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

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

FORM 10-Q

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

FOR THE QUARTER ENDED JUNE 30, 2001

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

COMMISSION FILE NUMBER: 000-22007

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

SOUTHWEST BANCORPORATION OF TEXAS, INC.
(Exact Name of Registrant as Specified in its Charter)

<Table>

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

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

(713) 235-8800
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

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

There were 32,872,638 shares of the Registrant's Common Stock outstanding
as of the close of business on August 1, 2001.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

<Table>
<Caption>
PAGE
----

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants......................... 2
Condensed Consolidated Balance Sheet as of June 30, 2001
and December 31, 2000
(unaudited)............................................ 3
Condensed Consolidated Statement of Income for the Three
and Six Months Ended June 30, 2001 and 2000
(unaudited)............................................ 4
Condensed Consolidated Statement of Changes in
Shareholders' Equity for the Six Months Ended June 30,
2001 (unaudited)....................................... 5
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 2001 and 2000 (unaudited)........ 6
Notes to Condensed Consolidated Financial Statements...... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 25
Item 2. Changes in Securities and Use of Proceeds.......... 25
Item 3. Defaults upon Senior Securities.................... 25
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 25
Item 5. Other Information.................................. 25
Item 6. Exhibits and Reports on Form 8-K................... 26
Signatures.................................................. 27
</Table>

1
3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying condensed consolidated balance sheet of
Southwest Bancorporation of Texas, Inc. and Subsidiaries (the "Company") as of
June 30, 2001, the related condensed consolidated statements of income for the
three- and six-month periods ended June 30, 2001 and 2000, the condensed
consolidated statement of changes in shareholders' equity for the six-month
period ended June 30, 2001 and the condensed consolidated statement of cash
flows for the six-month periods ended June 30, 2001 and 2000. These financial
statements are the responsibility of the Company's management.

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

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

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2000, and the related consolidated statements of income, of changes
in shareholders' equity, and of cash flows for the year then ended (not
presented herein); and in our report dated February 23, 2001 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet
information as of December 31, 2000 is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been derived.

PricewaterhouseCoopers LLP

Houston, Texas
July 19, 2001

2
4

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)

<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------

ASSETS
Cash and due from banks..................................... $ 222,485 $ 331,965
Federal funds sold and other cash equivalents............... 71,150 79,341
---------- ----------
Total cash and cash equivalents........................ 293,635 411,306
Securities available for sale............................... 807,528 848,164
Loans held for sale......................................... 81,669 85,939
Loans held for investment................................... 2,545,655 2,425,498
Allowance for loan losses................................... (30,590) (28,150)
Premises and equipment, net................................. 57,617 52,462
Accrued interest receivable................................. 22,408 27,334
Other assets................................................ 159,499 117,789
---------- ----------
Total assets........................................... $3,937,421 $3,940,342
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing............................. $ 875,128 $ 892,296
Demand -- interest-bearing................................ 33,246 62,773
Money market accounts..................................... 1,350,415 1,154,808
Savings................................................... 81,753 76,715
Time, $100 and over....................................... 543,717 506,629
Other time................................................ 365,737 400,649
---------- ----------
Total deposits......................................... 3,249,996 3,093,870
Securities sold under repurchase agreements................. 231,668 211,800
Other borrowings............................................ 101,300 305,961
Accrued interest payable.................................... 3,727 5,505
Other liabilities........................................... 17,585 23,883
---------- ----------
Total liabilities...................................... 3,604,276 3,641,019
---------- ----------
Minority interest in consolidated subsidiary................ 1,410 1,313
---------- ----------

Commitments and contingencies
Shareholders' equity:
Common stock -- $1 par value, 150,000,000 shares
authorized, 32,864,901 issued and 32,863,869
outstanding at June 30, 2001 and 75,000,000 shares
authorized, 32,705,909 issued and 32,704,877
outstanding at December 31, 2000....................... 32,865 32,706
Additional paid-in capital................................ 72,390 69,735
Retained earnings......................................... 223,779 198,720
Accumulated other comprehensive income (loss)............. 2,745 (3,107)
Treasury stock, at cost -- 1,032 shares................... (44) (44)
---------- ----------
Total shareholders' equity............................. 331,735 298,010
---------- ----------
Total liabilities and shareholders' equity............. $3,937,421 $3,940,342
========== ==========
</Table>

The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
5

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
2001 2000 2001 2000
------- ------- -------- --------

Interest income:
Loans........................................... $51,832 $50,966 $107,809 $ 96,762
Securities...................................... 12,841 14,434 26,434 28,773
Federal funds sold and other.................... 754 619 1,880 1,188
------- ------- -------- --------
Total interest income........................ 65,427 66,019 136,123 126,723
Interest expense on deposits and other
borrowings...................................... 26,908 29,131 58,854 55,228
------- ------- -------- --------
Net interest income.......................... 38,519 36,888 77,269 71,495
Provision for loan losses......................... 1,750 1,896 3,500 3,457
------- ------- -------- --------
Net interest income after provision for loan
losses..................................... 36,769 34,992 73,769 68,038
------- ------- -------- --------
Noninterest income:
Service charges on deposit accounts............. 6,096 4,969 11,780 9,962
Investment services............................. 1,702 1,526 3,395 2,914
Other fee income................................ 2,488 2,202 5,352 4,357
Other operating income.......................... 3,736 1,723 6,942 3,612
Gain (loss) on sale of securities, net.......... 8 (3) 25 (2)
------- ------- -------- --------
Total noninterest income..................... 14,030 10,417 27,494 20,843
------- ------- -------- --------
Noninterest expenses:
Salaries and employee benefits.................. 19,496 16,317 38,283 32,246
Occupancy expense............................... 5,083 4,221 10,070 8,396
Other operating expenses........................ 7,745 7,747 15,970 15,685
------- ------- -------- --------
Total noninterest expenses................... 32,324 28,285 64,323 56,327
------- ------- -------- --------
Income before income taxes and minority
interest................................... 18,475 17,124 36,940 32,554
Provision for income taxes........................ 5,914 5,769 11,834 10,956
------- ------- -------- --------
Income before minority interest.............. 12,561 11,355 25,106 21,598
Minority interest................................. 17 39 47 82
------- ------- -------- --------
Net income................................... $12,544 $11,316 $ 25,059 $ 21,516
======= ======= ======== ========
Earnings per common share
Basic........................................... $ 0.38 $ 0.35 $ 0.76 $ 0.67
======= ======= ======== ========
Diluted......................................... $ 0.37 $ 0.34 $ 0.73 $ 0.65
======= ======= ======== ========
</Table>

The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
6

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

<Table>
<Caption>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
------------------- PAID-IN RETAINED INCOME TREASURY SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS (LOSS) STOCK EQUITY
---------- ------- ---------- -------- ------------- -------- -------------

BALANCE AT DECEMBER 31, 2000........... 32,704,877 $32,706 $69,735 $198,720 $(3,107) $(44) $298,010
Exercise of stock options............ 158,992 159 2,600 2,759
Deferred compensation amortization... 55 55
Comprehensive income:
Net income for the six months ended
June 30, 2001.................... 25,059 25,059
Net change in unrealized
appreciation on securities
available for sale, net of
deferred taxes of $3,215......... 5,852 5,852
--------
Total comprehensive income......... 30,911
---------- ------- ------- -------- ------- ---- --------
BALANCE AT JUNE 30, 2001............... 32,863,869 $32,865 $72,390 $223,779 $ 2,745 $(44) $331,735
========== ======= ======= ======== ======= ==== ========
</Table>

The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
7

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
---------------------
2001 2000
-------- ---------

Cash flows from operating activities:
Net income................................................ $ 25,059 $ 21,516
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 3,500 3,457
Depreciation............................................ 4,940 4,013
Realized (gain) loss on securities available for sale,
net................................................... (25) 2
Amortization............................................ 1,269 905
Minority interest in net income of consolidated
subsidiary............................................ 47 82
Gain on sale of loans, net.............................. (1,796) (417)
Dividends on Federal Home Loan Bank stock............... (644) (482)
Origination of loans held for sale and mortgage
servicing rights...................................... (68,144) (32,320)
Proceeds from sales of loans............................ 72,773 22,846
(Increase) decrease in accrued interest receivable and
other assets.......................................... 11,629 (15,396)
Increase (decrease) in accrued interest payable and
other liabilities..................................... (6,706) 5,671
Other, net.............................................. (302) (42)
-------- ---------
Net cash provided by operating activities.......... 41,600 9,835
-------- ---------
Cash flows from investing activities:
Proceeds from maturity of securities available for sale... 99,762 3,000
Proceeds from maturity of securities held to maturity..... -- 3,020
Principal paydowns of mortgage-backed securities available
for sale................................................ 65,614 49,692
Principal paydowns of mortgage-backed securities held to
maturity................................................ -- 2,073
Proceeds from sale of securities available for sale....... 25,920 136
Purchase of securities available for sale................. (150,784) (78,074)
Purchase of securities held to maturity................... -- (7,413)
Purchase of Federal Reserve Bank stock.................... -- (801)
Proceeds from redemption of Federal Home Loan Bank
stock................................................... 10,126 --
Net increase in loans receivable.......................... (122,573) (277,177)
Purchase of Bank-owned life insurance policies............ (50,000) --
Purchase of premises and equipment........................ (10,727) (6,484)
Proceeds from sale of premises and equipment.............. 984 48
Purchase of mortgage servicing rights..................... (315) --
-------- ---------
Net cash used in investing activities.............. (131,993) (311,980)
-------- ---------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits... (17,168) 94,877
Net increase in time deposits............................. 2,176 174,142
Net increase in other interest-bearing deposits........... 171,118 64,434
Net increase in securities sold under repurchase
agreements.............................................. 19,868 17,836
Net increase (decrease) in other short-term borrowings.... (204,498) 13,025
Payments on long-term borrowings.......................... (163) (131)
Net proceeds from exercise of stock options............... 1,389 2,008
Purchase of treasury stock................................ -- (117)
Payment of dividends on common stock...................... -- (780)
-------- ---------
Net cash provided by (used in) financing
activities....................................... (27,278) 365,294
-------- ---------
Net increase (decrease) in cash and cash equivalents........ (117,671) 63,149
Cash and cash equivalents at beginning of period............ 411,306 214,074
-------- ---------
Cash and cash equivalents at end of period.................. $293,635 $ 277,223
======== =========
</Table>

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

6
8

SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of
Southwest Bancorporation of Texas, Inc. (the "Company") and its direct and
indirect wholly-owned subsidiaries, Southwest Holding Delaware, Inc. (the
"Delaware Company"), Southwest Bank of Texas National Association (the "Bank"),
and Mitchell Mortgage Company, LLC ("Mitchell"). The consolidated financial
statements also include the accounts of First National Bank of Bay City, a 58%
owned subsidiary of the Delaware Company. In connection with the Company's
December 2000 merger with Citizens Bankers, Inc. ("Citizens") and acquisition of
all of the assets and liabilities of Citizens Bankers Limited Partnership
("CBLP"), the historical financial data has been restated to include the
accounts and operations of Citizens and CBLP for all periods prior to the merger
date. All material intercompany accounts and transactions have been eliminated.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly the Company's consolidated financial
position at June 30, 2001 and December 31, 2000, consolidated income for the
three and six month periods ended June 30, 2001 and 2000, consolidated cash
flows for the six month periods ended June 30, 2001 and 2000 and the
consolidated changes in shareholders' equity for the six month period ended June
30, 2001. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period.

These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 2000.

PricewaterhouseCoopers LLP is not subject to the liability provisions of
Section 11 of the Securities Act of 1933 for their report on the unaudited
financial information as of June 30, 2001 and for the three months and six
months then ended, because that report is not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of Sections 7 and 11 of the Act.

New Accounting Pronouncement

On June 29, 2001, the Financial Accounting Standards Board approved
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 amends APB Opinion No. 16, Business Combinations, to prohibit use of the
pooling-of-interest (pooling) method of accounting for business combinations
initiated after the issuance date of the final Statement. SFAS No. 142 amends
APB Opinion No. 17, Intangible Assets, by stating that goodwill will no longer
be amortized, but will be tested for impairment in a manner different from how
other assets are tested for impairment. SFAS No. 142 establishes a new method of
testing goodwill for impairment by requiring that goodwill be separately tested
for impairment using a fair value approach rather than an undiscounted cash flow
approach.

The provisions of SFAS No. 141 and SFAS No. 142 will be effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 must be adopted at
the beginning of a fiscal year. The Company is currently evaluating the impact
of the adoption of these Statements.

7
9
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES

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

2. COMPREHENSIVE INCOME

Comprehensive income consists of the following:

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------

Net income.................................. $12,544 $11,316 $25,059 $21,516
Net change in unrealized appreciation
(depreciation) on securities available for
sale, net of tax.......................... (1,726) 1,871 5,852 (3,598)
------- ------- ------- -------
Total comprehensive income.................. $10,818 $13,187 $30,911 $17,918
======= ======= ======= =======
</Table>

3. EARNINGS PER COMMON SHARE

Earnings per common share is computed as follows:

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------

Net income.................................. $12,544 $11,316 $25,059 $21,516
Divided by average common shares and common
share equivalents:
Average common shares..................... 32,838 32,325 32,807 32,207
Average common shares issuable under the
stock option plan...................... 1,199 1,007 1,293 1,017
------- ------- ------- -------
Total average common shares and common
share equivalents...................... 34,037 33,332 34,100 33,224
======= ======= ======= =======
Basic earnings per common share............. $ 0.38 $ 0.35 $ 0.76 $ 0.67
======= ======= ======= =======
Diluted earnings per common share........... $ 0.37 $ 0.34 $ 0.73 $ 0.65
======= ======= ======= =======
</Table>

4. SUPPLEMENTAL NONCASH FINANCING ACTIVITIES

During the six months ended June 30, 2001 and 2000, the Company reduced its
federal income tax liability by approximately $1.4 million and $2.6 million,
respectively, and recorded a corresponding increase to additional paid-in
capital representing the tax benefit related to the exercise of certain stock
options.

8
10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

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

OVERVIEW

On December 29, 2000, the Company and Citizens Bankers, Inc. ("Citizens")
completed their merger, which was accounted for as a pooling of interests. The
merger agreement provided for the exchange of 249.443 shares of the Company's
Common Stock for each share of Citizens Stock, resulting in the issuance of
approximately 3.9 million shares of Company Common Stock on a fully diluted
basis.

In a related transaction, the Company, Citizens Bankers Limited Partnership
("CBLP") and Baytown Land I, Ltd., the general partner of CBLP, entered into an
agreement pursuant to which the Company acquired the assets and assumed the
liabilities of CBLP. CBLP's primary assets and liabilities were the bank
building located at 1300 Rollingbrook and the related debt to third parties. In
connection with this agreement, the Company issued approximately 106,000 shares
of the Company's Common Stock on a fully diluted basis. The financial data
preceding the merger date has been restated to include the interests and
operations of Citizens and CBLP.

Total assets at June 30, 2001 and December 31, 2000 were $3.94 billion.
Gross loans were $2.63 billion at June 30, 2001, an increase of $115.9 million
or 5% from $2.51 billion at December 31, 2000. Shareholders' equity was $331.7
million and $298.0 million at June 30, 2001 and December 31, 2000, respectively.

For the six months ended June 30, 2001, net income was $25.1 million ($0.73
per diluted share) compared to $21.5 million ($0.65 per diluted share) for the
same period in 2000, an increase of 16%. For the three months ended June 30,
2001, net income was $12.5 million ($0.37 per diluted share) compared to $11.3
million ($0.34 per diluted share) for the same period in 2000, an increase of
11%. Return on average assets and return on average common shareholders' equity
for the three months ended June 30, 2001 was 1.30% and 15.56%, respectively, as
compared to 1.32% and 18.57% for the three months ended June 30, 2000.

9
11

RESULTS OF OPERATIONS

Interest Income

Interest income for the three months ended June 30, 2001 was $65.4 million,
a decrease of $592,000, or 1%, from the three months ended June 30, 2000. This
decrease in interest income is due to a decrease in the average yield on
interest-earning assets to 7.57% for the three months ended June 30, 2001, a
decrease of 79 basis points when compared to the same period in 2000. This
decrease is partially offset by a $292.5 million increase in average earning
assets to $3.47 billion for the three months ended June 30, 2001, a 9% increase
from the same period last year. For the six months ended June 30, 2001, interest
income was $136.1 million, a $9.4 million, or 7%, increase from the same period
a year ago. This increase in interest income is due to a $368.4 million increase
in average earning assets to $3.47 billion for the six months ended June 30,
2001, a 12% increase from the same period last year.

Interest income on loans increased $866,000 to $51.8 million for the three
months ended June 30, 2001. This was due to a $355.2 million increase in average
loans outstanding during the same period. The average yield on loans was 8.06%
for the three months ended June 30, 2001, a decrease of 116 basis points when
compared to the same period in 2000. Interest income on securities decreased to
$12.8 million, a $1.6 million decrease from the three month period ended June
30, 2000. This decrease was attributable to a $89.8 million decrease in average
securities outstanding, down 10% when compared to the three months ended June
30, 2000.

For the six months ended June 30, 2001, interest income on loans increased
11% to $107.8 million, up from $96.8 million for the same period last year. This
was due to a $415.9 million increase in average loans outstanding during the
same period. The average yield on loans was 8.48% for the six months ended June
30, 2001, a decrease of 58 basis points when compared to the same period in
2000. Interest income on securities decreased to $26.4 million, a decrease of
$2.3 million, or 8%, from the six month period ended June 30, 2000. This
decrease was attributable to a $80.3 million decrease in average securities
outstanding, down 9% when compared to the six months ended June 30, 2000. This
decrease was partially offset by an increase in the average yield on securities
to 6.41% for the six months ended June 30, 2001 compared to 6.34% for the same
period in 2000.

Interest Expense

Interest expense on deposits and other borrowings for the three months
ended June 30, 2001 was $26.9 million, a decrease of $2.2 million, or 8%, from
the three months ended June 30, 2000. This decrease in interest expense was
attributable to a decrease in the average rate on interest-bearing liabilities
to 3.97% for the period, a decrease of 88 basis points when compared to the same
period in 2000. This decrease is partially offset by a $299.3 million increase
in average interest-bearing liabilities to $2.72 billion for the three months
ended June 30, 2001, an increase of 12% from the same period last year.

Interest expense on deposits and other borrowings for the six months ended
June 30, 2001 was $58.9 million, an increase of $3.6 million, or 7%, from the
six months ended June 30, 2000. This increase in interest expense was
attributable to a $355.5 million increase in average interest-bearing
liabilities to $2.72 billion for the six months ended June 30, 2001, an increase
of 15% from the same period last year. This increase is partially offset by a
decrease in the average rate on interest-bearing liabilities to 4.37% for the
period, a decrease of 34 basis points when compared to the same period in 2000.

Net Interest Income

Net interest income was $38.5 million for the three months ended June 30,
2001, compared with $36.9 million for the same period in 2000, an increase of
4%. For the six months ended June 30, 2001, net interest income increased 8%
from the same period in 2000 to $77.3 million. The increase in net interest
income during the three and six months ended June 30, 2001 is attributable to
growth in average interest-earning assets, primarily loans, partially offset by
decreases in the net interest margin of 22 basis points and 15 basis points,
respectively.

10
12

During the first half of 2001, market interest rates declined due to
actions of the Federal Reserve aimed at stimulating the national economy. This
decline in interest rates has unfavorably impacted the Company's net interest
margin. While additional reductions in interest rates may be expected, the
Company believes that its ability to manage its interest rate sensitivity will
minimize the potential adverse impact on net interest income for the year 2001.

For the three months ended June 30, 2001, the net interest margin declined
to 4.45% compared to 4.67% for the three months ended June 30, 2000. This
decrease resulted from a decrease on the yield on interest-earning assets of 79
basis points from 8.36% for the three months ended June 30, 2000 to 7.57% for
the three months ended June 30, 2001. This decrease in the yield on
interest-earning assets was partially offset by a decrease in the cost of funds
of 88 basis points, from 4.85% for the three months ended June 30, 2000 to 3.97%
for the three months ended June 30, 2001. For the six months ended June 30,
2001, the net interest margin declined to 4.49% compared to 4.64% for the six
months ended June 30, 2000. This decrease resulted from a decrease on the yield
on interest-earning assets of 31 basis points from 8.22% for the six months
ended June 30, 2000 to 7.91% for the six months ended June 30, 2001. This
decrease in the yield on interest-earning assets was partially offset by a
decrease in the cost of funds of 34 basis points, from 4.71% for the six months
ended June 30, 2000 to 4.37% for the six months ended June 30, 2001.

11
13

The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are daily average balances. Nonaccruing loans have been
included in the table as loans carrying a zero yield.

<Table>
<Caption>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
-------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)

ASSETS
Interest-earning assets:
Loans............................... $2,577,869 $51,832 8.06% $2,222,714 $50,966 9.22%
Securities.......................... 823,346 12,841 6.26 913,097 14,434 6.36
Federal funds sold and other........ 67,566 754 4.48 40,516 619 6.14
---------- ------- ---- ---------- ------- ----
Total interest-earning assets.... 3,468,781 65,427 7.57% 3,176,327 66,019 8.36%
------- ---- ------- ----
Less allowance for loan losses........ (30,134) (24,545)
---------- ----------
Total earning assets, net of
allowance........................... 3,438,647 3,151,782
Nonearning assets..................... 430,644 291,554
---------- ----------
Total assets..................... $3,869,291 $3,443,336
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings deposits... $1,430,439 11,150 3.13% $1,202,584 12,256 4.10%
Certificates of deposits............ 864,802 11,602 5.38 767,110 10,792 5.66
Repurchase agreements and borrowed
funds............................ 420,976 4,156 3.96 447,258 6,083 5.47
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities.................... 2,716,217 26,908 3.97% 2,416,952 29,131 4.85%
------- ---- ------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 794,470 749,088
Other liabilities................... 35,163 32,213
---------- ----------
Total liabilities................ 3,545,850 3,198,253
Shareholders' equity.................. 323,441 245,083
---------- ----------
Total liabilities and
shareholders' equity........... $3,869,291 $3,443,336
========== ==========
Net interest income................... $38,519 $36,888
======= =======
Net interest spread................... 3.60% 3.51%
==== ====
Net interest margin................... 4.45% 4.67%
==== ====
</Table>

12
14

<Table>
<Caption>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
-------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)

ASSETS
Interest-earning assets:
Loans............................. $2,563,291 $107,809 8.48% $2,147,387 $ 96,762 9.06%
Securities........................ 831,804 26,434 6.41 912,057 28,773 6.34
Federal funds sold and other...... 73,473 1,880 5.16 40,678 1,188 5.87
---------- -------- ---- ---------- -------- ----
Total interest-earning
assets....................... 3,468,568 136,123 7.91% 3,100,122 126,723 8.22%
-------- ---- -------- ----
Less allowance for loan losses...... (29,462) (23,821)
---------- ----------
Total earning assets, net of
allowance......................... 3,439,106 3,076,301
Nonearning assets................... 424,089 294,958
---------- ----------
Total assets................... $3,863,195 $3,371,259
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and savings
deposits....................... $1,399,698 24,435 3.52% $1,179,538 23,290 3.97%
Certificates of deposits.......... 880,352 24,840 5.69 735,729 20,115 5.50
Repurchase agreements and borrowed
funds.......................... 435,315 9,579 4.44 444,573 11,823 5.35
---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities.................. 2,715,365 58,854 4.37% 2,359,840 55,228 4.71%
-------- ---- -------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits....................... 797,332 742,360
Other liabilities................. 35,103 29,574
---------- ----------
Total liabilities.............. 3,547,800 3,131,774
Shareholders' equity................ 315,395 239,485
---------- ----------
Total liabilities and
shareholders' equity......... $3,863,195 $3,371,259
========== ==========
Net interest income................. $ 77,269 $ 71,495
======== ========
Net interest spread................. 3.54% 3.51%
==== ====
Net interest margin................. 4.49% 4.64%
==== ====
</Table>

13
15

The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances, the volatility of interest rates,
and the change in number of days due to leap year. For purposes of this table,
changes attributable to both rate and volume which cannot be segregated have
been allocated.

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -----------------------------------
2001 VS. 2000 2001 VS. 2000
--------------------------- -----------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- -----------------------------------
VOLUME RATE TOTAL VOLUME RATE DAYS TOTAL
------- ------- ------- ------- ------- ----- -------
(DOLLARS IN THOUSANDS)

INTEREST-EARNING ASSETS:
Loans............................. $ 8,306 $(7,440) $ 866 $18,953 $(7,374) $(532) $11,047
Securities........................ (1,383) (210) (1,593) (2,446) 265 (158) (2,339)
Federal funds sold and other...... 416 (281) 135 959 (260) (7) 692
------- ------- ------- ------- ------- ----- -------
Total increase (decrease) in
interest income............ 7,339 (7,931) (592) 17,466 (7,369) (697) 9,400
------- ------- ------- ------- ------- ----- -------
INTEREST-BEARING LIABILITIES:
Money market and savings
deposits........................ 2,359 (3,433) (1,074) 4,399 (3,126) (128) 1,145
Certificates of deposits.......... 1,408 (598) 810 3,998 838 (111) 4,725
Repurchase agreements and borrowed
funds........................... (343) (1,616) (1,959) (213) (1,966) (65) (2,244)
------- ------- ------- ------- ------- ----- -------
Total increase (decrease) in
interest expense........... 3,424 (5,647) (2,223) 8,184 (4,254) (304) 3,626
------- ------- ------- ------- ------- ----- -------
Increase (decrease) in net
interest income................. $ 3,915 $(2,284) $ 1,631 $ 9,282 $(3,115) $(393) $ 5,774
======= ======= ======= ======= ======= ===== =======
</Table>

Provision for Loan Losses

The provision for loan losses was $1.8 million for the three months ended
June 30, 2001 as compared to $1.9 million for the three months ended June 30,
2000. The provision for loan losses was $3.5 million for each of the six months
ended June 30, 2001 and 2000. Although no assurance can be given, management
believes that the present allowance for loan losses is adequate considering loss
experience, delinquency trends and current economic conditions. Management
regularly reviews the Company's loan loss allowance as its loan portfolio grows
and diversifies. (See -- Financial Condition -- Loan Review and Allowance for
Loan Losses.)

Noninterest Income

Noninterest income for the three months ended June 30, 2001 was $14.0
million, an increase of $3.6 million, or 35%, from $10.4 million during the
comparable period in 2000. Noninterest income for the six months ended June 30,
2001 was $27.5 million, an increase of $6.7 million, or 32%, from $20.8 million
during the comparable period in 2000. The following table presents for the
periods indicated the composition of noninterest income.

14
16

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN THOUSANDS)

Service charges on deposit accounts......... $ 6,096 $ 4,969 $11,780 $ 9,962
Investment services......................... 1,702 1,526 3,395 2,914
Factoring fee income........................ 1,202 954 2,346 1,826
Loan fee income............................. 915 943 1,759 2,060
Bank-owned life insurance income............ 1,170 393 2,090 849
Letters of credit fee income................ 308 250 628 471
Gain on sale of loans, net.................. 1,076 286 1,796 417
Gain (loss) on sale of securities, net...... 8 (3) 25 (2)
Other income................................ 1,553 1,099 3,675 2,346
------- ------- ------- -------
Total noninterest income............... $14,030 $10,417 $27,494 $20,843
======= ======= ======= =======
</Table>

The largest component of noninterest income, service charges on deposit
accounts, was $6.1 million for the three months ended June 30, 2001, an increase
of $1.1 million, or 23%, from $5.0 million for the same period last year.
Service charges on deposit accounts were $11.8 million for the six months ended
June 30, 2001, an increase of $1.8 million, or 18%, from $10.0 million for the
same period last year. This resulted primarily from an increase in the number of
deposit accounts serviced, which grew from 134,888 at June 30, 2000 to 147,136
at June 30, 2001.

Earnings on bank-owned life insurance was $1.2 million for the three months
ended June 30, 2001, an increase of $777,000, or 198%, from $393,000 for the
same period last year. Earnings on bank-owned life insurance was $2.1 million
for the six months ended June 30, 2001, an increase of $1.2 million, or 146%,
from $849,000 for the same period last year. This increase is attributable to
the purchase of additional bank-owned life insurance early in the first quarter
of 2001.

Gain on sale of loans was $1.1 million for the three months ended June 30,
2001, an increase of $790,000, or 276%, from $286,000 for the same period last
year. Gain on sale of loans was $1.8 million for the six months ended June 30,
2001, an increase of $1.4 million, or 331%, from $417,000 for the same period
last year. The principal balance of mortgage loans sold was $49.4 million during
the three months ended June 30, 2001 compared to $11.4 million during the three
months ended June 30, 2000. The principal balance of mortgage loans sold for the
six months ended June 30, 2001 was $71.0 million compared to $22.8 million for
the comparable period last year.

Additional areas of growth included factoring fee income and investment
services income. Factoring fee income is derived from the financing of accounts
receivable. Average gross accounts receivable purchased was $27.5 million and
$27.2 million for the three and six months ended June 30, 2001, respectively,
compared to $21.7 million and $19.9 million for the comparable periods last
year. The increase in investment services income is attributable to the
expanding international and foreign exchange departments, as well as the
continued strategic focus by the Company to increase its competitive position in
providing investment services.

Noninterest Expenses

For the three months ended June 30, 2001, noninterest expenses totaled
$32.3 million, an increase of $4.0 million, or 14%, from $28.3 million during
2000. For the six months ended June 30, 2001, noninterest expenses totaled $64.3
million, an increase of $8.0 million, or 14%, from the same period in 2000. The
increase in noninterest expenses was primarily due to salaries and employee
benefits and occupancy expenses. The efficiency ratio was 61.52% for the three
months ended June 30, 2001 compared with 59.79% for the same period last year.
For the six months ended June 30, 2001, the efficiency ratio was 61.41% compared
with 61.00% for the same period last year.

Salaries and employee benefits for the three months ended June 30, 2001 was
$19.5 million, an increase of $3.2 million, or 19%, from the three months ended
June 30, 2000. Salaries and employee benefits was $38.3

15
17

million for the six months ended June 30, 2001, an increase of $6.0 million, or
19%, from $32.3 for the same period last year. This increase was due primarily
to hiring of additional personnel required to accommodate the Company's growth.
Total full-time employees were 1,306 and 1,233 at June 30, 2001 and 2000,
respectively.

Occupancy expense for the three months ended June 30, 2001 was $5.1
million, an increase of $862,000, or 20%, from the three months ended June 30,
2000. Occupancy expense was $10.1 million for the six months ended June 30,
2001, an increase of $1.7 million, or 20%, from $8.4 for the same period last
year. Major categories within occupancy expense are building lease expense and
depreciation expense. Building lease expense increased to $1.5 million for the
three months ended June 30, 2001 from $1.0 million for the comparable period
last year, an increase of $523,000 or 51%. For the six months ended June 30,
2001, building lease expense was $3.0 million, an increase of $973,000, or 47%,
from $2.1 million for the same period last year. The Company leased 91,689
square feet for an operations center in downtown Houston late in the prior year.
Depreciation expense increased $562,000, or 28%, to $2.6 million for the three
months ended June 30, 2001. For the six months ended June 30, 2001, depreciation
expense was $4.9 million, an increase of $927,000, or 23%, from $4.0 million for
the same period last year. This increase was due primarily to depreciation on
equipment provided to new employees and expenses related to technology upgrades
throughout the Company. In addition, the Company recorded $111,000 and $194,000
of depreciation expense related to the leasehold improvements at the new
operations center during the three and six months ended June 30, 2001,
respectively.

Income Taxes

Income tax expense includes the regular federal income tax at the statutory
rate, plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of nondeductible interest expense, and
the amount of other nondeductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus certain
officers' salaries, less interest income from federal securities. For the three
months ended June 30, 2001, the provision for income taxes was $5.9 million, an
increase of $145,000, or 3%, from the $5.8 million provided for the same period
in 2000. For the six months ended June 30, 2001, income tax expense was $11.8
million, an increase of $878,000, or 8%, from the $11.0 million provided for the
same period in 2000. The Company's effective tax rate was 32% for the three and
six months ended June 30, 2001. The effective tax rate was 34% for the three and
six months ended June 30, 2000. The reduced rate is primarily due to an increase
in income earned on the Company's bank-owned life insurance and tax exempt
securities.

16
18

FINANCIAL CONDITION

Loans Held for Investment

Loans held for investment were $2.55 billion at June 30, 2001, an increase
of $120.2 million, or 5%, from $2.43 billion at December 31, 2000.

The following table summarizes the loan portfolio of the Company by type of
loan as of June 30, 2001 and December 31, 2000:

<Table>
<Caption>
JUNE 30, 2001 DECEMBER 31, 2000
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)

Commercial and industrial................ $1,020,735 40.10% $ 954,912 39.37%
Real estate:
Construction and land development...... 677,731 26.62 641,128 26.43
1-4 family residential................. 350,632 13.77 335,934 13.85
Commercial owner occupied.............. 293,352 11.53 265,534 10.95
Farmland............................... 4,891 0.19 5,753 0.24
Other.................................. 25,104 0.99 31,861 1.31
Consumer................................. 173,210 6.80 190,376 7.85
---------- ------ ---------- ------
Loans held for investment................ $2,545,655 100.00% $2,425,498 100.00%
========== ====== ========== ======
</Table>

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

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

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

Loans collateralized by single-family residential real estate generally
have been originated in amounts of no more than 90% of appraised value. The
Company requires mortgage title insurance and hazard insurance in the amount of
the loan. Although the contractual loan payment periods for single-family
residential real estate loans are generally for a 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

17
19

amount of the loan. The contractual loan payment periods for residential
construction loans are generally for a six to twelve month period.

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

The contractual maturity ranges of the commercial and industrial and real
estate construction and land development loan portfolio and the amount of such
loans with fixed interest rates and floating interest rates in each maturity
range as of June 30, 2001 are summarized in the following table:

<Table>
<Caption>
JUNE 30, 2001
-------------------------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
---------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)

Commercial and industrial............. $ 684,206 $304,297 $32,232 $1,020,735
Real estate construction and land
development......................... 385,932 269,014 22,785 677,731
---------- -------- ------- ----------
Total............................ $1,070,138 $573,311 $55,017 $1,698,466
========== ======== ======= ==========
Loans with a fixed interest rate...... $ 471,037 $153,880 $23,460 $ 648,377
Loans with a floating interest rate... 599,101 419,431 31,557 1,050,089
---------- -------- ------- ----------
Total............................ $1,070,138 $573,311 $55,017 $1,698,466
========== ======== ======= ==========
</Table>

Loans Held for Sale

Loans held for sale of $81.7 million at June 30, 2001 decreased from $85.9
million at December 31, 2000. These loans are carried at the lower of cost or
market and typically sold to investors within one year of origination.

Loan Review and Allowance for Loan Losses

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

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

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

18
20

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 security and the evaluation of its loan portfolio by the loan review
function. Charge-offs occur when loans are deemed to be uncollectible.

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

Management believes that the allowance for loan losses at June 30, 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 June 30, 2001.

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

<Table>
<Caption>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)

Allowance for loan losses, beginning balance................ $28,150 $22,436
Provision charged against operations........................ 3,500 7,053
Charge-offs................................................. (1,604) (2,093)
Recoveries.................................................. 544 754
------- -------
Allowance for loan losses, ending balance................... $30,590 $28,150
======= =======
Allowance to period-end loans............................... 1.20% 1.16%
Net charge-offs to average loans............................ 0.09% 0.06%
Allowance to period-end nonperforming loans................. 429.76% 297.82%
</Table>

The following table describes the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. Portions of the allowance for loan losses are allocated to
cover the estimated losses inherent in particular risk categories of loans. The
allocation of the allowance for loan losses is based upon the Company's loss
experience over a period of years and is adjusted for subjective factors such as
economic trends, performance trends, portfolio age and concentrations of credit.

19
21

The allocation is made for analytical purposes and is not necessarily indicative
of the categories in which future loan losses may occur. The total allowance is
available to absorb losses from any segment of loans.

<Table>
<Caption>
JUNE 30, 2001 DECEMBER 31, 2000
--------------------- ---------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------- ----------- ------- -----------
(DOLLARS IN THOUSANDS)

Balance of allowance for loan losses applicable to:
Commercial and industrial........................... $13,559 40.10% $12,219 39.37%
Real estate:
Construction and land development................. 7,007 26.62 5,733 26.43
1-4 family residential............................ 2,897 13.77 3,294 13.85
Commercial owner occupied......................... 2,764 11.53 2,676 10.95
Farmland.......................................... -- 0.19 40 0.24
Other............................................. 1,467 0.99 1,253 1.31
Consumer............................................ 2,896 6.80 2,935 7.85
------- ------ ------- ------
Total allowance for loan losses..................... $30,590 100.00% $28,150 100.00%
======= ====== ======= ======
</Table>

Nonperforming Assets and Impaired Loans

The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is deemed unsatisfactory. All
loans past due 90 days are placed on nonaccrual status, unless the loan is both
well collateralized and in the process of collection. Cash payments received
while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection.

Nonperforming assets were $8.5 million at June 30, 2001 compared with $9.9
million at December 31, 2000. This resulted in a ratio of nonperforming assets
to loans plus other real estate of 0.33% and 0.41% at June 30, 2001 and December
31, 2000, respectively. Nonaccrual loans, the largest component of nonperforming
assets, were $5.9 million at June 30, 2001, a decrease of $2.4 million from $8.3
million at December 31, 2000. This decrease is primarily due to the
reclassification of a $1.1 million loan secured by two houses and real estate.
The two houses were sold during 2001. The real estate has been foreclosed and is
classified as other real estate and foreclosed property. Additionally, a
$500,000 construction loan classified as nonaccrual at December 31, 2000 was
paid in full in June 2001.

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

<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(DOLLARS IN THOUSANDS)

Nonaccrual loans............................................ $5,895 $8,345
Accruing loans 90 or more days past due..................... 1,223 1,107
Other real estate and foreclosed property................... 1,351 454
------ ------
Total nonperforming assets............................. $8,469 $9,906
====== ======
Nonperforming assets to total loans and other real estate... 0.33% 0.41%
</Table>

The Company regularly updates appraisals on loans collateralized by real
estate, particularly those categorized as nonperforming loans and potential
problem loans. In instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for possible writedowns or appropriate additions to
the allowance for loan losses.

A loan is considered impaired when, based upon current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal and interest when due according to the contractual terms
of the loan agreement. The Company's impaired loans were approximately $6.5
million and $10.8 million at June 30, 2001 and December 31, 2000, respectively.
The largest component of impaired loans at June 30, 2001 and December 31, 2000
is a secured relationship which is expected to be a long term workout. The
balance outstanding to this borrower was $4.3 million and $5.5 million at June
30, 2001 and December 31, 2000, respectively. The Company has charged off
$800,000 related to this borrower during the

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six months ended June 30, 2001. The average recorded investment in impaired
loans during the six months ended June 30, 2001 and the year ended December 31,
2000 was $8.7 million and $9.3 million, respectively. The total required
allowance for loan losses related to these loans was $635,000 and $1.0 million
for each reported period, respectively. Interest income on impaired loans of
$114,000 and $198,000 was recognized for cash payments received during the six
months ended June 30, 2001 and June 30, 2000, respectively.

Securities

At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held to maturity, trading or available for sale.
At each reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities classified as held to maturity are stated at cost
increased by accretion of discounts and reduced by amortization of premiums,
both computed by the interest method, only if management has the positive intent
and ability to hold those securities to maturity. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading and measured at fair value in the financial statements with
unrealized gains and losses included in earnings. Securities not classified as
either held to maturity or trading are classified as available for sale and
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, as a component of accumulated other comprehensive
income (loss) until realized. Gains and losses on sales of securities are
determined using the specific-identification method. The Company has classified
all securities as available for sale at June 30, 2001 which allows the Company
to manage its investment portfolio more effectively and to enhance the average
yield on the portfolio.

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

<Table>
<Caption>
JUNE 30, 2001 DECEMBER 31, 2000
--------------------------------------- ---------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ---------------- FAIR AMORTIZED ---------------- FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ------ ------- -------- --------- ------ ------- --------
(DOLLARS IN THOUSANDS)

U.S. Government securities... $ 83,412 $1,504 $ (99) $ 84,817 $169,069 $1,080 $ (819) $169,330
Mortgage-backed securities... 589,044 5,462 (3,142) 591,364 618,523 2,088 (7,395) 613,216
Municipal securities......... 85,993 536 (169) 86,360 28,414 148 (27) 28,535
Federal Reserve Bank stock... 4,207 -- -- 4,207 3,949 -- -- 3,949
Federal Home Loan Bank
stock...................... 7,229 -- -- 7,229 17,972 -- -- 17,972
Other securities............. 33,336 226 (11) 33,551 14,997 187 (22) 15,162
-------- ------ ------- -------- -------- ------ ------- --------
TOTAL SECURITIES
AVAILABLE FOR SALE..... $803,221 $7,728 $(3,421) $807,528 $852,924 $3,503 $(8,263) $848,164
======== ====== ======= ======== ======== ====== ======= ========
</Table>

Securities totaled $807.5 million at June 30, 2001, a decrease of $40.6
million from $848.1 million at December 31, 2000. The yield on the securities
portfolio for the six months ended June 30, 2001 was 6.41% while the yield was
6.34% for the six months ended June 30, 2000.

The Company has no mortgage-backed securities that have been issued by
non-agency entities. Included in the Company's mortgage-backed securities at
June 30, 2001 were agency issued collateral mortgage obligations with a book
value of $300.5 million and a fair value of $301.3 million.

At June 30, 2001, $446.6 million of the mortgage-backed securities held by
the Company had final maturities of more than 10 years. At June 30, 2001,
approximately $68.6 million of the Company's mortgage-backed securities earned
interest at floating rates and repriced within one year, and accordingly were
less susceptible to declines in value should interest rates increase.

In connection with the Citizens merger, the Company transferred all of
Citizens' held to maturity debt securities to the available for sale category in
2000. The amortized cost of these securities at the time of transfer was $55.8
million and the unrealized gain was $267,000 ($174,000 net of income taxes).

The following table summarizes the contractual maturity of investments
(including securities, federal funds sold and interest-bearing deposits) and
their weighted average yields at June 30, 2001. The yield on the

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securities portfolio is based on average historical cost balances and does not
give effect to changes in fair value that are reflected as a component of other
comprehensive income.

<Table>
<Caption>
JUNE 30, 2001
------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
----------------- ----------------- ----------------- -----------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED
COST YIELD COST YIELD COST YIELD COST YIELD TOTAL YIELD
--------- ----- --------- ----- --------- ----- --------- ----- -------- -----
(DOLLARS IN THOUSANDS)

U.S. Government
securities............. $ 42,969 6.26% $ 34,946 6.48% $ 4,990 6.19% $ 507 6.22% $ 83,412 6.35%
Mortgage-backed
securities............. 1,622 5.92 64,774 6.24 76,040 6.17 446,608 6.24 589,044 6.23
Municipal securities..... 5,279 5.12 9,378 4.47 6,431 4.71 64,905 5.30 85,993 5.15
Federal Reserve Bank
stock.................. 4,207 6.00 -- -- -- -- -- -- 4,207 6.00
Federal Home Loan Bank
stock.................. 7,229 5.60 -- -- -- -- -- -- 7,229 5.60
Other securities......... 24,317 2.90 7,862 6.96 994 6.58 163 9.26 33,336 4.00
Federal funds sold....... 68,216 3.79 -- -- -- -- -- -- 68,216 3.79
Interest-bearing
deposits............... 2,934 3.77 -- -- -- -- -- -- 2,934 3.77
-------- ---- -------- ---- ------- ---- -------- ---- -------- ----
Total investments.... $156,773 4.54% $116,960 6.22% $88,455 6.07% $512,183 6.13% $874,371 5.85%
======== ==== ======== ==== ======= ==== ======== ==== ======== ====
</Table>

Other Assets

Other assets were $159.5 million at June 30, 2001, an increase of $41.7
million from $117.8 million at December 31, 2000. This increase is attributable
to the purchase of $50 million of additional bank-owned life insurance in the
first quarter of 2001. Significant components within other assets include the
cash value of bank owned life insurance of $80.2 million and accounts receivable
purchased of $24.9 million.

Deposits

The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings, NOW
accounts, money market and time accounts. The Company relies primarily on
customer service, advertising and competitive pricing policies to attract and
retain these deposits. As of June 30, 2001, the Company had less than 2% of its
deposits classified as brokered funds and does not anticipate any significant
increase. Deposits provide the primary source of funding for the Company's
lending and investment activities, and the interest paid for deposits must be
managed carefully to control the level of interest expense.

The Company's ratio of average non-interest bearing demand deposits to
average total deposits for the periods ended June 30, 2001 and December 31,
2000, was 29% and 30%, respectively.

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24

The average daily balances and weighted average rates paid on deposits for
the six months ended June 30, 2001 and the year ended December 31, 2000, are
presented below:

<Table>
<Caption>
JUNE 30, 2001 DECEMBER 31, 2000
--------------------- ---------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
BALANCE RATE BALANCE RATE
----------- ---- ----------- ----
(DOLLARS IN THOUSANDS)

NOW accounts........................................ $ 91,527 2.43% $ 58,093 1.09%
Regular savings..................................... 79,184 1.98 74,380 2.28
Premium yield....................................... 841,273 4.25 659,979 5.25
Money market savings................................ 387,714 2.50 425,414 3.16
CD's less than $100,000............................. 308,958 5.65 289,183 5.32
CD's $100,000 and over.............................. 496,053 5.75 464,470 6.17
IRA's, QRP's and other.............................. 75,341 5.47 75,394 5.66
---------- ---- ---------- ----
Total interest-bearing deposits................ 2,280,050 4.36% $2,046,913 4.82%
==== ====
Noninterest-bearing deposits........................ 797,332 774,111
---------- ----------
Total deposits................................. $3,077,382 $2,821,024
========== ==========
</Table>

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

<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(DOLLARS IN THOUSANDS)

3 months or less............................................ $297,749 $265,232
Between 3 months and 6 months............................... 127,468 124,144
Between 6 months and 1 year................................. 71,164 61,774
Over 1 year................................................. 47,336 55,479
-------- --------
Total time deposits $100,000 and over.................. $543,717 $506,629
======== ========
</Table>

Borrowings

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

<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(DOLLARS IN THOUSANDS)

Securities sold under repurchase agreements:
Average................................................ $242,409 $209,816
Period-end............................................. 231,668 211,800
Maximum month-end balance during period................ 265,982 241,834
Interest rate:
Average................................................ 4.18% 4.69%
Period-end............................................. 3.10% 4.89%
Other borrowings:
Average................................................ $192,906 $205,213
Period-end............................................. 101,300 305,961
Maximum month-end balance during period................ 376,509 380,121
Interest rate:
Average................................................ 4.91% 6.39%
Period-end............................................. 4.57% 6.83%
</Table>

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

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25

Liquidity and Capital Resources

Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. For the six months ended June 30, 2001, the
Company's liquidity needs have primarily been met by growth in core deposits.
The cash and federal funds sold position, supplemented by amortizing securities
and loan portfolios, have generally created an adequate liquidity position.

The Company's risk-based capital ratios including Leverage Capital, Tier 1
Risk-Based Capital and the Total Risk-Based Capital Ratio were 8.54%, 10.47% and
11.46%, respectively, at June 30, 2001.

Other Matters

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes since December 31, 2000. See the
Company's Annual Report on Form 10-K, "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Interest Rate Sensitivity and Liquidity."

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26

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

(a) The Company's Annual Meeting of Shareholders (the "Annual Meeting")
was held on April 25, 2001.

(b) The following Class II directors were elected for a three-year term at
the Annual Meeting: Ernest H. Cockrell, Paul B. Murphy, Jr. and Fred
R. Lummis. Additionally, John H. Echols was elected as a Class II
director to fill a new position in that Class created by the Board of
Directors in January 2001 and Duncan W. Stewart was elected as a Class
I director to fill a new position in that Class created by the Board
of Directors in January 2001. The following Class I and III directors
also continued in office after the Annual Meeting: John B. Brock, III,
David Heaney, Andres Palandjoglou, Stanley D. Stearns, Jr., John W.
Johnson, Walter E. Johnson, Wilhelmina E. Robertson and Lane Ward. A
total of 27,359,425 votes were cast in favor of each Director, except
for John H. Echols where there were 27,359,309 votes cast in favor of
and Duncan W. Stewart where there were 27,358,097 votes cast in favor
of. There were 231,674 abstained from each director except for John H.
Echols, which 231,790 abstained and Duncan W. Stewart where 233,022
abstained. No votes were cast against any of the Directors.

(c) At the Annual Meeting, the Company amended the Company's Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 75,000,000 to 150,000,000. A total of 25,745,150 votes were
cast in favor of and 1,833,456 votes cast against the amendment and
there were 12,493 votes abstaining.

At the Annual Meeting, the Company approved a new Restricted Stock
Plan. A total of 26,650,818 votes were cast in favor of and 776,564
votes cast against the Plan and there were 163,717 votes abstaining.

At the Annual Meeting, the Company also ratified the selection of
PricewaterhouseCoopers LLP, as the Company's independent auditors for
the year ending December 31, 2001. A total of 27,418,632 votes were
cast in favor of and 166,283 votes cast against and there were 6,184
votes abstaining from voting on the proposal.

ITEM 5. OTHER INFORMATION

None.

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27

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a.) Exhibits:

*15.1 Awareness Letter of PricewaterhouseCoopers LLP.

b.) Reports on Form 8-K:

None.
- ---------------

* Filed herewith

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28

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----

/s/ PAUL B. MURPHY, JR. Director, President and Chief August 7, 2001
- ------------------------------------------------ Executive Officer
PAUL B. MURPHY, JR. (Principal Executive Officer)

/s/ DAVID C. FARRIES Executive Vice President, August 7, 2001
- ------------------------------------------------ Treasurer and Secretary
DAVID C. FARRIES (Principal Financial Officer)

/s/ R. JOHN MCWHORTER Senior Vice President and Controller August 7, 2001
- ------------------------------------------------ (Principal Accounting Officer)
R. JOHN MCWHORTER
</Table>

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29

EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------

15.1 -- Awareness Letter of PricewaterhouseCoopers LLP.
</Table>