SOUTHWEST BANCORP OF TEXAS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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COMMISSION FILE NUMBER: 000-22007
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SOUTHWEST BANCORPORATION OF TEXAS, INC.
(Exact name of registrant as specified in its charter)

TEXAS 76-0519693
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(Address of Principal Executive Offices, including zip code)

(713) 235-8800
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
(TITLE OF CLASS)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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There were 32,966,336 shares of the Registrant's Common Stock outstanding
as of the close of business on February 26, 2002. The aggregate market value of
the Registrant's Common Stock held by non-affiliates was approximately $786.6
million (based upon the closing price of $30.75 on February 26, 2002, as
reported on the NASDAQ National Market System).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement relating to the 2002 Annual
Meeting of Shareholders, which will be filed within 120 days after December 31,
2001, are incorporated by reference into Part III of this Report.
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PART I

ITEM 1. BUSINESS

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Southwest Bancorporation of Texas, Inc. (the "Company") to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. The words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate," and similar expressions are intended to
identify such forward-looking statements. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements due to a variety of factors, including, without limitation: (a) the
effects of future economic conditions on the Company and its customers; (b)
governmental monetary and fiscal policies, as well as legislative and regulatory
changes; (c) the risks of changes in interest rates on the level and composition
of deposits, loan demand, and the values of loan collateral, securities and
interest rate protection agreements, as well as interest rate risks; (d) the
effects of competition from other commercial banks, thrifts, mortgage banking
firms, consumer finance companies, credit unions, securities brokerage firms,
insurance companies, money market and other mutual funds and other financial
institutions operating in the Company's market area and elsewhere, including
institutions operating locally, regionally, nationally and internationally,
together with such competitors offering banking products and services by mail,
telephone, computer and the Internet; and (e) the failure of assumptions
underlying the establishment of reserves for loan losses and estimations of
values of collateral and various financial assets and liabilities. All written
or oral forward-looking statements attributable to the Company are expressly
qualified in their entirety by these cautionary statements.

THE COMPANY

General. The Company was incorporated as a business corporation under the
laws of the State of Texas on March 28, 1996, for the purpose of serving as a
bank holding company for Southwest Bank of Texas National Association (the
"Bank"). The holding company formation was consummated and the Company acquired
all of the outstanding shares of capital stock of the Bank as of the close of
business on June 30, 1996. Based upon total assets as of December 31, 2001, the
Company ranks as the largest independent bank holding company headquartered in
the Houston metropolitan area. The Company's headquarters are located at 4400
Post Oak Parkway, Houston, Texas 77027, and its telephone number is (713)
235-8800.

Mergers and Acquisitions. On August 1, 1997, Pinemont Bank was merged with
and into the Bank in exchange for approximately 3.3 million shares of Company
Common Stock in a transaction accounted for as a pooling-of-interests. The
acquisition of Pinemont Bank added $235 million in total assets and $219 million
in total deposits to the Company's balance sheet and nine banking locations to
the Company's operations.

On April 1, 1999, Fort Bend Holding Corp. was merged with and into the
Company and Fort Bend's subsidiary savings and loan association was merged with
and into the Bank in exchange for approximately 4.1 million shares of Company
Common Stock in a transaction accounted for as a pooling-of-interests. The
acquisition of Fort Bend Holding Corp. added $316 million in total assets and
$269 million in total deposits to the Company's balance sheet and seven banking
locations to the Company's operations.

Through the merger with Fort Bend, the Company acquired Fort Bend's 51%
ownership interest in Mitchell Mortgage Company L.L.C. ("Mitchell"), a full
service mortgage banking affiliate of The Woodlands Operating Company L.P.
("Woodlands"). On June 17, 1999, the Company issued 307,323 shares of Company
Common Stock to Woodlands in exchange for Woodlands' 49% ownership interest in
Mitchell and Mitchell became a wholly-owned subsidiary of the Bank effective as
of June 30, 1999. As a result, 100% of the accounts and operations of Mitchell
after that date are included in the financial statements of the Company.

1

On December 29, 2000, Citizens Bankers, Inc. was merged with and into the
Company and the three wholly-owned subsidiary banks of Citizens Bankers, Inc.
were merged with and into the Bank (and the assets and liabilities of a related
partnership were acquired by the Bank) in exchange for approximately 4.0 million
shares of Company Common Stock in a transaction accounted for as a
pooling-of-interests. The acquisition of Citizens Bankers, Inc. added $436
million in total assets and $381 million in total deposits to the Company's
balance sheet and seven banking locations to the Company's operations.

Business Strategy. The Company provides an array of sophisticated products
typically found only in major regional banks. These services are provided to
middle market businesses in the Houston metropolitan area through 33 full
service banking facilities. Each banking office has seasoned management with
significant lending experience who are responsible for credit and pricing
decisions, subject to loan committee approval for larger credits. This
decentralized management approach, coupled with the continuity of service by the
same staff members, enables the Company to develop long-term customer
relationships, maintain high quality service and provide quick responses to
customer needs. The Company believes that its emphasis on local relationship
banking, together with its conservative approach to lending and resultant strong
asset quality, are important factors in the success and the growth of the
Company.

The Company seeks credit opportunities of good quality within its target
market that exhibit positive historical trends, stable cash flows and secondary
sources of repayment from tangible collateral. The Company extends credit for
the purpose of obtaining and continuing long term relationships. Lenders are
provided with detailed underwriting policies for all types of credit risks
accepted by the Company and must obtain appropriate approvals for credit
extensions in excess of conservatively assigned individuals' lending limits. The
Company also maintains strict documentation requirements and extensive credit
quality assurance practices in order to identify credit portfolio weaknesses as
early as possible so any exposures that are discovered might be reduced.

The Company has a three-part strategy for growth. First, the Company will
continue to actively target the "middle market" and private banking customers in
Houston for loan and deposit opportunities as it has successfully done for the
past twelve years. The "middle market" is generally characterized by privately
owned companies having annual revenues ranging from $1 million to $500 million
and borrowings ranging from $50,000 to $10 million, but primarily in the
$150,000 to $5 million range. Typical middle market customers seek a
relationship with a local independent bank that is sensitive to their needs and
understands their business philosophy. These customers desire a long-term
relationship with a decision-making loan officer who is responsive and
experienced and has ready access to a bank's senior management. In implementing
this part of its strategy, the Company continues to explore opportunities (i) to
solidify its existing customer relationships and build new customer
relationships by providing new services required by its middle market customers
and (ii) to expand its base of services in the professional and executive market
to meet the demands of that sector.

Second, the Company intends to establish branches in areas that
demographically complement its existing or targeted customer base. As other
local banks are acquired by out-of-state organizations, the Company believes
that the establishment of branches will better meet the needs of customers in
many Houston area neighborhoods who feel disenfranchised by larger regional or
national organizations.

Third, the Company may pursue selected acquisitions of other financial
institutions. The Company intends to conduct thorough studies and reviews of any
possible acquisition candidates to assure that they are consistent with the
Company's existing goals, both from an economic and strategic perspective. The
Company believes market and regulatory factors may present opportunities for the
Company to acquire other financial institutions.

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

2

THE BANK

The Bank provides a complete range of retail and commercial banking
services that compete directly with major regional banks. Loans consist of
commercial loans to middle market businesses, loans to individuals, commercial
real estate loans, residential mortgages and construction loans. The Bank also
originates and purchases residential and commercial mortgage loans to sell to
investors with servicing rights retained. The Bank also promotes residential and
commercial construction financing to builders and developers and acts as a
broker in the origination of multi-family and commercial real estate loans. In
addition, the Bank offers a broad array of fee income products including
merchant card services, letters of credit, accounts receivable financing,
customized cash management services, brokerage and mutual funds, trust and
private banking activities.

The Bank maintains a staff of professional treasury management marketing
officers who consult with middle market and large corporate companies to design
custom cost-effective cash management solutions. The Bank offers a full product
line of cash concentration, disbursement, information reporting services and a
full suite of Internet products superior to those offered by many regional
banks. Through the Bank's continued investment in new technology and people, the
Bank has been able to attract some of Houston's largest middle market companies
to utilize the Bank's treasury management products. The Bank has also been able
to attract new loan customers through use of the Bank's treasury management as a
lead-in with products, such as an image-based lockbox service and controlled
disbursement and sweep products, which allow borrowers to minimize interest
expense and convert excess operating funds into interest income. Through the use
of an interactive terminal or personal computer, the Bank's NetStar system
provides customers with instant access to all bank account information with
multiple intraday updates. The Bank makes business communication more efficient
through Electronic Data Interchange ("EDI"), which is an inter-organizational
computer-to-computer exchange of business documentation in a standard
computer-processable format. Through the use of EDI and electronic payments, the
Bank can provide the customer with a paperless funds management system. Positive
Pay, a service under which the Bank only pays checks listed on a legitimate
"company issue" file, is another product which helps in the prevention of check
fraud. The Bank's average commercial customer uses six treasury management
services. Because these services help customers improve their treasury
operations and achieve new efficiencies in cash management, they are extremely
useful in building and maintaining long-term relationships.

The Bank has a retail presence in 33 locations throughout the Houston
metropolitan area. Such locations are emerging as an important source of bank
funding and fee income. Retail products consist of both traditional deposit
accounts such as checking, savings, money market accounts and certificates of
deposit, and a wide array of consumer loan and electronic banking alternatives.
The Bank is putting a consistent emphasis on the cultivation of retail market
opportunities and on its retail staff to help expand and deepen customer
relationships.

The Bank maintains a strong community orientation by, among other things,
supporting active participation of all employees in local charitable, civic,
school and church activities. Several banking offices also appoint selected
customers to a business development board that assists in introducing
prospective customers to the Bank and in developing or modifying products and
services to better meet customer needs.

THE MORTGAGE COMPANY

The Company originates, sells and services single family residential
mortgages and commercial mortgages through its ownership of Mitchell. Through
Mitchell, the Company also originates and services residential and commercial
construction loans. Mitchell has production offices in Fort Bend and Montgomery
Counties, Texas, with corporate offices in The Woodlands, Texas. Mitchell is an
approved seller/servicer for Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") and an approved issuer of
Government National Mortgage Association ("GNMA") mortgage-backed securities.
Mitchell is also a HUD-Approved Title II nonsupervised mortgagee. During 2001,
Mitchell funded approximately $179 million in residential mortgage loans, $141
million in commercial loans and $131 million in residential and commercial
construction loans.

3

COMPETITION

The banking business is highly competitive, and the profitability of the
Company will depend principally upon the Company's ability to compete in its
market area. The Company competes with other commercial and 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 non-financial institutions, including certain
governmental organizations which may offer subsidized financing at lower rates
than those offered by the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing technology and
customer service, including local office decision-making on loans, establishing
long-term customer relationships and building customer loyalty, and by providing
products and services designed to address the specific needs of its customers.
Bank deposits in the Houston area total approximately $50 billion.

The success of the Company is also highly dependent on the economic
strength of the Company's general market area. Significant deterioration in the
local economy or economic problems in the greater Houston area could
substantially impact the Company's performance. In addition, the enactment of
the Gramm-Leach-Bliley Act (see discussion below) which breaks down many
barriers between the banking, securities and insurance industries, may
significantly affect the competitive environment in which the Company operates.

EMPLOYEES

As of December 31, 2001, the Company had 1,376 full-time employees, 458 of
whom were officers of the Bank. The Company provides medical and hospitalization
insurance to its full-time employees. The Company has also provided most of its
employees with the benefit of Common Stock ownership through the Company's
contributions to a 401(k) plan, in which 1,080 of its employees are currently
participating. The Company considers its relations with its employees to be
excellent.

ECONOMIC CONDITIONS

The Company's success is dependent to a significant extent upon general
economic conditions in the Houston metropolitan area. The banking industry in
Texas and Houston is affected by general economic conditions such as inflation,
recession, unemployment, real estate values and other factors beyond the
Company's control. During the mid-1980's, severely depressed oil and gas 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 local
economy has gained nearly 790,000 jobs, averaging 3.2% annual growth. In the
Houston metropolitan area, the job count is 2.15 million, more than Alabama,
Louisiana, South Carolina or Kentucky. The Federal Reserve projects job growth
for 2002 at 15,000 jobs, a 0.7% increase. The economic base in Houston has
diversified from being energy dependent to being energy independent as evidenced
by the decrease in the upstream energy sector which is estimated to account for
32% of Houston's economic base, down from 69% in 1981. Since 1982, the
energy-independent portion of the economic base has grown at a annual compound
rate of 7.4%. Nevertheless, an economic recession over a prolonged period of
time in the 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 local economy would not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows.

SUPERVISION AND REGULATION

The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of the Company and the Bank. The
following description or references herein to applicable statutes and
regulations, which are not intended to be complete descriptions of these
provisions or their effects on the Company or the Bank, are brief summaries and
are qualified in their entirety by reference to such statutes and regulations.

4

THE BANK

As a national banking association, the Bank is principally supervised,
examined and regulated by the Office of the Comptroller of the Currency (the
"OCC"). The OCC regularly examines such areas as capital adequacy, reserves,
loan portfolio, investments and management practices. The Bank must also furnish
quarterly and annual reports to the OCC, and the OCC may exercise cease and
desist and other enforcement powers over the Bank if its actions represent
unsafe or unsound practices or violations of law. Since the deposits of the Bank
are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation (the "FDIC"), the Bank is also subject to regulation and supervision
by the FDIC. Because the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") regulates the Company, and because the Bank is a member
of the Federal Reserve System, the Federal Reserve Board also has supervisory
authority which affects the Bank.

Restrictions on Transactions with Affiliates and Insiders. The Bank is
subject to certain federal statutes limiting transactions with the Company and
its nonbanking affiliates. Section 23A of the Federal Reserve Act affects loans
or other credit extensions to, asset purchases from and investments in
affiliates of the Bank. Such transactions with the Company or any of its
nonbanking subsidiaries are limited in amount to ten percent of the Bank's
capital and surplus and, with respect to the Company and all of its nonbanking
subsidiaries together, to an aggregate of twenty percent of the Bank's capital
and surplus. Furthermore, such loans and extensions of credit, as well as
certain other transactions, are required to be collateralized in specified
amounts.

In addition, Section 23B of the Federal Reserve Act requires that certain
transactions between the Bank, including its subsidiaries, and its affiliates
must be on terms substantially the same, or at least as favorable to the Bank or
its subsidiaries, as those prevailing at the time for comparable transactions
with or involving other nonaffiliated persons. In the absence of such comparable
transactions, any transaction between the Bank and its affiliates must be on
terms and under circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated persons. The Bank is also
subject to certain prohibitions against any advertising that indicates the Bank
is responsible for the obligations of its affiliates.

In May 2001, the Federal Reserve Board adopted an interim rule addressing
the applications of Section 23A and Section 23B of the Federal Reserve Act to
credit exposure arising out of derivative transactions between an insured
institution and its affiliates and intra-day extensions of credit by an insured
depository institution to its affiliates. The rule requires institutions to
adopt policies and procedures reasonably designed to monitor, manage, and
control credit exposures arising out of transactions and to clarify that the
transactions are subject to Section 23B of the Federal Reserve Act. In May 2001,
the Federal Reserve Board also proposed a new rule to implement comprehensively
Section 23A and 23B of the Federal Reserve Act. When adopted in final form, the
regulation will supersede previous interpretations of the statutory provisions.
The Company cannot predict what form the final regulation might take.

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 loans 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 OCC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.

Interest Rate Limits. Interest rate limitations for the Bank are primarily
governed by the National Bank Act which generally defers to the laws of the
state where the bank is located. Under the laws of the State of Texas, the
maximum annual interest rate that may be charged on most loans made by the Bank
is based on doubling the average auction rate, to the nearest 0.25%, for 26 week
United States Treasury Bills, as computed by the Office of the Consumer Credit
Commissioner of the State of Texas. However, the maximum rate does not decline
below 18% or rise above 24% (except for loans in excess of $250,000 that are
made for business, commercial, investment or other similar purposes in which
case the maximum annual rate may not rise above 28%, rather than 24%). On fixed
rate closed-end loans, the maximum non-usurious rate is to be determined at the
time the rate is contracted, while on floating rate and open-end loans (such as
credit cards), the rate varies

5

over the term of the indebtedness. State usury laws have been preempted by
federal law for loans collateralized by a first lien on residential real
property.

Examinations. The OCC periodically examines and evaluates national banks.
Based upon such an evaluation, the OCC may revalue the assets of a national bank
and require that it establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such assets. Onsite
examinations are to be conducted every 12 months, except that certain well
capitalized banks may be examined every 18 months. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") authorizes the OCC to assess the
institution for its costs of conducting the examinations.

Prompt Corrective Action. In addition to the capital adequacy guidelines,
FDICIA requires the OCC to take "prompt corrective action" with respect to any
national bank which does not meet specified minimum capital requirements. The
applicable regulations establish five capital levels, ranging from "well
capitalized" to "critically undercapitalized," which authorize, and in certain
cases require, the OCC to take certain specified supervisory action. Under
regulations implemented under FDICIA, a national bank is considered well
capitalized if it has a total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0%
or greater, and it is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure. A national bank is considered adequately
capitalized if it has a total risk-based capital ratio of 8.0% or greater, a
Tier 1 risk-based capital ratio of at least 4.0% and a leverage capital ratio of
4.0% or greater (or a leverage ratio of 3.0% or greater if the institution is
rated composite 1 in its most recent report of examination, subject to
appropriate federal banking agency guidelines), and the institution does not
meet the definition of an undercapitalized institution. A national bank is
considered undercapitalized if it has a total risk-based capital ratio that is
less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a
leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines). A
significantly undercapitalized institution is one which has a total risk-based
capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0%. A critically
undercapitalized institution is one which has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. Under certain circumstances, a
well capitalized, adequately capitalized or undercapitalized institution may be
treated as if the institution were in the next lower capital category.

With certain exceptions, national banks will be prohibited from making
capital distributions or paying management fees to a holding company if the
payment of such distributions or fees will cause them to become
undercapitalized. Furthermore, undercapitalized national banks will be required
to file capital restoration plans with the OCC. Such a plan will not be accepted
unless, among other things, the banking institution's holding company guarantees
the 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. Undercapitalized national banks also will be subject to restrictions
on growth, acquisitions, branching and engaging in new lines of business unless
they have an approved capital plan that permits otherwise. The OCC also may,
among other things, require an undercapitalized national bank to issue shares or
obligations, which could be voting stock, to recapitalize the institution or,
under certain circumstances, to divest itself of any subsidiary.

The OCC is authorized by FDICIA to take various enforcement actions against
any significantly undercapitalized national bank and any national bank that
fails to submit an acceptable capital restoration plan or fails to implement a
plan accepted by the OCC. These powers include, among other things, requiring
the institution to be recapitalized, prohibiting asset growth, restricting
interest rates paid, requiring primary approval of capital distributions by any
bank holding company which controls the institution, requiring divestiture by
the institution of its subsidiaries or by the holding company of the institution
itself, requiring new election of directors, and requiring the dismissal of
directors and officers.

Significantly and critically undercapitalized national banks may be subject
to more extensive control and supervision. The OCC may prohibit any such
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from

6

making payments of principal or interest on outstanding subordinated debt.
Within 90 days of a national bank becoming critically undercapitalized, the OCC
must appoint a receiver or conservator unless certain findings are made with
respect to the prospect for the institution's continued viability.

As of December 31, 2001, the Bank met the capital requirements of a "well
capitalized" institution.

Dividends. There are certain statutory limitations on the payment of
dividends by national banks. Without approval of the OCC, dividends may not be
paid by the Bank in an amount in any calendar year which exceeds the Bank's
total net profits for that year, plus its retained profits for the preceding two
years, less any required transfers to capital surplus. In addition, a national
bank may not pay dividends in excess of total retained profits, including
current year's earnings after deducting bad debts in excess of reserves for
losses. In some cases, the OCC may find a dividend payment that meets these
statutory requirements to be an unsafe or unsound practice. Under FDICIA, the
Bank cannot pay a dividend if it will cause the Bank to be undercapitalized.

FDIC INSURANCE ASSESSMENTS

Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for
insured depositary institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The
risk-based system assigns an institution to one of three capital categories: (i)
well-capitalized, (ii) adequately capitalized, or (iii) undercapitalized. These
three categories are substantially similar to the prompt corrective action
categories, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
an evaluation provided to the FDIC by the institution's primary federal
regulator and information which the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned.

Under the final risk-based assessment system there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied. Assessment rates for deposit
insurance currently range from zero basis points to 27 basis points. The
supervisory subgroup to which an institution is assigned by the FDIC is
confidential and may not be disclosed. A bank's rate of deposit insurance
assessments will depend on the category and subcategory to which the bank is
assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on the earnings of insured institutions, including the Bank.

Under FDICIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
Management does not know of any practice, condition or violation that might lead
to termination of deposit insurance.

Conservator and Receivership Powers. FDICIA significantly expanded the
authority of the federal banking regulators to place depository institutions
into conservatorship or receivership to include, among other things, appointment
of the FDIC as conservator or receiver of an undercapitalized institution under
certain circumstances. In the event the Bank is placed into conservatorship or
receivership, the FDIC is required, subject to certain exceptions, to choose the
method for resolving the institution that is least costly to the BIF, such as
liquidation.

Brokered Deposit Restrictions. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and FDICIA generally limit institutions
which are not well capitalized from accepting brokered deposits. In general,
undercapitalized institutions may not solicit, accept or renew brokered
deposits. Adequately capitalized institutions may not solicit, accept or renew
brokered deposits unless they obtain a waiver from the FDIC. Even in that event,
they may not pay an effective yield of more than 75 basis points

7

over the effective yield paid on deposits of comparable size and maturity in the
institution's normal market area for deposits accepted from within that area, or
the national rate paid on deposits of comparable size and maturity for deposits
accepted from outside the institution's normal market area.

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 Community Reinvestment
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.

Under Section 501 of the Gramm-Leach-Bliley Act (see discussion below), the
federal banking agencies are required to establish appropriate standards for
financial institutions regarding the implementation of safeguards to ensure the
security and confidentiality of customer records and information, protection
against any anticipated threats or hazards to the security or integrity of such
records and protection against unauthorized access to or use of such records or
information in a way that could result in substantial harm or inconvenience to a
customer. The agencies have published a joint final rule which was effective
July 1, 2001. Among other matters, the rule requires each bank to implement a
comprehensive written information security program that includes administrative,
technical and physical safeguards relating to customer information.

Under the Gramm-Leach-Bliley Act, a financial institution must provide its
customers with a notice of privacy policies and practices. Section 502 prohibits
a financial institution from disclosing nonpublic personal information about a
consumer to nonaffiliated third parties unless the institution satisfies various
notice and opt-out requirements and the customer has not elected to opt out of
the disclosure. Under Section 504, the agencies are authorized to issue
regulations as necessary to implement notice requirements and restrictions on a
financial institution's ability to disclose nonpublic personal information about
consumers to nonaffiliated third parties. In June 2000, the federal banking
agencies issued a final rule, effective November 13, 2000, but compliance with
which was optional until July 1, 2001. Under the rule, all banks must develop
initial and annual privacy notices which describe in general terms the bank's
information sharing practices. Banks that share nonpublic personal information
about customers with nonaffiliated third parties must also provide customers
with an opt-out notice and a reasonable period of time for the customer to opt
out of any such disclosure (with certain exceptions). Limitations are placed on
the extent to which a bank can disclose an account number or access code for
credit card, deposit, or transaction accounts to any nonaffiliated third party
for use in marketing.

THE COMPANY

The Company is a bank holding company registered under the Bank Holding
Company Act of 1956 (the "BHCA"), and is subject to supervision and regulation
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.
As a bank holding company, the Company's activities and those of its banking and
nonbanking subsidiaries have in the past been limited to the business of banking
and activities closely related or incidental to banking. Under new banking
legislation (see discussion of Gramm-Leach-Bliley Act below), however, national
banks have broadened authority, subject to limitations on investment, to engage
in activities that are financial in nature (other than insurance underwriting,
merchant or insurance portfolio investment, real estate development and real
estate investment) through subsidiaries if the bank is well capitalized, well
managed and has at least a satisfactory rating under the Community Reinvestment
Act.

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

8

the prior claims of the subsidiary's creditors. In the event of a liquidation or
other resolution of the Bank, the claims of depositors and other general or
subordinated creditors of the Bank 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.

Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. For example, the Federal
Reserve Board's Regulation Y 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. As another
example, a holding company could not impair its subsidiary bank's soundness by
causing it to make funds available to nonbanking subsidiaries or their customers
if the Federal Reserve Board believed it not prudent to do so.

FIRREA expanded the Federal Reserve Board's 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. Notably, FIRREA increased the amount of civil money
penalties which the Federal Reserve Board can assess for certain activities
conducted on a 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. FIRREA also expanded the scope
of individuals and entities against which such penalties may be assessed.

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.

Annual Reporting; Examinations. The Company is required to file an annual
report with the Federal Reserve Board, and such additional information as the
Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve
Board may examine a bank holding company or any of its subsidiaries, and charge
the Company for the cost of such an examination.

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 and
certain off-balance sheet assets such as letters of credit 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).

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 total consolidated average assets. Bank holding companies must maintain a
minimum leverage ratio of at least 3.0%, although most organizations are
expected to maintain leverage ratios that are 100 to 200 basis points above this
minimum ratio.

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. In addition, the regulations
of the Federal Reserve Board provide that concentration of credit risk and
certain risks arising from nontraditional activities, as well as an
institution's ability to manage these risks, are important factors to be taken
into account by regulatory agencies in assessing an organization's overall
capital adequacy.

9

The Federal Reserve Board adopted amendments to its risk-based capital
regulations to provide for the consideration of interest rate risk in the
agencies' determination of a banking institution's capital adequacy.

GRAMM-LEACH-BLILEY ACT

Traditionally, the activities of bank holding companies have been limited
to the business of banking and activities closely related or incidental to
banking. On November 12, 1999, however, the Gramm-Leach-Bliley Act was signed
into law which permits bank holding companies to engage in a broader range of
financial activities. Specifically, bank holding companies may elect to become
"financial holding companies" which may affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature
or incidental to a financial activity. A bank holding company may become a
financial holding company under the new statute only if each of its subsidiary
banks is well capitalized, is well managed and has at least a satisfactory
rating under the Community Reinvestment Act. A bank holding company that falls
out of compliance with such requirement may be required to cease engaging in
certain activities. Any bank holding company which does not elect to become a
financial holding company remains subject to the current restrictions of the
Bank Holding Company Act.

Under the new legislation, the Federal Reserve Board serves as the primary
"umbrella" regulator of financial holding companies with supervisory authority
over each parent company and limited authority over its subsidiaries. The
primary regulator of each subsidiary of a financial holding company will depend
on the type of activity conducted by the subsidiary. For example, broker-dealer
subsidiaries will be regulated largely by securities regulators and insurance
subsidiaries will be regulated largely by insurance authorities.

Under the Gramm-Leach-Bliley Act, among the activities that will be deemed
"financial in nature" for "financial holding companies" are, in addition to
traditional lending activities, securities underwriting, dealing in or making a
market in securities, sponsoring mutual funds and investment companies,
insurance underwriting and agency activities, activities which the Federal
Reserve Board determines to be closely related to banking, and certain merchant
banking activities.

In January 2001, the Federal Reserve Board and the Secretary of the
Treasury promulgated final regulations governing the scope of permissible
merchant banking investments which are those made under Section 4(k)(4)(H) of
the Bank Holding Company Act, as amended by the Gramm-Leach-Bliley Act, which
authorizes a financial holding company, directly or indirectly as principal or
on behalf of one or more persons, to acquire or control any amount of shares,
assets or ownership interests of a company or other entity that is engaged in
any activity not otherwise authorized for the financial holding company under
Section 4 of the Bank Holding Company Act. Under the regulation, the types of
ownership that may be acquired include shares, assets or ownership interests of
a company or other entity including debt or equity securities, warrants,
options, partnership interests, trust certificates or other instruments
representing an ownership interest in a company or entity whether voting or
nonvoting. The merchant banking investments may be made by the financial holding
company or any of its subsidiaries, other than a depository institution or
subsidiary of a depository institution. Before acquiring or controlling a
merchant banking investment, a financial holding company must either be or have
a securities affiliate registered under the Securities Exchange Act of 1934 or a
qualified insurance affiliate. The regulation places restrictions on the ability
of a financial holding company to become involved in the routine management or
operation of any of its portfolio companies. The regulation also provides that a
financial holding company may own or control shares, assets and ownership
interests pursuant to the merchant banking provisions only for such period of
time as to enable the sale or disposition on a reasonable basis consistent with
the financial viability of the financial holding company's merchant banking
investment activities. Generally, the ownership period is limited to ten years.
Special provisions are included in the regulation governing the investment by a
financial holding company in private equity funds. Under the merchant banking
regulation, a financial holding company may not, without Federal Reserve Board
approval, have aggregate merchant banking investments exceeding 30 percent of
the Tier 1 capital of the financial holding company; or after excluding
interests in private equity funds, 20 percent of the Tier 1 capital of the
financial holding company.

10

The Federal Reserve Board and Secretary of Treasury have also requested
public comment on the issue of whether to add the activities of real estate
brokerage and real estate management to the list of permissible activities for
financial holding companies and financial subsidiaries of national banks. The
Company cannot predict whether the proposal will be adopted or the form any
final rule might take.

The Federal Reserve Board, the OCC, and the FDIC have adopted a rule,
effective April 1, 2002, which establishes special minimum regulatory capital
requirements for equity investments in non-financial companies. The capital
requirements apply symmetrically to equity investments of banks and bank holding
companies and impose a series of marginal capital charges on covered equity
investments that increase with the level of a banking organization's overall
exposure to equity investments relative to the organization's Tier 1 capital.

ENFORCEMENT POWERS OF THE FEDERAL BANKING AGENCIES

The Federal Reserve Board and the OCC 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 the Bank, as well as officers, directors and other
institution-affiliated parties of these organizations, to administrative
sanctions and potentially substantial civil money penalties. In addition to the
grounds discussed above under "-- The Bank -- Prompt Corrective Action," 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.

Imposition of Liability for Undercapitalized Subsidiaries. FDICIA requires
bank regulators 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. Under FDICIA, the aggregate liability of all companies
controlling 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 guarantee
and limit on liability expire after the regulators notify the institution that
it has remained adequately capitalized for each of four consecutive calendar
quarters. FDICIA grants greater powers to the bank regulators 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. At
December 31, 2001, the Bank met the requirements of a "well capitalized"
institution and, therefore, these requirements presently do not apply to the
Company.

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 direct or
indirect ownership or control of more than 5% of any class of voting shares of
any bank.

The Federal Reserve Board will allow the acquisition by a bank holding
company of an interest in any bank located in another state only if the laws of
the state in which the target bank is located expressly authorize such
acquisition. Texas law permits, in certain circumstances, out-of-state bank
holding companies to acquire banks and bank holding companies in Texas.

EXPANDING ENFORCEMENT AUTHORITY

One of the major effects of FDICIA was the increased ability of banking
regulators to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve Board and FDIC have extensive authority to police
unsafe or unsound practices and violations of applicable laws and regulations by

11

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.

USA PATRIOT ACT OF 2001

On October 6, 2001, the "Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot) Act
of 2001" was enacted. The statute increases the power of the United States
Government to obtain access to information and to investigate a full array of
criminal activities. In the area of money laundering activities, the statute
added terrorism, terrorism support and foreign corruption to the definition of
money laundering offenses and increased the civil and criminal penalties for
money laundering; applied certain anti-money laundering measures to United
States bank accounts used by foreign persons; prohibited financial institutions
from establishing, maintaining, administering or managing a correspondent
account with a foreign shell bank; provided for certain forfeitures of funds
deposited in United States interbank accounts by foreign banks; provided the
Secretary of the Treasury with regulatory authority to ensure that certain types
of bank accounts are not used to hide the identity of customers transferring
funds and to impose additional reporting requirements with respect to money
laundering activities; and included other measures. In November 2001, the
Department of Treasury issued interim guidance concerning compliance by covered
United States financial institutions with the new statutory anti-money
laundering requirement regarding correspondent accounts established or
maintained for foreign banking institutions, including the requirement that
financial institutions take reasonable steps to ensure that correspondent
accounts provided to foreign banks are not being used to indirectly provide
banking services to foreign shell banks. This was followed by a proposed rule in
December 2001. The Company cannot predict what form the final regulation might
take.

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.

12

ITEM 2. PROPERTIES

FACILITIES

The Company currently maintains 34 locations in the greater Houston area,
fifteen of which are leased. The following table sets forth specific information
on each location. With the exception of the Operations Center, each location
offers full service banking. The Company's headquarters are located at 4400 Post
Oak Parkway, in a 28-story office tower in the Galleria area in Houston, Texas.

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

(1) Leased location.

13

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings that arise in the
normal course of business. In the opinion of management of the Company, after
consultation with its legal counsel, such legal proceedings are not expected to
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of the fiscal year
covered by this Annual Report to a vote of the Company's security holders.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock began trading on the NASDAQ Stock Market on
January 28, 1997, and is quoted in such Market under the symbol "SWBT". The
Company's Common Stock was not publicly traded, nor was there an established
market therefor, prior to January 28, 1997. On February 26, 2002 there were
approximately 974 holders of record of the Company's Common Stock.

No cash dividends have ever been paid by the Company on its Common Stock,
and the Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company's principal source of funds to pay
cash dividends on its Common Stock would be cash dividends from the Bank. There
are certain statutory limitations on the payment of dividends by national banks.
Without approval of the OCC, dividends in any calendar year may not exceed the
Bank's total net profits for that year, plus its retained profits for the
preceding two years, less any required transfers to capital surplus or to a fund
for the retirement of any preferred stock. In addition, a dividend may not be
paid in excess of a bank's cumulative net profits after deducting bad debts in
excess of the allowance for loan losses. As of December 31, 2001, approximately
$128.1 million was available for payment of dividends by the Bank to the Company
under these restrictions without regulatory approval. See "Item
1. Business -- Supervision and Regulation."

The following table presents the range of high and low sale prices reported
on the NASDAQ during the years ended December 31, 2001 and December 31, 2000.

RECENT SALES OF UNREGISTERED SECURITIES

None.

14

ITEM 6. 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 Annual Report, and the information
contained in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected historical consolidated
financial data as of the end of and for each of the five years in the period
ended December 31, 2001 are derived from the Company's Consolidated Financial
Statements which have been audited by independent accountants.

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

(1) Basic earnings per common share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per common share is computed by
dividing net income available to common shareholders, adjusted for any
changes in income that would result from the assumed conversion of all
dilutive potential common shares, by the sum of the weighted average number
of common shares outstanding and the effect of all dilutive potential common
shares outstanding for the period.

(2) Calculated by dividing total noninterest expenses by net interest income
plus noninterest income, excluding net security gains (losses).

(3) At period end, except net charge-offs to average loans.

(4) Nonperforming assets consist of nonperforming loans and other real estate
owned.

(5) Nonperforming loans consist of nonaccrual loans, troubled debt
restructurings and loans contractually past due 90 days or more.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's consolidated financial
statements and should be read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto and other detailed information
appearing elsewhere in this Annual Report.

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

OVERVIEW

Total assets at December 31, 2001, 2000 and 1999 were $4.40 billion, $3.94
billion, and $3.27 billion, respectively. This growth was a result of a strong
local economy, the addition of new loan officers, aggressive marketing, and the
Company's overall growth strategy. Loans were $2.76 billion at December 31,
2001, an increase of $248.0 million or 10% from $2.51 billion at the end of
2000. Loans were $2.04 billion at year end 1999. Deposits increased to $3.43
billion at year end 2001 from $3.09 billion at year end 2000 and $2.53 billion
at year end 1999.

Net income was $52.7 million, $43.5 million, and $32.0 million and diluted
earnings per common share was $1.55, $1.29, and $0.97 for the years ended 2001,
2000 and 1999, respectively. This increase in net income was primarily the
result of strong loan growth, maintaining strong asset quality and expense
control and resulted in returns on average assets ("ROA") of 1.32%, 1.23%, and
1.06% and returns on average common equity ("ROE") of 15.82%, 17.00%, and 14.70%
for the years ended 2001, 2000 and 1999, respectively.

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
borrowed funds. Net interest income is the principal source of the Company's
earnings. In 2001, net interest income provided 73.3% of the Company's net
revenues, compared with 77.8% in 2000 and 76.7% in 1999. Interest rate
fluctuations, as well as changes in the amount and type of earning assets and
liabilities, combine to affect net interest income.

2001 versus 2000. Net interest income was $160.0 million in 2001 compared
to $150.5 million in 2000, an increase of $9.5 million or 6%. Growth in average
earning assets, primarily loans, was $356.4 million or 11% while yields
decreased 114 basis points to 7.25%. Yields decreased throughout 2001 as the
Bank's prime lending rate decreased. The yield on earning assets during the
fourth quarter was the lowest for the year, resulting in decreased yields on a
weighted average basis.

The impact of the growth in average earning assets was partially offset by
a $333.4 million or 14% increase in average interest-bearing liabilities, offset
by a decrease in the rate paid on interest-bearing liabilities of 132 basis
points to 3.62% in 2001.

Net interest margin decreased 20 basis points in 2001 to 4.44%. This
decrease in the net interest margin is the direct result of the Federal Reserve
lowering the federal funds rate 475 basis points since the beginning of 2001.

Net interest margin risk is typically related to a narrowing of the prime
rate and cost of funds. The Company managed this risk with asset and liability
pricing to minimize the impact of declining rates, lowering the average costs of
deposits and adding interest rate floors to some of its loan agreements. On
January 4, 2001 the Federal Reserve decreased the federal funds rate and
discount rate by 50 basis points. This was followed by seven additional
decreases of 50 basis points each on February 1, 2001, March 21, 2001, April 19,
2001, May 16, 2001, September 18, 2001, October 3, 2001 and November 7, 2001,
and three additional decreases of 25 basis points each on June 28, 2001, August
22, 2001 and December 12, 2001. Due to the Bank's asset

16

sensitivity, the net interest margin gradually decreased during the year. This
resulted in net interest margins of 4.44% and 4.64% and net interest spreads of
3.63% and 3.45% for 2001 and 2000, respectively.

2000 versus 1999. Net interest income totaled $150.5 million in 2000
compared to $123.0 million in 1999, an increase of $27.5 million or 22%. This
resulted in net interest margins of 4.64% and 4.44% and net interest spreads of
3.45% and 3.44% for 2000 and 1999, respectively.

The increase in net interest income was due primarily to a $472.7 million
or 17% increase in average interest-earning assets. Average loans grew $518.5
million or 29% during 2000 while average securities decreased $45.1 million or
5% during the same period. The yield earned on average loans outstanding
increased 71 basis points to 9.25% in 2000. Overall, the yield earned on average
interest-earning assets increased 77 basis points to 8.39% in 2000 compared to a
76 basis point increase in the rate paid on average interest-bearing
liabilities.

17

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

18

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

PROVISION FOR LOAN LOSSES

The 2001 provision for loan losses was $7.5 million, an increase of
$447,000 from 2000. The provision for the year ended 2000 was $7.1 million, an
increase of $579,000 from the year ended December 31, 1999. Net charge-offs
during 2001 equaled $4.3 million, which when subtracted from the provision for
loan losses of $7.5 million resulted in a net increase in the allowance for loan
losses of $3.2 million. Although no assurance can be given, management believes
that the present allowance for loan losses is adequate considering loss
experience, delinquency trends and current economic conditions. Management
regularly reviews the Company's loan loss allowance as its loan portfolio grows
and diversifies. (See "-- Financial Condition -- Loan Review and Allowance for
Loan Losses.")

NONINTEREST INCOME

Noninterest income grew to $58.2 million for the year ended December 31,
2001, an increase of $15.3 million or 36% from 2000. Noninterest income totaled
$42.9 million in 2000, an increase of $5.4 million or 14% from 1999.

19

The following table shows the breakout of noninterest income between the
bank and the mortgage company for 2001, 2000 and 1999:

Banking Segment. The largest component of noninterest income is service
charges on deposit accounts, which were $27.7 million for the year ended
December 31, 2001, compared to $20.8 million for 2000 and $17.0 million for
1999. These were increases of 33% and 22%, respectively, for 2001 and 2000.
Several factors contributed to this growth. First, the Bank's treasury
management division continues to achieve great success, with gross revenues up
$2.9 million, or 27%, in 2001. This success at winning new business results from
the Company's ability to design custom cost-effective cash management solutions
for middle market and large corporate customers. Second, during this three-year
period the Company introduced several new products to its existing retail
product line. Finally, in 1999 the Company initiated a deposit campaign
encompassing all of its existing marketing areas and redesigned the consumer
banking area which has experienced strong growth since its inception.
Additionally, the number of deposit accounts grew from 124,424 at December 31,
1999 to 141,036 at December 31, 2000 and to 151,376 at December 31, 2001.

Income on Bank-owned life insurance was $4.5 million for the year ended
December 31, 2001, compared to $1.7 million for 2000 and $1.4 million for 1999.
These were increases of 171% and 21%, respectively, for 2001 and 2000. The
increase in 2001 is attributable to the purchase of $50.0 million of additional
Bank-owned life insurance early in the first quarter of 2001.

Additional areas of growth included investment services income and
factoring fee income. Investment services income was $7.2 million for the year
ended December 31, 2001, compared to $6.0 million for 2000 and $4.9 million for
1999. The increase in investment services income is attributable to the
expanding international and foreign exchange departments, as well as the
addition of several experienced calling officers and an increase in referrals
from the Company's growing customer base. Factoring fee income, which is derived
from the purchase of accounts receivable, was $4.7 million for the year ended
December 31, 2001, compared to $4.1 million for 2000 and $3.2 million for 1999.
Average gross accounts receivable purchased was $27.7 million for the year ended
December 31, 2001, compared to $22.6 million for 2000 and $16.0 million for
1999.

Mortgage Segment. Gain on sale of loans was $3.2 million for the year
ended December 31, 2001, compared to $1.0 million for 2000 and $822,000 for
1999. These were increases of 211% and 24%, respectively, for 2001 and 2000. The
lower interest rates in 2001 resulted in an increase in mortgage refinancings
and originations. This increase in loan volume resulted in a larger portfolio of
loans available for sale during the year. The principal balances of mortgage
loans sold were $141.5 million, $45.2 million, and $63.5 million during the
years ended December 31, 2001, 2000 and 1999, respectively.

20

Loan fee income was $2.7 million for the year ended December 31, 2001,
compared to $2.2 million for 2000 and $2.1 million for 1999. These were
increases of 25% and 4%, respectively, for 2001 and 2000. The increase in loan
fee income is also a result of the increased loan originations during the year.

NONINTEREST EXPENSES

For the year ended December 31, 2001, noninterest expenses totaled $133.2
million, an increase of $13.0 million, or 11%, from $120.2 million during 2000,
which had increased from $104.5 million during 1999. The increase in noninterest
expenses during these periods was due primarily to salaries and employee
benefits and occupancy expenses.

The efficiency ratio is calculated by dividing total noninterest expenses
by net interest income plus noninterest income, excluding net security gains
(losses). An increase in the efficiency ratio indicates that more resources are
being utilized to generate the same (or greater) volume of income while a
decrease would indicate a more efficient allocation of resources. The Company's
efficiency ratios were 61.05%, 61.98% and 65.07% for the years ended December
31, 2001, 2000 and 1999, respectively. The Company's efficiency ratios before
merger-related expenses were 61.05%, 60.00% and 62.29%, respectively. The
increase in the efficiency ratio in 2001 is a direct result of the decrease in
the net interest margin discussed in "-- Results of Operations -- Net Interest
Income" above.

Salaries and employee benefits expense was $78.0 million for the year ended
December 31, 2001, an increase of $10.9 million or 16% from $67.1 million for
the year ended December 31, 2000. Salaries and employee benefits expense for the
year ended December 31, 2000 increased $9.5 million or 17% from the same period
in 1999. These increases were due primarily to hiring additional personnel
required to accommodate the Company's growth. Total full-time equivalent
employees for the years ended December 31, 2001, 2000 and 1999 were 1,376,
1,313, and 1,168, respectively.

Occupancy expense rose $3.5 million to $21.5 million in 2001. Major
categories included within occupancy expense are building lease expense,
depreciation expense, and maintenance contract expense. Building lease expense
increased to $6.2 million in 2001 from $4.7 million in 2000, an increase of $1.5
million or 32%. This increase is primarily due to the Company leasing 91,689
square feet for an operations center in downtown Houston late in 2000.
Depreciation expense increased $2.4 million to $10.4 million for the year ended
December 31, 2001. This increase was due primarily to additional depreciation on
equipment provided to new employees and expenses related to technology upgrades
throughout the Company. In addition, the Company recorded $381,000 of
depreciation expense related to the leasehold improvements at the new operations
center during the year ended December 31, 2001. Maintenance contract expense for
the year ended December 31, 2001 was $3.2 million, an increase of $694,000 or
28% compared to $2.5 million in 2000 and $1.8 million in 1999. The Company has
purchased maintenance contracts for major operating systems throughout the
organization.

During 2000 and 1999, the Company recorded, on a pre-tax basis,
approximately $4.1 million and $4.5 million, respectively in merger-related
expenses and other charges including investment banking fees, other professional
fees and severance expenses associated with the mergers of Citizens in 2000 and
Fort Bend in 1999. There were no such transactions in 2001.

INCOME TAXES

Income tax expense includes the regular federal income tax at the statutory
rate, plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of nondeductible interest expense, and
the amount of other nondeductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus certain
officers salaries, less interest income from federal securities. In 2001 income
tax expense was $24.7 million, an increase of $2.1 million or 9% from the $22.6
million of income tax expense in 2000 which increased $5.1 million or 29% from
the $17.5 million of income tax expense in 1999. The Company's effective tax
rates were 32%, 34%, and 35% for the years ended

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December 31, 2001, 2000 and 1999, respectively. The reduced tax rate is
primarily due to an increase in tax exempt income earned on the Company's
bank-owned life insurance and other tax exempt securities.

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, which do
not necessarily change in accordance with inflation rates. The Company attempts
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

LOANS HELD FOR INVESTMENT

Loans held for investment were $2.67 billion at December 31, 2001, an
increase of $247.0 million, or 10% from December 31, 2000. Loans were $2.43
billion at December 31, 2000, an increase of $467.2 million, or 24%, from $1.96
billion at December 31, 1999.

During the past 5 years loans have grown at an annualized rate of 24%. This
growth is consistent with the Company's strategy of targeting corporate "middle
market" and private banking customers and providing innovative products with
superior customer service. This plan also includes establishing new branches in
areas that demographically complement existing or targeted customer base,
pursuing selected mergers/acquisitions which will add new markets, delivery
systems and talent to the Company and leveraging new or existing technology to
improve the profitability of the Company and its customers.

Although gross loans increased during 2001, the Company has noted many
borrowing customers are reducing debt and operating with a more conservative
balance sheet. The Company continues to take a conservative posture related to
credit underwriting, which it believes is a prudent course of action, especially
during slowing economic times. Both of these factors have combined to cause a
recent slowing in the growth of the Company's loan portfolio. While the
short-term outlook for loan growth has moderated, the Company is optimistic
about the future, as it has continued to invest in new products and services
that it believes will bring excellent opportunities for growth and expansion.

The loan portfolio is concentrated in loans to commercial, real estate
construction and land development enterprises, with the balance in residential
and consumer loans. While no specific industry concentration is considered
significant, lending operations are located primarily in an eight county area in
and around Houston. An economic recession over a prolonged period of time in the
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 local economy would not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows.

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The following table summarizes the loan portfolio of the Company by major
category as of the dates indicated:

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

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

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

Loans collateralized by single-family residential real estate are typically
originated in amounts of no more than 90% of appraised value. The Company
requires mortgage title insurance and hazard insurance in the amount of the
loan. Although the contractual loan payment periods for single-family
residential real estate loans are generally for a 15 to 30 year period, such
loans often remain outstanding for significantly shorter periods than their
contractual terms.

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

Residential construction financing to builders generally has been
originated in amounts of no more than 80% of appraised value. The Company
requires a mortgage title binder and builder's risk insurance in the amount of
the loan. The contractual loan payment periods for residential constructions
loans are generally for a six to twelve month period.

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Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 84 months and vary based
upon the nature of collateral and size of loan.

The contractual maturity ranges of the commercial and industrial and funded
real estate construction loan portfolio and the amount of such loans with fixed
interest rates and floating interest rates in each maturity range as of December
31, 2001 are summarized in the following table:

LOANS HELD FOR SALE

Loans held for sale of $87.0 million at December 31, 2001 increased from
$85.9 million at December 31, 2000. These loans are carried at the lower of cost
or market and are typically sold to investors within one year of origination.
The market value of these loans is impacted by changes in current interest
rates. An increase in interest rates would result in a decrease in the market
value of these loans while a decrease in interest rates would result in an
increase in the market value of these loans. The business of originating and
selling loans is conducted by the Company's mortgage segment.

LOAN REVIEW AND ALLOWANCE FOR LOAN LOSSES

The Company's loan review procedures include a credit quality assurance
process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors, an independent loan review department
staffed, in part, with OCC experienced personnel, low individual lending limits
for officers, Senior Loan Committee approval for large credit relationships and
quality loan documentation procedures. The Company also maintains a well
developed monitoring process for credit extensions in excess of $100,000. The
Company performs monthly and quarterly concentration analyses based on various
factors such as industries, collateral types, business lines, large credit
sizes, international investments and officer portfolio loads. The Company has
established underwriting guidelines to be followed by its officers. The Company
also monitors its delinquency levels for any negative or adverse trends. There
can be no assurance, however, that the Company's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general economic conditions.

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

The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Based on an evaluation of the loan
portfolio, management presents a quarterly analysis of the allowance for loan
losses to the Board of Directors, indicating any changes in the allowance since
the last review and any

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recommendations as to adjustments in the allowance. In making its evaluation,
management considers, among other things, growth in the loan portfolio, the
diversification by industry of the Company's commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio of
current economic indicators and their probable impact on borrowers, the amount
of charge-offs for the period, the amount of nonperforming loans and related
collateral and the evaluation of its loan portfolio by the loan review function.
Charge-offs occur when loans are deemed to be uncollectible.

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

Management believes that the allowance for loan losses at December 31, 2001
is adequate to cover losses inherent in the portfolio as of such date. There can
be no assurance, however, that the Company will not sustain losses in future
periods, which could be greater than the size of the allowance at December 31,
2001.

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