercisable or satisfiable, as applicable. The
Committee, in its discretion, may determine that upon the occurrence of a Change
of Control, each Award other than an Option outstanding hereunder shall
terminate within a specified number of days after notice to the Holder, and such
Holder shall receive, with respect to each share of Stock subject to such Award,
cash in an amount equal to the excess, if any, of the Change of Control Value.
Further, in the event of a Change of Control, the Committee, in its discretion
shall act to effect one or more of the following alternatives with respect to
outstanding Options, which may vary among individual Holders and which may vary
among Options held by any individual Holder: (i) determine a limited period of
time on or before a specified date (before or after such Change of Control)
after which specified date all unexercised Options and all rights of Holders
thereunder shall terminate, (2) require the mandatory surrender to the Company
by selected Holders of some or all of the outstanding Options held by such
Holders (irrespective of whether such Options are then exercisable under the
provisions of the Plan) as of a date, before or after such Change of Control,
specified by the Committee, in which event the Committee shall thereupon cancel
such Options and the Company shall pay to each Holder an amount of cash per
share equal to the excess, if any, of the Change of Control Value of the shares
subject to such Option over the exercise price(s) under such Options for such
shares, (3) make such adjustments to Options then outstanding as the Committee
deems appropriate to reflect such Change of Control (provided, however, that the
Committee may determine in its sole discretion that no adjustment is necessary
to Options then outstanding) or (4) provide that thereafter upon any exercise of
an Option theretofore granted the Holder shall be entitled to purchase under
such Option, in lieu of the number of shares of Stock then covered by such
Option the number and class of shares of stock or other securities or property
(including, without limitation, cash) to which the Holder would have been
entitled pursuant to the terms of the agreement of merger, consolidation or sale
of assets and dissolution if, immediately prior to such merger, consolidation or
sale of assets and dissolution the Holder has been the holder of record of the
number of shares of Stock then covered by such Option. The provisions contained
in this paragraph shall be inapplicable to an Award granted within six (6)
months before the occurrence of a Change of Control if the Holder of such Award
is subject to the reporting requirements of Section 16(a) of the 1934 Act. The
provisions contained in this paragraph shall not terminate any rights of the
Holder to further payments pursuant to any other agreement with the Company
following a Change of Control.

-13-
<PAGE>
(d) In the event of changes in the outstanding Stock by reason of
recapitalization, reorganizations, mergers, consolidations, combinations,
exchanges or other relevant changes in capitalization occurring after the date
of the grant of any Award and not otherwise provided for by this Paragraph XII,
any outstanding Awards and any agreements evidencing such Awards shall be
subject to adjustment by the Committee at its discretion as to the number and
price of shares of Stock or other consideration subject to such Awards. In the
event of any such change in the outstanding Stock, the aggregate number of
shares available under the Plan may be appropriately adjusted by the Committee,
whose determination shall be conclusive.

(e) The existence of the Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting Stock or the rights thereof, the dissolution or liquidation of the
Company or any sale, lease, exchange or other disposition of all or any part of
its assets or business or any other corporate act or proceeding.

(f) Any adjustment provided for in Subparagraphs (a), (b), (c) or (d)
above shall be subject to any required shareholder action.

(g) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares of obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Awards theretofore granted or the purchase price per
share, if applicable.

XIII. AMENDMENT AND TERMINATION OF THE PLAN

The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Awards have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided that no change in any Award theretofore granted may be
made which would impair the rights of the Holder without the consent of the
Holder (unless such change is required in order to cause the benefits under the
Plan to qualify as performance-based compensation within the meaning of section
162(m) of the Code and applicable interpretive authority thereunder), and
provided, further, that the Board may not, without approval of the shareholders,
amend the Plan:

-14-
<PAGE>
(a) to increase the maximum number of shares which may be issued on
exercise or surrender of an Award, except as provided in Paragraph XII;

(b) to change the Option price;

(c) to change the employees, directors or other individuals eligible to
receive Awards or materially increase the benefits accruing to employees under
the Plan;

(d) to extend the maximum period during which Awards may be granted under
the Plan;

(e) to modify materially the requirements as to eligibility for
participation in the Plan; or

(f) to decrease any authority granted to the Committee hereunder in
contravention of Rule 16b-3.

XIV. MISCELLANEOUS

(a) NO RIGHT TO AN AWARD. Neither the adoption of the Plan by the Company
nor any action of the Board or the Committee shall be deemed to give an
employee, director or any other individual any right to be granted an Award to
purchase Stock, a right to a Stock Appreciation Right, a Restricted Stock Award,
a Performance Award or a Phantom Stock Award or any of the rights hereunder
except as may be evidenced by an Award or by an Option Agreement, Stock
Appreciation Rights Agreement, Restricted Stock Agreement, Performance Award
Agreement or Phantom Stock Award Agreement on behalf of the Company, and then
only to the extent and on the terms and conditions expressly set forth therein.
The Plan shall be unfunded. The Company shall not be required to establish any
special or separate fund or to make any other segregation of funds or assets to
assure the payment of any Award.

(b) NO EMPLOYMENT RIGHTS CONFERRED. Nothing contained in the Plan shall
(i) confer upon any employee, director or any other individual any right with
respect to continuation of employment with the Company or any subsidiary or (ii)
interfere in any way with the right of the Company or any subsidiary to
terminate his or her employment at any time.

(c) OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue
any Stock pursuant to any Award granted under the Plan at any time when the
shares covered by such Award have not been registered under the Securities Act
of 1933, as amended, and such other state and federal laws, rules or regulations
as the Company or the Committee deems applicable and, in the opinion of legal
counsel for the Company, there is no exemption from the registration
requirements

-15-
<PAGE>
of such laws, rules or regulations available for the issuance and sale of such
shares. No fractional shares of Stock shall be delivered, nor shall any cash in
lieu of fractional shares be paid. The Company shall have the right to deduct in
connection with all Awards any taxes required by law to be withheld and to
require any payments required to enable it to satisfy its withholding
obligations.

(d) NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan
shall be construed to prevent the Company or any subsidiary from taking any
corporate action which is deemed by the Company or such subsidiary to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any Award made under the Plan. No employee,
director, beneficiary or other person shall have any claim against the Company
or any subsidiary as a result of any such action.

(e) RESTRICTIONS ON TRANSFER. An Award shall not be transferable otherwise
than by will or the laws of descent and distribution or pursuant to a "qualified
domestic relations order" as defined by the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder, and
shall be exercisable during the Holder's lifetime only by such Holder or the
Holder's guardian or legal representative.

(f) RULE 16B-3. It is intended that the Plan and any grant of an Award
made to a person subject to Section 16 of the 1934 Act meet all of the
requirements of Rule 16b-3. If any provision of the Plan or any such Award would
disqualify the Plan or such Award under, or would otherwise not comply with,
Rule 16b-3, such provision or Award shall be construed or deemed amended to
conform to Rule 16b-3.

(g) SECTION 162(M). If the Plan is subject to 162(m) of the Code, it is
intended that the Plan comply fully with and meet all the requirements of
Section 162(m) of the Code so that Options and Stock Appreciation Rights granted
hereunder and, if determined by the Committee, Restricted Stock Awards, shall
constitute "performance-based" compensation within the meaning of such section.
If any provision of the Plan would disqualify the Plan or would not otherwise
permit the Plan to comply with Section 162(m) as so intended, such provision
shall be construed or deemed amended to conform to the requirements or
provisions of Section 162(m); provided that no such construction or amendment
shall have an adverse effect on the economic value to a Holder of any Award
previously granted hereunder.

(h) GOVERNING LAW. This Plan shall be construed in accordance with
the laws of the State of Texas.

-16-

EXHIBIT 21

SUBSIDIARIES OF RIVERWAY HOLDINGS, INC.

NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
- ------------------ -----------------------------
Riverway Holdings of Delaware, Inc. Delaware
Riverway Bank Texas
Hydrox Holdings, Inc. Texas

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of Riverway Holdings, Inc.
on Form S-1 of our report dated February 6, 1998 (except for Note 22 as to which
the date is August 4, 1998), appearing in the Prospectus, which is part of this
Registration Statement.

We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.

/s/ DELOITTE & TOUCHE LLP

Houston, Texas
August 11, 1998

<ARTICLE> 9

<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 5,712,080 6,045,159
<INT-BEARING-DEPOSITS> 522,517 412,225
<FED-FUNDS-SOLD> 11,500,000 18,077,707
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 86,411,483 43,129,305
<INVESTMENTS-CARRYING> 86,391,249 91,781,206
<INVESTMENTS-MARKET> 84,610,366 89,655,856
<LOANS> 231,311,715 178,333,218
<ALLOWANCE> 2,102,578 1,210,296
<TOTAL-ASSETS> 433,934,474 348,201,240
<DEPOSITS> 352,186,157 295,253,494
<SHORT-TERM> 54,281,019 31,488,086
<LIABILITIES-OTHER> 1,462,618 1,075,705
<LONG-TERM> 4,400,000 0
0 0
0 0
<COMMON> 2,909,105 2,909,105
<OTHER-SE> 19,871,642 18,762,261
<TOTAL-LIABILITIES-AND-EQUITY> 433,934,474 348,201,240
<INTEREST-LOAN> 8,391,635 12,903,052
<INTEREST-INVEST> 4,990,453 9,418,522
<INTEREST-OTHER> 1,340,028 726,702
<INTEREST-TOTAL> 14,722,116 23,048,276
<INTEREST-DEPOSIT> 7,759,164 12,126,958
<INTEREST-EXPENSE> 8,920,908 13,669,238
<INTEREST-INCOME-NET> 5,801,208 9,379,038
<LOAN-LOSSES> 1,000,000 570,000
<SECURITIES-GAINS> 1,951 54,810
<EXPENSE-OTHER> 3,921,939 5,868,658
<INCOME-PRETAX> 1,490,427 3,972,136
<INCOME-PRE-EXTRAORDINARY> 1,490,427 3,972,136
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,109,381 2,916,952
<EPS-PRIMARY> 0.39 1.02
<EPS-DILUTED> 0.39 1.00
<YIELD-ACTUAL> 2.97 3.08
<LOANS-NON> 36,534 39,843
<LOANS-PAST> 139,857 117,268
<LOANS-TROUBLED> 0 473,461
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,210,296 897,793
<CHARGE-OFFS> 114,565 282,857
<RECOVERIES> 6,847 25,360
<ALLOWANCE-CLOSE> 2,102,578 1,210,296
<ALLOWANCE-DOMESTIC> 83,899 59,737
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,018,679 1,150,559

</TABLE>