As filed with the Securities and Exchange Commission on June 18, 2004

Registration No. 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

WOODFOREST FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Texas

6021

76-0163373

(State or other jurisdiction of

Incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

1330 Lake Robbins, Suite 100

The Woodlands, Texas 77380

(281) 297-1100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Robert E. Marling, Jr.

Chief Executive Officer

1330 Lake Robbins, Suite 100

The Woodlands, Texas 77380

(281) 297-1100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies To:


William T. Luedke IV		Robert F. Gray, Jr.
Charlotte M. Rasche		Seth D. Wexler
Bracewell & Patterson, L.L.P.		Fulbright & Jaworski L.L.P.
711 Louisiana Street, Suite 2900		1301 McKinney, Suite 5100
Houston, TX 77002-2781		Houston, TX 77010-3095
(713) 223-2900		(713) 651-5151

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered

Proposed Maximum

Aggregate Offering Price(1)(2)

Amount of

Registration Fee

Common Stock, $1.00 par value

$100,000,000.00

$12,670.00

(1)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act of 1933, as amended.

(2)	Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

SUBJECT TO COMPLETION, DATED JUNE 18, 2004.

PROSPECTUS

Shares

LOGO

Woodforest Financial Group, Inc.

Common Stock

This is an initial public offering of shares of our common stock. All of the shares of common stock offered by this prospectus are being sold by us. Prior to this offering, there has been no public market for our common stock. We currently anticipate that the initial public offering price of our common stock will be between $ and $ per share. See “Underwriting” for a discussion of the factors to be considered in determining the initial public offering price. The market price of the shares of our common stock after the offering may be higher or lower than the initial public offering price. We intend to apply to have our common stock listed on the Nasdaq National Market under the symbol “WOOD.”

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 9 to read about the factors you should consider before investing in our common stock.


	Per Share	Total
Initial Public Offering Price	$	$
Underwriting Discount	$	$
Proceeds, Before Expenses, To Us	$	$

We have granted an over-allotment option to the underwriters of this offering. Under this option, the underwriters may elect to purchase a maximum of additional shares of our common stock from us at the initial public offering price within 30 days following the date of this prospectus to cover over-allotments, if any.

Delivery of shares will be made on or about , 2004.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The securities offered hereby are not deposits or savings accounts of a bank or savings association and they are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

Sole Book-Running Manager

BEAR, STEARNS & CO. INC.

KEEFE, BRUYETTE & WOODS

SUNTRUST ROBINSON HUMPHREY

The date of this prospectus is , 2004

LOGO

TABLE OF CONTENTS


		Page
Prospectus Summary		1
Risk Factors		9
Special Cautionary Notice Regarding Forward-Looking Statements		16
Use of Proceeds		17
Our Policy Regarding Dividends		17
Capitalization		19
Dilution		21
Business		22
Delta Card Spin-Off		28
Selected Historical Consolidated Financial Data		29
Pro Forma Selected Historical Consolidated Financial Data		31
Unaudited Pro Forma Consolidated Financial Information		33
Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Management		75
Compensation of Executive Officers and Directors		80
Beneficial Stock Ownership by Principal Shareholders and Management		86
Supervision and Regulation		87
Description of Our Capital Stock		95
Shares Eligible for Future Sale		99
Underwriting		102
Legal Matters		104
Experts		105
Where You Can Find More Information		105
Index to Financial Statements		F-1

You should rely only on the information contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We have not authorized anyone to provide you with different information. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or other dates stated in this prospectus. Our business, financial condition, results of operations and prospects may have changed since these dates.

We are not making an offer of these securities in any jurisdiction where the offer is not permitted. Furthermore, you should not consider this prospectus to be an offer or solicitation relating to our common stock if the person making the offer or solicitation is not qualified to do so, or it is unlawful for you to receive such an offer or solicitation.

As used in this prospectus, the terms “Woodforest,” “company,” “we,” “us” and “our” refer to Woodforest Financial Group, Inc. and its consolidated subsidiaries, unless the context requires otherwise. When we refer to “Woodforest National Bank” or the “bank” in this prospectus, we are referring to our wholly owned subsidiary, Woodforest National Bank, a national banking association.

PROSPECTUS SUMMARY

This summary provides an overview of selected information contained elsewhere in this prospectus. Because this is a summary, it does not contain all of the information that you should consider before investing in our common stock. Therefore, you should read the following summary together with the more detailed information set forth in this prospectus, including the risks of investing in our common stock discussed in the “Risk Factors” section and our consolidated financial statements and the notes to these financial statements appearing elsewhere in this prospectus.

Although we intend to convert to a “C” corporation for federal income tax purposes immediately prior to completion of this offering, we are currently a Subchapter S corporation. Accordingly, except where we indicate otherwise, our discussion of our financial condition and results of operations does not include the effect of a federal income tax. Further, unless we indicate otherwise, the information in this prospectus assumes that the underwriters will not exercise their option to purchase additional shares to cover over-allotments.

General

We are a financial holding company headquartered in The Woodlands, Texas, a rapidly expanding community located approximately 30 miles north of Houston. Our principal subsidiary, Woodforest National Bank, provides a wide range of commercial and consumer financial products and services from 133 locations throughout Texas, 28 of which are traditional branches and 105 of which are “in-store” branches. As of March 31, 2004, we had $1.4 billion in total assets, $899.9 million in total loans, $1.2 billion in total deposits and $79.7 million in total shareholders’ equity. Based on total assets as of March 31, 2004, we are the fourth largest independent commercial banking organization headquartered in the greater Houston area.

We have experienced substantial balance sheet growth while maintaining strong profitability ratios and sound asset quality. During the three calendar years ended December 31, 2003, our compounded average annual growth was 19.6% in assets, 22.3% in loans and 18.1% in deposits. We have also grown our earnings 21.5% in that same time period. Our pre-tax return on average assets for the three months ended March 31, 2004 was 1.54%, and our pre-tax return on equity was 27.15% for that same period. While achieving this growth, we have maintained our high credit quality.

Woodforest National Bank was chartered as a community bank in 1980 in northeast Houston. In 1989, our Chairman and Chief Executive Officer, Robert E. Marling, Jr., joined our organization and initiated our successful, customer service-oriented growth strategy. At that time, we had approximately $69.0 million in total assets. We acquired National Bank of Conroe in 1995, which added $127.8 million in assets and provided us with an entry point into fast growing Montgomery County. As a strategic complement to our traditional branches, we opened our first in-store branch in a Wal-Mart in 1996. Since then, we have completed one more bank acquisition which added approximately $75.0 million in assets and greatly expanded our number of traditional and in-store branches in our primary market of Montgomery and Harris Counties and our number of in-store branches in major market areas in Texas.

Business

We conduct our financial services business from both traditional branch bank offices and branches located in stores operated by large retail chains.

Traditional Branches. At our 28 traditional branches, all of which are currently located in our primary market, we use detailed knowledge of the local market to provide a broad array of loan and deposit products, many of which can be tailored to an individual customer’s needs. By providing these incremental services at our traditional branches, we give in-store customers access to a comprehensive suite of financial products. We originate a substantial portion of our commercial loans from our traditional branch locations, and these loans

typically fund the operations of local businesses and the institutions considered most important to the community, such as schools, churches and medical facilities.

In-Store Branches. Under a series of long-term lease agreements with Wal-Mart and, to a lesser extent, under similar arrangements with the Kroger grocery store chain and several other stores, we have opened 105 in-store branches, including 65 branches located in major market areas of Texas outside of our primary market. As the nation’s largest retailer, Wal-Mart has historically been adept at establishing stores in locations that attract a high level of foot traffic. The large customer count at these stores enables our in-store branches to receive high customer visibility, gather low cost deposits and generate fee income. As a result of our experience in this area, we have been able to reduce our average build out and premises cost of opening an in-store branch to approximately $165,000, which enables us to achieve profitability faster than at one of our new traditional branches.

Spokes and Hub Strategy. In addition to increasing our customer base, the operation of both traditional and in-store branches strategically complement one another. For example, as a result of the product demands of our customers at those locations, our in-store branches have been a major source of fee income, while our traditional branches have been our principal source of net interest income as a result of our lending activities at those locations. In addition, the low cost deposits generated at our in-store branches, along with those at our traditional branches, are deployed to fund loans at our traditional branches. In order to maximize cross-selling opportunities and capitalize more fully on the profit potential resulting from operating both types of branches, we have begun to implement a “spokes and hub” strategy. After leading into new markets with low cost, high customer generating in-store branches, we leverage our in-store name recognition and established customer base by opening, in a proximate location, a traditional branch that offers a broad array of loan products and other financial services. When we implement our spokes and hub strategy, the combination of name recognition, fee income and low cost deposits derived from our in-store branches and the full product offerings at our traditional branches strengthens all branches comprising a particular spokes and hub network.

Service and Convenience. We believe that we provide greater convenience and more responsive service than our competitors. Our in-store branches are open for business seven days a week (including four 24-hour locations). Our 8:00 p.m. cut-off time, the time by which customer transactions must be completed in order to be considered part of the current day’s business, allows customers additional time to receive credit for deposits, and our seven days a week check processing gives retail and business customers ready access to updated current account data. We provide our customers with the following additional products and conveniences:

“Absolutely Free Checking;”

“Second Chance Checking” (for customers with prior credit issues);

Free on-line banking with free bill payment;

Our courtesy overdraft service, which we have branded “CheckPay;”

Free daily e-mail notification regarding account balances;

Western Union money transfer;

Merchant services; and

Utility bill payment and U.S. postal services (in-store branches only).

Technology has historically played a key role in our growth strategy. We are large enough to provide the technology to support the products and services that our customers require, yet we are flexible enough to customize products to meet our customers’ needs.

presidents of independent community banks and are accustomed to making quick, responsive decisions. Furthermore, we furnish special training on a regular basis to all of our employees in the areas of customer service and satisfaction. Our management is empowered and motivated to provide the highest level of personal service while maximizing profits. We provide our officers and employees with economic incentives, incentive plans and stock ownership. Through our KSOP plan, our employees are currently our third largest shareholder, owning approximately 19.0% of our common stock. As owners of our common stock, our employees are strategically aligned with our shareholders and provided incentives to conduct business with an owner’s mentality.

Market

Attractive Banking Market. We believe that the demographic and economic characteristics of both our primary market of Montgomery and Harris Counties and the State of Texas will continue to support our growth plan. Between 2000 and 2002, Montgomery County, where we make the majority of our loans and control 19% of the total deposits, was the sixth fastest growing county in the United States among counties with populations of 250,000 or more. The Woodlands, the principal community in Montgomery County, has ranked first in Texas since 1990 in new home sales and has ranked between fourth and seventh in the United States in the last six years. Harris County, the home to Houston, the fourth largest city in the U.S., is the third largest county in the nation. Texas is the second most populous state and among the ten fastest growing states in the nation. The dollar amount of commercial bank deposits in Texas increased from $175.8 billion as of June 30, 1999 to $255.4 billion as of June 30, 2003. We believe that statistics related to projected population growth and job creation bode well for the Texas economy, which has diversified from the energy industry into the manufacturing, services and technology industries. We have focused our expansion efforts on markets with large, growing populations. Our 28 traditional branches are located in Montgomery and Harris Counties, both of which are densely populated. Of our 105 in-store branches, 40 are located in our primary market. The remaining in-store branches include three branches in counties near our primary market, 37 branches in the Dallas-Fort Worth area, 13 branches in the Austin-San Antonio region, nine branches in East Texas and three branches in West Texas. We believe that our presence in the major market areas of Texas will provide us with an opportunity to grow our commercial and consumer loans and attract deposits.

Competitive Landscape. We believe that the current competitive landscape in Texas suits our growth strategy. Both our primary market and the State of Texas in general have experienced substantial bank industry consolidation in recent years. As a result of this consolidation, we compete with both larger super-regional institutions and local community banks. We believe that we offer quicker decisions, better service and more product flexibility than our larger competitors and broader technological capabilities than most of our smaller community competitors. We believe that our focus on customer service will continue to attract customers who are not experiencing the desired level of service and responsiveness from larger institutions or the desired level of sophistication from smaller community banks.

Strategies

Our principal growth opportunities and operating strategies are the following:

Capitalize on demographic growth and economic health in Texas and take advantage of the state of competition among financial institutions. The demographic and economic conditions in our primary market and other major market areas in Texas where we are located provide an attractive banking market for our products and services. We plan to attract customers whose financial services needs can no longer be served by smaller banks but still desire more personal service unavailable at larger institutions.

Expand our leadership position in Texas in-store operations. We plan to open 15 to 20 in-store locations in Texas during each of 2004 and 2005, focusing on major market areas such as Houston, Dallas-Fort Worth, San Antonio, Austin and other high growth areas. Through our in-store operations, we plan to continue to attract low-cost deposits, increase customer accounts, generate fees and further our name recognition.

Expand our spokes and hub strategy. While our in-store branches can operate profitably on a stand-alone basis, we believe that we can provide better overall customer service and strengthen all contributing branches by effecting our spokes and hub strategy. We plan to continue our market penetration by adding five to eight traditional branches in each of 2004 and 2005 in major market areas in Texas, which could include areas other than Houston. In addition, we believe that recent changes in home equity lending laws in Texas will enable us to use our vast retail network to grow our consumer loans.

Grow our fee income. Income from service charges on deposit accounts and other service charges and fees is our fastest growing income component, providing us with a predictable, stable source of income. Fee income constituted 25.9% of our total income for the period ended March 31, 2004. We plan to grow our fee income by continuing to attract customers at our branches.

Maintain high level of core deposits. From 1999 to 2003, our core deposits, comprised of our demand deposits, NOW checking, money market and savings accounts and certificates of deposit less than $100,000, increased 119.8% from $470.5 million to $1.0 billion. These low cost deposits represented 90.7% of our total deposits at March 31, 2004. Continued maintenance of our core deposit base provides us with a cost effective and stable source of funding for our earning assets.

Continue to maintain asset quality. We have grown and increased our profitability while maintaining excellent asset quality, and we believe that our knowledge of our lending markets and conservative loan underwriting procedures will enable us to continue to do so in the future. At March 31, 2004, our ratio of nonperforming assets to total loans and other real estate was 0.89% and our net charge-offs to average loans was 0.24%.

Exploit our technological experience and knowledge to maximize profitability. Since our inception, we have utilized our in-house technological expertise to drive both revenues and efficiency improvements and to optimize our systems to better attract and retain customers in our target markets through customized solutions. Further, we plan to increase our efficiency through the centralization of our operations that will occur later this year.

Consider suitable bank acquisitions that will complement and expand our business. In assessing potential acquisition candidates, we intend to focus on location, community demographics, credit quality, market share, culture, management and past operating performance. We have successfully integrated our two previous acquisitions and believe that we have the experience and capabilities necessary to integrate acquisitions successfully in the future.

Maintain active community involvement. Active community involvement by our directors, officers and employees is important to our overall success in attracting customers. Community involvement not only enhances our overall image and name recognition, but it enables us to gain knowledge of the community, which allows us to be responsive in developing products and better able to assess the level of service that we provide.

Our principal executive offices are located at 1330 Lake Robbins, Suite 100, The Woodlands, Texas 77380 and our telephone number is (281) 297-1100. Our website address is www.woodforest.com. Information contained in our website is not incorporated by reference into this prospectus and you should not consider information contained in our website as part of this prospectus.

RECENT DEVELOPMENTS

Immediately prior to the completion of this offering, we intend to take the following significant corporate actions:

Make a cash distribution of approximately $24.0 million to our existing shareholders prior to our conversion from a Subchapter S corporation to a “C” corporation for federal income tax purposes. We have operated as a Subchapter S corporation since 1998 and, although we have paid regular and substantial dividends on our common stock, we have accumulated certain undistributed earnings on which our existing shareholders have previously been taxed or will be subject to federal income tax through the date of our conversion to a “C” corporation. Immediately prior to the conversion, we plan to distribute these accumulated earnings to our existing shareholders;

Spin off the ownership interests in our wholly-owned subsidiary, Texas DCS, Ltd. (Delta Card), to our shareholders as of a record date prior to completion of this offering. We acquired Delta Card, a merchant payment processing service that provides electronic credit verification for businesses that accept major credit and debit cards, in 2001. The spin-off will be taxable to our existing shareholders but is expected to be tax-free to us and Delta Card. See “Delta Card Spin-Off;” and

Voluntarily terminate our status as a Subchapter S corporation and convert to a “C” corporation for federal income tax purposes.

In addition to the historical financial information provided in this prospectus, we have also included pro forma information showing our operating results and financial condition without including the operations of Delta Card and as if we had been taxed as a “C” corporation. See “Unaudited Pro Forma Consolidated Financial Information” and “Pro Forma Selected Historical Consolidated Financial Data.”

THE OFFERING

Common stock offered ⁽¹⁾

Common stock outstanding immediately after this offering ^{(1) (2)}

Use of proceeds

We intend to use approximately $24.0 million of the net proceeds we will receive from this offering to increase our capital accounts following the approximately $24.0 million cash distribution to our existing shareholders and approximately $ million to repay all or a portion of our long-term debt with a third party lender. We expect to use the remainder of the net proceeds for general corporate purposes.

Risk Factors

See “Risk Factors,” “Dilution” and other information included in this prospectus for a discussion of certain factors that you should carefully consider before investing in our common stock.

Nasdaq National Market symbol

We intend to apply to have our common stock quoted on the Nasdaq National Market under the symbol “WOOD.”

(1)	Assumes that the underwriters will not exercise their over-allotment option. If the underwriters exercise this option in full, shares of our common stock will be outstanding immediately after this offering. See “Underwriting.”

(2)	The number of shares of our common stock outstanding immediately after this offering does not include up to:

1,222,016 shares that we may issue upon the exercise of stock options outstanding as of March 31, 2004 at a weighted average exercise price of $10.95 per share (prior to adjustment of exercise prices for the cash distribution to our existing shareholders and the Delta Card spin-off);

199,360 additional shares as of March 31, 2004 that we may issue under our 1995 stock option plan; and

1,200,000 shares that we may issue under our 2004 stock incentive plan approved by our shareholders in June 2004.

SUMMARY PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table summarizes our historical and pro forma consolidated financial data for the periods and at the dates indicated and should be read in conjunction with our audited consolidated financial statements, including the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 38. The summary historical financial data as of December 31, 2003 and 2002 and for each of the three years ended December 31, 2003 is derived from our audited consolidated financial statements and related notes included in this prospectus. The summary historical financial data as of December 31, 2001 is derived from our audited consolidated financial statements not included in this prospectus. The summary historical financial data as of March 31, 2004 and 2003 and for the three-month periods then ended are derived from our unaudited interim consolidated financial statements and related notes included in this prospectus. These unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of our financial position and results of operation as of the dates and for the periods indicated. Information for any interim period is not necessarily indicative of results that may be anticipated for the full year. Although we intend to convert to a “C” corporation for federal income tax purposes immediately prior to completion of this offering, we are currently a Subchapter S corporation. Accordingly, there is no federal income tax included in the historical consolidated financial information presented below.

The unaudited pro forma consolidated financial data is presented to show the impact of the distribution of our accumulated and undistributed earnings to our existing shareholders, the spin-off of Delta Card and our conversion from a Subchapter S corporation to a “C” corporation for federal income tax purposes on our historical financial position and results of operations. The unaudited pro forma consolidated financial data is intended for informational purposes only and is not necessarily indicative of our future financial position or future operating results or of our financial position or operating results that would have actually occurred if the cash distribution, the spin-off and the conversion to a “C” corporation had been effective as of the dates or for the periods presented.


	Pro Forma as of and for the Three Months Ended March 31,		Pro Forma as of and for the Year Ended December 31,		As of and for the Three Months Ended March 31,				As of and for the Years Ended December 31,
	2004(1)		2003(1)		2004		2003		2003		2002		2001
	(Unaudited)				(Unaudited)
	(in thousands, except branch and account number data)
Income Statement Data:
Interest income	$	15,803	$	64,451	$	15,803	$	16,212	$	64,451	$	67,669	$	71,846
Interest expense		4,542		18,964		4,542		5,083		18,964		24,763		36,719

Net interest income		11,261		45,487		11,261		11,129		45,487		42,906		35,127
Provision for loan losses		860		2,945		860		625		2,945		3,250		2,200

Net interest income after provision for loan losses		10,401		42,542		10,401		10,504		42,542		39,656		32,927
Gains on sales of securities, net		560		2,873		560		1,492		2,873		4,234		5,449
Other noninterest income		13,557		48,377		33,565		28,033		124,272		104,815		81,216

Total noninterest income		14,117		51,250		34,125		29,525		127,145		109,049		86,665
Noninterest expense		19,901		72,264		39,223		33,767		145,666		125,958		104,570

Income before income taxes		4,617		21,528		5,303		6,262		24,021		22,747		15,022
Income tax expense		1,524		7,104		—		—		—		—		—

Net earnings	$	3,093	$	14,424	$	5,303	$	6,262	$	24,021	$	22,747	$	15,022

Common Share Data(2):
Basic earnings per share	$	0.18	$	0.85	$	0.38	$	0.45	$	1.71	$	1.63	$	1.07
Diluted earnings per share		0.18		0.84		0.37		0.44		1.69		1.62		1.07
Book value per share		4.59		4.53		5.67		5.49		5.48		5.43		4.39
Tangible book value per share(3)		3.95		1.81		2.44		2.39		2.19		2.43		1.14


	Pro Forma as of and for the Three Months Ended March 31,			Pro Forma as of and for the Year Ended December 31,			As of and for the Three Months Ended March 31,						As of and for the Years Ended December 31,
	2004(1)			2003(1)			2004			2003			2003			2002			2001
	(Unaudited)						(Unaudited)
	(in thousands, except branch and account number data)
Balance Sheet Data (at period end):
Total assets	$	1,418,373		$	1,352,633		$	1,418,890		$	1,321,724		$	1,353,273		$	1,281,375		$	1,218,635
Securities		212,344			221,342			212,344			252,183			221,342			268,712			284,256
Loans (including loans held for sale)		899,922			866,459			899,922			797,503			866,459			793,951			688,315
Allowance for loan losses		(10,413	)		(10,096	)		(10,413	)		(9,309	)		(10,096	)		(8,957	)		(7,090	)
Total deposits		1,242,718			1,177,156			1,242,718			1,164,732			1,177,156			1,129,154			1,082,362
Borrowings and note payable		90,835			91,205			90,835			75,835			91,205			71,620			69,410
Total shareholders’ equity		77,982			76,915			79,682			77,099			76,915			76,278			60,600

Selected Financial Ratios and Other Data:
Performance Ratios and Other Data:
Return on average assets		1.34	%		1.09	%		1.54	%		1.95	%		1.82	%		1.80	%		1.36	%
Return on average equity		16.06			18.93			27.15			33.12			31.53			33.13			25.89
Net interest margin		3.93			4.11			3.93			4.15			4.11			4.00			3.66

Fee income per deposit account(4)	$	240.27		$	231.31		$	240.27			N/A	(9)	$	231.31		$	211.54		$	161.79
Fee income to total revenue(5)		54.63	%		51.54	%		74.88	%		71.58	%		73.21	%		70.96	%		69.81	%

Core deposits to total deposits		90.70	%		91.70	%		90.70	%		91.70	%		91.60	%		87.00	%		89.70	%
Loans to deposits		72.42			73.61			72.42			68.47			73.61			70.31			63.59
Average investment securities to average earning assets		18.80			22.25			18.80			23.92			22.25			25.30			23.32

Asset Quality Ratios(6):
Nonperforming assets to total loans and other real estate		0.89	%		1.32	%		0.89	%		1.16	%		1.32	%		1.16	%		0.71	%
Net charge-offs to average loans		0.24			0.22			0.24			0.14			0.22			0.19			0.13
Allowance for loan losses to total loans		1.16			1.17			1.16			1.17			1.17			1.13			1.03
Allowance for loan losses to nonperforming loans(7)		259.67			154.97			259.67			341.47			154.97			110.38			179.09

Capital Ratios(8):
Leverage ratio								5.99	%		5.89	%		5.88	%		5.79	%		4.36	%
Average shareholders’ equity to average total assets								5.67			5.89			5.77			5.43			5.27
Tier 1 risk-based capital ratio								8.06			8.32			7.80			8.43			6.62
Total risk-based capital ratio								11.07			10.89			11.16			11.08			10.23

Branch Locations (Unaudited):
Traditional		28			26			28			25			26			25			24
In-store		105			102			105			88			102			85			64

Total		133			128			133			113			128			110			88

Number of deposit accounts(4)		170,922			155,390			170,922			N/A	(9)		155,390			132,636			104,637

(1)	Includes the pro forma effect of federal income tax on our earnings as if we were a “C” corporation at the rate of 33%.

(2)	Adjusted for a four-for-one stock split effective September 12, 2001 and a three-for-one stock split effective July 1, 2000.

(3)	Calculated by dividing total assets, less total liabilities, goodwill and intangible assets, by shares outstanding at end of period.

(4)	For these purposes, deposit accounts exclude money market and time deposits.

(5)	Calculated by dividing noninterest income (excluding securities gains) by the sum of net interest income plus noninterest income (excluding securities gains).

(6)	At period end, except for net charge-offs to average loans, which is for periods ended at such dates.

(7)	Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more and restructured loans.

(8)	At period end, except for average shareholders’ equity to average total assets, which is for periods ended at such dates.

(9)	Information for the three months ended March 31, 2003 is not available.

RISK FACTORS

An investment in our common stock involves risks. We describe below the material risks and uncertainties that affect our business. Before making an investment decision, you should carefully read and consider all of these risks and all other information contained in this prospectus. If any of the risks described in this prospectus occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.

Risks Associated With Us

Our allowance for loan losses may not be sufficient to cover actual loan losses, which could adversely affect our results of operations.

As a lender, we are exposed to the risk that our loan customers may not repay their loans according to their terms and that the collateral securing the payment of these loans may be insufficient to assure repayment. We may experience significant loan losses which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectibility of our loan portfolio, which are based, in part, on:

current economic conditions and their estimated effects on specific borrowers;

an evaluation of the existing relationships among loans, potential loan losses and the present level of the allowance;

results of examinations of our loan portfolios by regulatory agencies; and

management’s internal review of the loan portfolio.

We maintain an allowance for loan losses in an attempt to cover loan losses inherent in our loan portfolio. Additional loan losses will likely occur in the future and may occur at a rate greater than we have experienced to date. In determining the size of the allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient. In addition, adjustments may be necessary to allow for unexpected volatility or deterioration in the local or national economy. Material additions to the allowance would materially decrease our net income.

In addition, federal regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our loan allowance or loan charge-offs as required by these regulatory agencies could have a material adverse effect on our results of operations.

A large percentage of our loans are collateralized by real estate, and an adverse change in the real estate market may result in losses and adversely affect our profitability.

Approximately 80.0% of our loan portfolio as of March 31, 2004 was comprised of loans collateralized by real estate. An adverse change in the economy affecting values of real estate generally or in our primary market specifically could significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. In the event of a default with respect to any of these loans, amounts received upon sale of the collateral may be insufficient to recover outstanding principal and interest on the loan. As a result, our profitability could be negatively impacted by an adverse change in the real estate market.

We may be responsible for environmental claims with respect to properties to which we take title.

In the course of our business, we may foreclose on and take title to real property that secures our loans. These properties could be subject to environmental liabilities. There is a risk that hazardous substances or wastes, contaminants, pollutants or other environmentally restricted substances could be discovered on our foreclosed properties. In this event, we might be required to remove the substances from the affected properties or to engage

in abatement procedures at our sole cost and expense. Potential environmental liability could include the cost of remediation and also damages for any injuries caused to third parties. We cannot assure you that the cost of removal or abatement would not substantially exceed the value of the affected properties or the loans secured by those properties, that we would have adequate remedies against prior owners or other responsible parties or that we would be able to resell the affected properties either prior to or following completion of any such removal or abatement procedures. Currently, we are not, and none of our subsidiaries is, a party to any pending legal proceeding under any environmental statute, nor are we aware of any instances that may give rise to such liability.

Our business is subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.

The majority of our assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings and profitability depend significantly on our net interest income, which is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. As of March 31, 2004, we were asset sensitive, meaning that our interest-earning assets were more sensitive to changes in market interest rates than our interest-bearing liabilities. If market interest rates should move contrary to our position, this “gap” will work against us, and our earnings may be negatively affected. We are unable to predict or control fluctuations of market interest rates, which are affected by many factors, including the following:

inflation;

recession;

changes in unemployment;

the money supply; and

international disorder and instability in domestic and foreign financial markets.

Our asset-liability management strategy may not be able to control our risk from changes in market interest rates, and it may not be able to prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.

We must effectively manage our credit risk.

We undertake risks in making any loan, including risks with respect to nonpayment of loans, the period of time over which the loan may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. We cannot assure you that our attempts to minimize our credit risk by carefully monitoring the concentration of our loans within specific industries and our loan application approval procedures will reduce these lending risks.

If we are not able to maintain our historical rate of growth, we may not be able to maintain our historical earnings trends.

To achieve our past levels of growth, we have initiated internal growth programs centered on developing new customer accounts through the establishment of traditional and in-store branches. We have also completed several bank acquisitions. We may not be able to sustain our historical rate of growth or may not even be able to grow at all. In addition, we may not be able to obtain financing necessary to fund additional growth. Various factors, such as economic conditions and competition, may impede or prohibit our opening of new branch offices. We may not be able to find suitable candidates for acquisition. Further, any inability to attract and retain

experienced bankers may adversely affect our internal growth. If we are not able to maintain our historical rate of growth, we may not be able to maintain our historical earnings trends.

If we are unable to manage our growth effectively, our operations could be negatively affected.

We intend to continue our current growth strategy. Companies such as us that experience rapid growth face certain risks and difficulties, including:

finding suitable markets for expansion;

attracting funding to support additional growth;

maintaining asset quality;

funding start-up costs associated with opening new branches;

attracting and retaining qualified management; and

maintaining adequate regulatory capital.

If we do not manage our growth effectively, our business, financial condition, results of operations and future prospects could be negatively affected, and we may not be able to continue to implement our business strategy and successfully conduct our operations.

Our inability to open additional in-store branches and operate in our existing in-store branches could significantly impact our ability to grow.

A key part of our growth strategy is to expand our Texas in-store operations. As of March 31, 2004, we operated 105 in-store branches, 85 of which are located in Wal-Mart stores and the remainder of which are located in Kroger grocery stores and several other stores. We have entered into a master sublease agreement with Wal-Mart and license agreements with the other chains that govern our lease of space at each store in which we maintain a branch. While we have lease agreements for the stores in which we currently maintain branches, neither Wal-Mart nor any of the other stores is obligated to provide us with space to open branches in additional stores. These lease and license agreements also generally contain customary default and termination provisions in favor of the lessor or licensor. If we are unable to open additional in-store branches or continue operating in our existing in-store branches, an important part of our growth strategy could be negatively impacted. As a result, our results of operation and financial condition could be adversely affected.

After our spin off of Delta Card, we will not have available a historical source of income.

In order to simplify our business plan, immediately prior to the completion of this offering, we intend to spin off the ownership interests in our subsidiary, Delta Card, to our existing shareholders of record as of a date preceding the completion of this offering. Delta Card’s operations provided us with pre-tax net income of $2.5 million, $1.7 million and $1.1 million in 2003, 2002 and 2001, respectively. This is a source of income that we will not have available to us after completion of the offering. We have included in this prospectus pro forma financial information reflecting our results of operations excluding the net pre-tax income generated by Delta Card. See “Pro Forma Selected Historical Consolidated Financial Data” and “Unaudited Pro Forma Consolidated Financial Information.”

Our profitability depends significantly on economic conditions in our primary market.

Our profitability depends on the general economic conditions in our primary market. Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in Montgomery and Harris Counties, and to a lesser extent other major market areas in Texas. The local economic conditions in these areas have a significant impact on our commercial, real estate, construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could impact these local economic conditions and could negatively affect the profitability of our operations.

We depend on our management team, and the loss of our executive officers or other key employees could impair our relationship with our customers and adversely affect our financial condition and results of operations.

A key factor to our success is the continued service and skills of certain members of our management team, including Robert E. Marling, Jr., Michael H. Richmond, M. Ann Thomas, George V. Sowers, Jr. and other senior officers. The unexpected loss of services of one or more of these key personnel could have an adverse impact on our business because of the loss of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

An interruption in or breach in security of our information systems may result in a loss of customer business.

We rely heavily on communications and information systems to conduct our business. Any failure or interruptions or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposits, servicing or loan origination systems. We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us. The occurrence of any failures or interruptions could result in a loss of customer business and have a material adverse effect on our results of operations and financial condition.

Terrorist activities could cause reductions in investor confidence and substantial volatility in the securities markets, which could adversely affect the trading price of our common stock.

It is not possible to predict the extent to which terrorist activities may occur in the United States or, if they occur, their effect on a particular issuance of securities. It is also uncertain what affects any past or future terrorist activities and any consequent actions on the part of the United States government and others will have on the United States and world financial markets and local, regional and national economies. Among other things, reduced investor confidence could result in substantial volatility in securities markets and a decline in general economic conditions. These unexpected events could materially affect our results of operations and adversely affect the trading price of our common stock.

Risks Associated With Our Industry

We face strong competition from other financial institutions and financial service companies, which could adversely affect our financial condition and results of operations.

The banking business is highly competitive, and our profitability depends heavily on our ability to compete in our markets with other financial institutions and financial service companies offering products and services similar to those offered by us. We face vigorous competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services than we have. We also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations, which may offer more favorable financing than we can. Some of our nonbank competitors are not subject to the same extensive regulations that govern us. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our results of operations and financial condition. See “Business—Competition.”

We operate in a highly regulated environment and as a result, are subject to extensive regulation and supervision that could adversely affect our financial performance, and may also be adversely affected by changes in federal, state and local laws and regulations.

We are subject to extensive regulation, supervision and examination by federal banking authorities. Any change in applicable regulations or federal or state legislation could have a substantial impact on us and

Woodforest National Bank, and our respective operations. Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority and operations or the powers, authority and operations of Woodforest National Bank, which could have a material adverse effect on our financial condition and results of operations. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power may have a negative impact on us. See “Supervision and Regulation.”

Risks Associated With Our Common Stock

After completion of the offering, our management and employees will continue to own a significant percentage of our common stock, allowing management certain control over our corporate affairs.

After the completion of this offering, our executive officers, directors and employee profit sharing plan will beneficially own % of the outstanding shares of our common stock, and approximately % of such shares of our common stock if the underwriters’ over-allotment option is fully exercised. Accordingly, these executive officers, directors and employees will be able to influence, to a significant extent, the outcome of all matters required to be submitted to our shareholders for approval, including decisions relating to the election of directors, the determination of our day-to-day corporate and management policies and other significant corporate transactions. See “Management,” “Beneficial Stock Ownership by Principal Shareholders and Management” and “Description of Our Capital Stock.”

Purchasers of our common stock will experience immediate dilution.

If you purchase shares of our common stock in this offering, you will experience immediate dilution of approximately % in your investment, in that our tangible book value after the offering will be approximately $ compared with an assumed initial public offering price of $ per share (which is the mid-point of the offering range). See “Dilution.”

There has been no prior public market for our common stock, and there is no assurance that once listed on Nasdaq a market will develop for our common stock.

Prior to the offering, there has been no public market for our shares of common stock. We intend to apply to have our common stock quoted on the Nasdaq National Market under the symbol “WOOD.” One of the requirements for trading on the Nasdaq National Market is that there be at least three registered market makers in our common stock before trading can commence. Making a market involves maintaining bid and asked quotations for our common stock and being available as a principal to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of our common stock at any given time, which presence is dependent upon the individual decisions of investors over which neither we nor any market maker has any control. Nonetheless, there can be no assurance that an active public market will develop or be sustained after the offering or that if such a market develops, investors in our common stock will be able to resell their shares at or above the initial public offering price.

Our determination of the market price of our common stock may not be indicative of its market price after this offering and our market price may decline.

The initial public offering price of shares of our common stock will be determined by negotiations between us and the underwriters, does not necessarily bear any relationship to our book value, past operating results, financial condition or other established criteria of value and may not be indicative of the market price of our common stock after this offering. We expect to determine the public offering price based on a variety of factors, including:

prevailing market and general economic conditions;

the market capitalizations, trading histories and stages of development of other traded companies that the underwriters believe comparable to us;

our results of operation in recent periods;

our current financial position;

estimates of our business potential and prospects;

an assessment of our management;

the present state of our development; and

the availability for sale in the market of a significant number of shares of common stock.

The stock market has experienced significant price and volume volatility in recent years. These market fluctuations may be unrelated to the operating performance of particular companies whose shares are traded and may adversely affect the market price of our common stock. In addition, future sales of our common stock could depress the price of our common stock. There can be no assurance that the market price of our common stock will not decline below the initial public offering price.

We currently do not intend to pay dividends on our common stock. In addition, our future ability to pay dividends is subject to restrictions.

We do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future following this offering. We have operated as a Subchapter S corporation since January 1, 1998, and as such, have paid regular and substantial dividends on our common stock. Immediately prior to completion of this offering, we intend to terminate our status as a Subchapter S corporation. We cannot assure you that we will pay any dividends in the future, and if we decide to do so, any dividends paid would very likely be much less than the dividends paid while we operated as a Subchapter S corporation. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.

We have issued an aggregate of $46.4 million in junior subordinated debentures to our five wholly-owned subsidiary trusts. We pay interest on the debentures, which is used by the trusts to pay distributions on the trust preferred securities issued by them. The indenture governing the issuance of each of these debentures provides that in the event we fail to make an interest payment on the debentures, we are prohibited from paying dividends on our common stock until all debenture interest payments are current. Accordingly, if we are unable to pay interest on these debentures, we will be unable to pay dividends on our common stock.

Our principal source of funds to pay dividends on our common stock will be cash dividends that we receive from Woodforest National Bank. The payment of dividends by Woodforest National Bank to us is subject to certain restrictions imposed by federal banking laws, regulations and authorities. The federal banking statutes prohibit federally insured banks from making any capital distributions (including a dividend payment) if, after making the distribution, the institution would be “under-capitalized” as defined by statute. In addition, the relevant federal regulatory agencies have authority to prohibit an insured bank from engaging in an unsafe or unsound practice, as determined by the agency, in conducting an activity. The payment of dividends could be deemed to constitute such an unsafe or unsound practice, depending on the financial condition of Woodforest National Bank. Regulatory authorities could impose administratively stricter limitations on the ability of Woodforest National Bank to pay dividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Capital Resources” and “Supervision and Regulation—Woodforest National Bank.”

Our corporate organizational documents and the provisions of Texas law to which we are subject may delay or prevent a change in control of our company that you may favor.

Our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws contain certain provisions which may delay, discourage or prevent an attempted acquisition or change of control of our company that you may favor. These provisions include:

a board of directors classified into three classes of directors with the directors of each class having staggered, three year terms;

a provision that any special meeting of our shareholders may be called only by a majority of the board of directors, the Chairman of the Board, the Chief Executive Officer, the President or the holders of at least 33% of our shares entitled to vote at the meeting;

a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at an annual or special meeting of shareholders;

a provision that denies shareholders the right to amend our Bylaws; and

the ability of our board of directors to issue shares of preferred stock, $1.00 par value per share, without shareholder approval and upon such terms as our board of directors may determine. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in us.

In addition, certain provisions of Texas law, including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of the company. See “Description of Our Capital Stock—Preferred Stock,” and “—Texas Law and Certain Provisions of the Articles of Incorporation and Bylaws.”

Future sales of our common stock could depress the price of our common stock, and sales of a substantial number of shares of our common stock in the public market by our shareholders after this offering, or the perception that these sales are likely to occur, could cause the market price of our common stock to decline.

Upon completion of this offering, we will have outstanding shares of our common stock. In addition, 1,421,376 shares are reserved for issuance to our directors, officers and employees under our stock option plans. Of these shares, approximately shares, including the shares sold in this offering, may be traded, without restrictions, in the public market immediately after this offering is completed. Approximately shares will become freely tradable subject to the volume restrictions of Rule 144 and the lock-up agreements described below in , 2004 and , 2004, respectively. Upon the expiration of the lock-up agreements entered into by our directors, officers and certain other significant shareholders in connection with the offering, which will occur 180 days from the date of this prospectus, approximately additional shares will be eligible for sale in the public market, subject, in the case of our affiliates, to the volume restrictions of Rule 144 under the Securities Act. Following the completion of this offering, we also intend to file a registration statement on Form-S-8 under the Securities Act covering the shares of our common stock reserved for issuance under our stock option plans as of , 2004. Accordingly, subject to applicable vesting requirements and exercise with respect to options, shares registered under that registration statement will be available for sale in the open market immediately after the 180-day lock-up agreements expire. See “Dilution” and “Shares Eligible For Future Sale.”

SPECIAL CAUTIONARY NOTICE REGARDING

FORWARD-LOOKING STATEMENTS

A number of presentations and disclosures in this prospectus, including any statements preceded by, followed by or which include the words “anticipate,” “believe,” “continue,” “expect,” “estimate,” “intend,” “may,” “will,” “should,” “could,” “hope,” “might,” “assume” and similar words constitute forward-looking statements. These statements discuss future expectations, activities or events and are subject to a number of risks and uncertainties, many of which are beyond our control. Important factors that could cause actual results or developments to differ materially from estimates or projections contained in forward-looking statements include:

general business and economic conditions in the markets we serve, which may be less favorable than anticipated;

changes in market rates and prices, which may impact the value of securities, loans, deposits and other financial instruments;

legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial securities industry;

increase in competitive factors including product and pricing pressures among financial services organizations;

our ability to expand and grow our business and operations, including the establishment of additional branches and acquisition of additional banks, and our ability to realize the cost savings and revenue enhancements we expect from such activities; and

fiscal and governmental policies of the United States federal government.

For other factors, risks and uncertainties that could cause actual results to differ materially from estimates and projections contained in forward-looking statements, please read the “Risk Factors” section of this prospectus.

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. These statements speak only as of the date of this prospectus (or earlier to the extent applicable). We have no duty, and do not intend to, update these statements unless applicable laws require us to do so.

USE OF PROCEEDS

We estimate that we will receive approximately $ million in net proceeds from the sale of our common stock in this offering, based on an assumed initial offering price of $ per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $ million.

We plan to use the net proceeds from this offering as follows:

approximately $24.0 million to increase our capital accounts following the cash distribution to our shareholders immediately prior to this offering of our accumulated and undistributed earnings on which they have been or will be subject to federal income tax;

approximately $ million to repay all or a portion of our indebtedness to a third party lender; and

any remainder for general corporate purposes, including contributions to the capital of Woodforest National Bank, investments in earning assets, the opening of additional traditional and in-store branches and for possible acquisitions of financial institutions.

The indebtedness to be repaid is the $33.1 million outstanding balance as of March 31, 2004 of a $41.9 million term loan from U.S. Bank, St. Louis, Missouri. The loan bears interest, payable quarterly, at a rate equal to the prime rate as posted in the Wall Street Journal minus 1%. The loan matures on March 3, 2006 and requires a quarterly principal payment of $1.1 million plus accrued interest. Our obligations under the loan are secured by a pledge of all of the shares of capital stock of our subsidiary, Woodforest National Bank.

The precise amount and timing of the application of the net proceeds from this offering depends on many factors, including, but not limited to, the amount of any such proceeds and actual funding requirements. Until the proceeds are used, we may invest the proceeds, depending on our cash flow requirements, in short and long-term investments including, but not limited to, treasury bills, commercial paper, certificates of deposit, securities issued by U. S. government agencies, money market funds, repurchase agreements and other similar investments.

OUR POLICY REGARDING DIVIDENDS

We currently do not anticipate paying any cash dividends on our common stock for the foreseeable future. Holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for that purpose. We cannot assure you that we will pay any amount of dividends in the future.

For a foreseeable period of time, the principal source of our cash revenues will be dividends paid by Woodforest National Bank with respect to its capital stock. There are certain restrictions on the payment of these dividends imposed by federal banking laws, regulations and authorities. Regulatory authorities could impose administratively stricter limitations on the ability of Woodforest National Bank to pay dividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements. See “Supervision and Regulation—Woodforest National Bank.”

The declaration and payment of dividends on our common stock will depend upon our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by our board of directors.

CAPITALIZATION

The following table sets forth our unaudited consolidated capitalization at March 31, 2004:

on an actual basis;

on a pro forma basis to give effect to:

the proposed distribution to our existing shareholders of our accumulated and undistributed earnings on which they have been or will be subject to federal income tax in connection with our conversion from a Subchapter S corporation to a “C” corporation;

the proposed spin-off of Delta Card to our shareholders as of a record date prior to completion of this offering;

additional federal income tax to be incurred upon our conversion from a Subchapter S corporation to a “C” corporation; and

the proposed issuance of shares of our common stock in this offering and the application of the net proceeds from the sale of the shares, at an assumed offering price of $ , net of the underwriting discounts and commissions of $ and other estimated offering expenses of $ , in order to increase our capital accounts after the cash distribution to our existing shareholders and the spin-off of Delta Card; and

on an as adjusted basis to give effect to the sale of the shares of our common stock offered by this prospectus, assuming the underwriter’s over-allotment is not exercised, at an assumed offering price of $ per share (the mid-point of the estimated offering range), net of underwriting discounts and commissions and other estimated offering expenses.

The following data should be read in conjunction with the financial information included in this prospectus, including our historical consolidated financial statements and related notes.


	March 31, 2004
	Actual			Pro Forma	As Adjusted for the Offering
	(dollars in thousands)
	(unaudited)
Indebtedness:
Federal Home Loan Bank advances	$	10,000
Note payable		33,064
Subordinated debentures due 2004 through 2006		550
Subordinated debentures due 2006		827
Junior subordinated debentures		46,394

Total indebtedness	$	90,835

Shareholders’ equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, no shares issued and outstanding	$	—
Common stock, $1.00 par value, 50,000,000 shares authorized, 14,290,712 shares issued and 14,050,110 shares outstanding; shares issued and shares outstanding, as adjusted		14,291
Additional paid-in capital		7,873
Retained earnings		58,850
Accumulated other comprehensive gain		1,074
Less treasury stock (at cost)		(2,406	)

Total shareholders’ equity	$	79,682

Total capitalization	$	170,517

Consolidated capital ratios:
Average equity to average total assets		5.67	%
Tier 1 risk-based capital ratio		8.06
Total risk-based capital ratio		11.07
Leverage ratio		5.99

DILUTION

If you invest in our common stock, your interest will be diluted to the extent that the initial public offering price per share of our common stock exceeds the pro forma net tangible book value per share of our common stock immediately after this offering.

Our pro forma net tangible book value as of March 31, 2004 was $79.7 million, or $2.04 per share of our common stock. Pro forma net tangible book value per share represents the difference between total assets, less intangible assets and goodwill, and total liabilities, divided by the pro forma number of shares of common stock outstanding.

Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after the offering. After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, not including possible issuance of an additional shares pursuant to the underwriters’ over-allotment, and after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2004 would have been $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value to existing shareholders of $ per share and an immediate dilution of $ per share to new investors.

The following table illustrates this per share dilution:


Assumed initial offering price per share (the mid-point of the estimated offering range)		$
Pro forma net tangible book value per share at March 31, 2004
Increase in net tangible book value per share attributable to new investors
Pro forma net tangible book value per share after the offering
Dilution per share to new investors		$

The following table compares, as of March 31, 2004 on the pro forma basis described above, the initial public offering price of shares of our common stock with the cost to our directors, executive officers and affiliates of shares of our common stock that they acquired from us within the past five years:

Shares Purchased

Total Consideration

Average Price
Per Share

Number

Percent

Amount

Percent

Directors, executive officers and affiliates

251,147

957,561

3.81

New investors

Total

The computations in the above tables do not take into account shares of our common stock that may be issued upon the exercise of stock options after March 31, 2004, including:

1,222,016 shares that we may issue upon the exercise of stock options outstanding as of March 31, 2004 at a weighted average exercise price of $10.95 per share (prior to adjustment of the exercise price for the cash distribution to existing shareholders and the Delta Card spin-off);

199,360 additional shares as of March 31, 2004 that we may issue under our 1995 stock option plan; and

1,200,000 shares that we may issue under our 2004 stock incentive plan approved by our shareholders in June 2004.

If all options outstanding as of March 31, 2004 were exercised on the date of completion of the offering, new investors purchasing shares of our common stock in this offering would suffer dilution per share of $ .

BUSINESS

General

We are a Texas corporation and a financial holding company headquartered in The Woodlands. We were organized in 1985 as a bank holding company for our principal subsidiary, Woodforest National Bank, which provides a wide range of commercial and consumer financial products and services from 133 locations throughout Texas, 28 of which are traditional branches and 105 of which are “in-store” branches. As of March 31, 2004, we had $1.4 billion in total assets, $899.9 million in total loans, $1.2 billion in total deposits and $79.7 million in total shareholders’ equity. Based on total assets as of March 31, 2004, we are the fourth largest independent commercial banking organization headquartered in the greater Houston area.

History

Business

We conduct our financial services business from both traditional branch banks and branches located in stores operated by large retail chains.

generating in-store branches, we leverage our in-store name recognition and established customer base by opening, in a proximate location, a traditional branch that offers a broad array of loan products and other financial services. When we implement our spokes and hub strategy, the combination of name recognition, fee income and low cost deposits derived from our in-store branches and the full product offerings at our traditional branches strengthens all branches comprising a particular spokes and hub network.

“Absolutely Free Checking;”

“Second Chance Checking” (for customers with prior credit issues);

Free on-line banking with free bill payment;

Our courtesy overdraft service, which we have branded “CheckPay;”

Free daily e-mail notification regarding account balances;

Western Union money transfer;

Merchant services; and

Utility bill payment and U.S. postal services (in-store branches only).

Our cohesive and complementary senior management team and well-trained employees play an important role in our service-oriented growth strategy. Five of the bank’s executive officers have served previously as presidents of independent community banks and are accustomed to making quick, responsive decisions. Furthermore, we furnish special training on a regular basis to all of our employees in the areas of customer service and satisfaction. Our management is empowered and motivated to provide the highest level of personal service while maximizing profits. We provide our officers and employees with economic incentives, incentive plans and stock ownership. Through our KSOP plan, our employees are currently our third largest shareholder, owning approximately 19.0% of our common stock. As owners of our common stock, our employees are strategically aligned with shareholders and provided incentives to conduct business with an owner’s mentality.

Market

technology industries. We have focused our expansion efforts on markets with large, growing populations. Our 28 traditional branches are located in Montgomery and Harris Counties, both of which are densely populated. Of our 105 in-store branches, 40 are located in our primary market. The remaining in-store branches include three branches in counties near our primary market, 37 branches in the Dallas-Fort Worth area, 13 branches in the Austin-San Antonio region, nine branches in East Texas and three branches in West Texas. We believe that our presence in the major market areas of Texas will provide us with an opportunity to grow our commercial and consumer loans and attract deposits.

New Branch Expansion. The expansion of our branch network is a significant factor driving our growth in noninterest income. New branches, both in-store and traditional, are an important source of new customers for deposit products and fee generation. As our number of branches has increased, we have experienced an increase in both the number of deposit accounts and the fee revenue generated per account. Of our 133 branches, 86.5% have been opened since 1999. Our focus on opening new branches will continue in 2004, with the planned opening of 24 branches, including five to eight new traditional branches and 19 new in-store branches.


	As of and For the Three Months Ended March 31, 2004			As of and For the Years Ended December 31,															Compound Annual Growth Rate
	As of and For the Three Months Ended March 31, 2004			2003			2002			2001			2000			1999			1-Year 2003/2002		4-Year 2003/1999
Number of new branches opened during the period:
Traditional		2			1			1			2			1			10		N.M.		N.M.
In-store		3			17			21	(1)		44			11			2		N.M.		N.M.

Total		5			18			22			46			12			12		N.M.		N.M.

Number of branches opened since January 1, 1999:
Traditional		17			15			14			13			11			10		7.1	%	10.7	%
In-store		98			95			78			57			13			2		21.8	%	162.5	%

Total		115			110			92			70			24			12		19.6	%	74.0	%

Percentage of total branches		86.5	%		85.9	%		83.6	%		79.5	%		57.1	%		40.0	%	N.M.		N.M.

Total service charges on deposit accounts (2) (in thousands)	$	9,747		$	33,311		$	25,096		$	14,354		$	8,615		$	6,471		32.7	%	50.6	%
Number of deposit accounts (2)		170,922			155,390			132,636			104,637			72,798			54,813		17.2	%	29.8	%
Revenue per deposit account (average accounts) (2)	$	240.27		$	231.31		$	211.54		$	161.79		$	135.02		$	154.28		9.3	%	10.7	%

(1)	Net of one branch closed during the period.

(2)	For these purposes, deposit accounts exclude money market and time deposits.

N.M.—Not meaningful.

Strategies

Our principal growth opportunities and operating strategies are the following:

Exploit our technological experience and knowledge to maximize profitability. Since our inception, we have utilized our in-house technological expertise to drive both revenues and efficiency improvements and to optimize our systems to better attract and retain customers in our target markets through customized solutions. Further, we plan to increase our efficiency through the centralization of our operations that will occur later this year.

Maintain active community involvement. Active community involvement by our directors, officers and employees is important to our overall success in attracting customers. Community involvement not

only enhances our overall image and name recognition, but it enables us to gain knowledge of the community, which allows us to be responsive in developing products and better able to assess the level of service that we provide.

Lending Activities

Through our traditional branches, we provide our customers with a full array of commercial and consumer loan products. These loans include commercial and industrial loans, commercial real estate loans, consumer mortgage loans, construction and land development loans, Small Business Administration (SBA) loans, student loans and general consumer loans. The following is a discussion of each of our major types of lending:

Commercial and Industrial. Our commercial loans are primarily made within our market areas and are underwritten on the basis of the borrower’s ability to service the debt from income. At March 31, 2004, we had $107.2 million in commercial business loans, which represented 11.9% of our total loans.

Commercial Real Estate. In addition to commercial loans, we make commercial mortgage loans to finance the purchase of real property, which generally consists of real estate with completed structures. At March 31, 2004, we had $342.2 million in commercial mortgage loans, which represented 38.0% of our total loans.

Consumer Mortgage. For our individual customers, we offer a variety of mortgage loan products which generally are amortized over five to 25 years. Our consumer mortgage portfolio was $84.6 million at March 31, 2004, which represented 9.4% of our total loans.

Construction/Land Development. We also make loans to finance the construction of residential and nonresidential properties. At March 31, 2004, we had $263.1 million in construction loans, which represented 29.2% of our total loans. Approximately $69.0 million in construction loans were loans to local builders and individuals to finance residential construction. Approximately $141.6 million of the remaining construction loans were to finance residential lots and land for development into residential lots to individuals and local builders. The remainder of the construction loans of $52.5 million were for the construction of owner-occupied commercial real estate.

SBA and Student Loans. We provide alternative financing options to small businesses through the federally guaranteed programs offered by the SBA. We provide student loans to students at approximately 50 schools in the government guarantee student loan program from the Department of Education. At March 31, 2004, we had $53.8 million in SBA and student loans, which represented 6.0% of our total loans.

Consumer. We also offer various types of secured and unsecured consumer loans. These loans are offered as a convenience to our customer base. At March 31, 2004, we had $19.6 million in consumer loans, which represented 2.2% of our total loans.

Additional Services

We recently launched “Tu Banco,” our full-service bilingual banking center targeting local Hispanic population. Tu Banco also provides outreach programs on finances and banking to adult and student Hispanics.

Our subsidiary, Woodforest Financial Services, Inc., addresses the needs of professionals, business owners and executives by furnishing investment services, business retirement plans, executive benefits, personal planning and employee benefits.

Competition

We experience substantial competition in attracting and retaining deposits and in lending funds. The primary factors we encounter in competing for deposits are convenient office locations and rates offered. Direct competition for savings deposits comes from other commercial bank and thrift institutions, money market mutual funds and corporate and government securities which may offer more attractive rates than insured depository institutions are willing to pay. The primary factors we encounter in competing for loans include, among others, interest rate and loan origination fees and the range of services offered. Competition for origination of real estate

loans normally comes from other commercial banks, thrift institutions, mortgage bankers, mortgage brokers and insurance companies. We have been able to compete effectively with other financial institutions by emphasizing customer service and technology, by establishing long-term customer relationships and building customer loyalty, and by providing competitive products and services designed to address the specific needs of our customers.

Employees

At March 31, 2004, we had 1,152 full-time equivalent employees, 78 of whom were officers of Woodforest National Bank. Management considers its relations with its employees to be good. Neither we nor Woodforest National Bank are a party to any collective bargaining agreement.

Facilities

We conduct business at our 133 banking locations, 28 of which are traditional branches and 105 of which are in-store branches. Our headquarters are located at 1330 Lake Robbins, Suite 100, The Woodlands, Texas. The following table sets forth specific information on our locations in or near the following geographic areas:


Region		Number of Branches
Houston/The Woodlands		28 Traditional 43 In-store
Dallas-Ft. Worth		37 In-store
San Antonio-Austin		13 In-store
East Texas		9 In-store
West Texas		3 In-store

All of our in-store branches are leased. Including the automatic renewal periods available at our option, the lease agreements expire as follows:


Expiration Dates		Number of Branches
2004-2010		2 locations
2011-2015		18 locations
2016-2020		85 locations

Of our 28 traditional branches, we own 15 of the branches and lease the other 13 branches. Including the automatic renewal periods available at our option, the lease agreements expire as follows:


Expiration Dates		Number of Branches
2004-2010		1 location
2011-2015		8 locations
2016-2021		4 locations

Legal Proceedings

We and Woodforest National Bank from time to time are involved in legal proceedings arising in the normal course of business. Other than proceedings incidental to our business, neither we nor Woodforest National Bank are a party to, nor is any of our property the subject of, any material pending legal proceedings. Although the amount of any ultimate liability with respect to such matters cannot be determined, management does not believe that any such liability will individually, or in the aggregate, have a material adverse effect upon our consolidated financial condition, results of operations or cash flows.

DELTA CARD SPIN-OFF

On February 1, 2001, we purchased all of the assets of Delta Card for $33.0 million. Delta Card provides merchant credit card processing through electronic processing systems. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair values at the date of acquisition. The consideration paid for Delta Card was $11.0 million in cash, $11.0 million in floating prime rate plus 1% subordinated debentures maturing February 1, 2006, and the issuance of shares of our common stock valued at $11.0 million.

Immediately prior to the completion of this offering, we intend to spin-off the ownership interests in our wholly-owned subsidiary, Delta Card, to our shareholders as of a record date prior to completion of this offering. The distribution will be taxable as if Delta Card had been sold for its fair market value, and any gain will flow through to our existing shareholders for federal income tax purposes. In addition, the spin-off will be treated as a distribution of property to our existing shareholders. As a result, the spin-off is expected to be tax-free for us and Delta Card.

As a result of the spin-off, Delta Card will no longer be our subsidiary and we will no longer receive its pre-tax net earnings. For the years ended December 31, 2003, 2002 and 2001, Delta Card generated pre-tax net earnings for us of $2.5 million, $1.7 million and $1.1 million, respectively. The operating agreement in existence between Delta Card and us, however, will remain in effect and pursuant to this agreement, we will continue to receive income from Delta Card. For the years ended December 31, 2003, 2002 and 2001, we received pre-tax income of $3.6 million, $3.1 million and $3.0 million, respectively, as a result of our operating agreement with Delta Card. The operating agreement expires in 2008.

In connection with the distribution of approximately $24.0 million of our accumulated and undistributed earnings to our existing shareholders and the spin-off of Delta Card, we intend to re-value the outstanding options that we have granted to acquire shares of our common stock to compensate the option holders for the spin-off and the cash distribution. In addition, our existing option holders will be granted options to acquire ownership interests in Delta Card on a pro rata basis to enable these holders to purchase the same percentage interest in Delta Card that they would have received if they had exercised their Woodforest stock options prior to the spin-off. As a result of the revaluation of the Woodforest options and the issuance of options to acquire ownership interests in Delta Card, immediately following the cash distribution to our existing shareholders and the spin-off of Delta Card, our option holders will hold options to purchase our common stock and options to acquire ownership interests in Delta Card with an aggregate value equal to the value of their Woodforest options immediately prior to these transactions.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table summarizes our selected historical consolidated financial data for the periods and at the dates indicated and should be read in conjunction with our audited consolidated financial statements, including the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 38. The selected historical financial data as of December 31, 2003 and 2002 and for each of the three years ended December 31, 2003 is derived from our audited consolidated financial statements and related notes included in this prospectus. The selected historical financial data as of December 31, 2001, 2000 and 1999 and for each of the two years ended December 31, 2000 is derived from our audited consolidated financial statements not included in this prospectus. The selected historical financial data as of March 31, 2004 and 2003 and for the three-month periods then ended are derived from our unaudited interim consolidated financial statements and related notes included in this prospectus. These unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of our financial position and results of operation as of the dates and for the periods indicated. Information for any interim period is not necessarily indicative of results that may be anticipated for the full year. We currently operate as a Subchapter S corporation. As such, there is no federal income tax included in the historical consolidated financial information presented below.


	As of and for the Three Months Ended March 31,						As of and for the Years Ended December 31,
	2004			2003			2003			2002			2001			2000			1999
	(in thousands, except per share and branch number data)
Income Statement Data:
Interest income	$	15,803		$	16,212		$	64,451		$	67,669		$	71,846		$	57,723		$	43,321
Interest expense		4,542			5,083			18,964			24,763			36,719			29,479			19,168

Net interest income		11,261			11,129			45,487			42,906			35,127			28,244			24,153
Provision for loan losses		860			625			2,945			3,250			2,200			2,690			1,150

Net interest income after provision for loan losses		10,401			10,504			42,542			39,656			32,927			25,554			23,003
Gains on sales of securities, net		560			1,492			2,873			4,234			5,449			114			5,773
Other noninterest income		33,565			28,033			124,272			104,815			81,216			17,234			11,979

Total noninterest income		34,125			29,525			127,145			109,049			86,665			17,348			17,752
Noninterest expense		39,223			33,767			145,666			125,958			104,570			31,741			24,052

Net earnings	$	5,303		$	6,262		$	24,021		$	22,747		$	15,022		$	11,161		$	16,703

Common Share Data(1):
Basic earnings per share	$	0.38		$	0.45		$	1.71		$	1.63		$	1.07		$	0.85		$	1.31
Diluted earnings per share		0.37			0.44			1.69			1.62			1.07			0.85			1.30
Book value per share		5.67			5.49			5.48			5.43			4.39			3.34			2.75
Tangible book value per share(2)		2.44			2.39			2.19			2.43			1.14			2.27			1.62
Cash dividends declared per share		0.22			0.26			1.04	(3)		0.93			0.51			0.43			0.76
Cash dividend payout ratio		58.3	%		58.3	%		60.8	%		57.2	%		47.6	%		50.5	%		57.9	%

Weighted average shares outstanding (basic)		14,047			14,042			14,042			13,980			14,026			13,107			12,716
Weighted average shares outstanding (diluted)		14,276			14,168			14,190			14,067			14,068			13,204			12,891
Shares outstanding at end of period		14,050			14,042			14,042			14,042			13,801			13,097			13,218

Balance Sheet Data (at period end):
Total assets	$	1,418,890		$	1,321,724		$	1,353,273		$	1,281,375		$	1,218,635		$	914,542		$	660,867
Securities		212,344			252,183			221,342			268,712			284,256			185,588			181,375
Loans (including loans held for sale)		899,922			797,503			866,459			793,951			688,315			564,761			387,682
Allowance for loan losses		(10,413	)		(9,309	)		(10,096	)		(8,957	)		(7,090	)		(5,682	)		(3,462	)
Total deposits		1,242,718			1,164,732			1,177,156			1,129,154			1,082,362			837,130			605,740
Borrowings and note payable		90,835			75,835			91,205			71,620			69,410			28,941			16,483
Total shareholders’ equity		79,682			77,099			76,915			76,278			60,600			43,809			36,336


	As of and for the Three Months Ended March 31,					As of and for the Years Ended December 31,
	2004			2003		2003			2002			2001			2000			1999
	(in thousands, except per share and branch number data)

Selected Financial Ratios and Other Data:
Performance Ratios and Other Data:
Return on average assets		1.54	%	1.95	%		1.82	%		1.80	%		1.36	%		1.42	%		2.86	%
Return on average equity		27.15		33.12			31.53			33.13			25.89			27.85			50.74
Net interest margin		3.93		4.15			4.11			4.00			3.66			3.84			4.16
Efficiency ratio(4)		87.50		86.23			85.81			85.27			87.32			69.80			66.57

Fee income per deposit account(5)	$	240.27		N/A	(10)	$	231.31		$	211.54		$	161.79		$	135.02		$	154.28
Fee income to total revenue(6)		74.88	%	71.58	%		73.21	%		70.96	%		69.81	%		37.90	%		33.15	%

Asset Quality Ratios(7):
Nonperforming assets to total loans and other real estate		0.89	%	1.16	%		1.32	%		1.16	%		0.71	%		0.31	%		0.44	%
Net charge-offs to average loans		0.24		0.14			0.22			0.19			0.13			0.10			0.09
Allowance for loan losses to total loans		1.16		1.17			1.17			1.13			1.03			1.01			0.89
Allowance for loan losses to nonperforming loans(8)		259.67		341.47			154.97			110.38			179.09			744.69			350.05

Capital Ratios(9):
Leverage ratio		5.99	%	5.89	%		5.88	%		5.79	%		4.36	%		6.34	%		5.56	%
Average shareholders’ equity to average total assets		5.67		5.89			5.77			5.43			5.27			5.09			5.63
Tier 1 risk-based capital ratio		8.06		8.32			7.80			8.43			6.62			9.31			8.62
Total risk-based capital ratio		11.07		10.89			11.16			11.08			10.23			11.57			10.96

Branch Locations (Unaudited):
Traditional		28		25			26			25			24			22			21
In-store		105		88			102			85			64			20			9

Total		133		113			128			110			88			42			30

Number of deposit accounts(5)		170,922		N/A	(10)		155,390			132,636			104,637			72,798			54,813

(1)	Adjusted for a four-for-one stock split effective September 12, 2001 and a three-for-one stock split effective July 1, 2000.

(2)	Calculated by dividing total assets, less total liabilities, goodwill and intangible assets, by shares outstanding at end of period.

(3)	Does not include a special non-cash dividend to shareholders of 100% of the bank’s ownership interest in a 27-hole golf course, which we acquired in March 2003 upon foreclosure of a loan. The value of such ownership interest at the time of distribution was determined to be $0.285 per share.

(4)	Calculated by dividing total noninterest expense (excluding securities losses) by the sum of net interest income before the provision from loan losses plus noninterest income (excluding securities gains).

(5)	For these purposes, deposit accounts exclude money market and time deposits.

(6)	Calculated by dividing noninterest income (excluding securities gains) by the sum of net interest income plus noninterest income (excluding securities gains).

(7)	At period end, except for net charge-offs to average loans, which is for periods ended at such dates.

(8)	Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more and restructured loans.

(9)	At period end, except for average shareholders’ equity to average total assets, which is for periods ended at such dates.

(10)	Information for the three months ended March 31, 2003 is not available.

PRO FORMA SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following selected historical consolidated financial data for the periods and at the dates indicated is presented to show the impact of the distribution of our accumulated and undistributed earnings to our existing shareholders, the spin-off of Delta Card to our shareholders as of a record date prior to completion of this offering and the additional taxes to be incurred upon our conversion from a Subchapter S corporation to a “C” corporation on our historical financial position and results of operations. The pro forma consolidated balance sheet data assumes that the spin-off, the cash distribution and conversion to a “C” corporation were consummated at the end of the indicated period. The pro forma consolidated income statement data assumes that the spin-off and conversion to a “C” corporation were consummated on January 1 of the earliest indicated period. The following information should be read in conjunction with our audited consolidated financial statements, including the notes thereto, and our unaudited pro forma consolidated financial information beginning on page 33 of this prospectus. The unaudited pro forma consolidated financial information is intended for informational purposes only and is not necessarily indicative of our future financial position or future operating results or of our financial position or operating results that would have actually occurred if the spin-off, the cash distribution and conversion to a “C” corporation had been effective as of the date or for the periods presented.


	As of and for the Three Months Ended March 31,						As of and for the Years Ended December 31,
	2004(1)			2003(1)			2003(1)			2002(1)			2001(1)			2000(1)			1999(1)
	(in thousands, except per share and branch data)
Income Statement Data:
Interest income	$	15,803		$	16,212		$	64,451		$	67,669		$	71,846		$	57,723		$	43,321
Interest expense		4,542			5,083			18,964			24,763			36,719			29,479			19,168

Net interest income		11,261			11,129			45,487			42,906			35,127			28,244			24,153
Provision for loan losses		860			625			2,945			3,250			2,200			2,690			1,150

Net interest income after provision for loan losses		10,401			10,504			42,542			39,656			32,927			25,554			23,003
Gains on sale of securities, net		560			1,492			2,873			4,234			5,449			114			5,773
Other noninterest income		13,557			11,026			48,377			38,371			23,627			17,234			11,979

Total noninterest income		14,117			12,518			51,250			42,605			29,076			17,348			17,752
Noninterest expense		19,901			17,272			72,264			61,240			48,113			31,741			24,052

Income before taxes		4,617			5,750			21,528			21,021			13,890			11,161			16,703
Provision for income taxes		1,524			1,898			7,104			6,937			4,584			3,683			5,512

Net earnings	$	3,093		$	3,852		$	14,424		$	14,084		$	9,306		$	7,478		$	11,191

Common Share Data (2):
Basic earnings per share	$	0.18		$	0.23		$	0.85		$	0.83		$	0.55		$	0.57		$	0.88
Diluted earnings per share		0.18			0.23			0.84			0.82			0.55			0.57			0.87
Book value per share		4.59			4.54			4.53			4.49			3.62			3.34			2.75
Tangible book value per share(3)		3.95			1.98			1.81			2.01			0.99			2.27			1.62
Cash dividends declared per share		0.18			0.22			0.86	(4)		0.77			0.42			0.43			0.76

Weighted average shares outstanding (basic)(5)		16,976			16,971			16,971			16,909			16,955			13,107			12,716
Weighted average shares outstanding (diluted)(5)		17,205			17,097			17,119			16,996			16,997			13,204			12,891
Shares outstanding at end of period(5)		16,979			16,971			16,971			16,971			16,730			13,097			13,218

Balance Sheet Data (at period end):
Total assets	$	1,418,373		$	1,321,336		$	1,352,633		$	1,280,635		$	1,217,671		$	914,542		$	660,867
Securities		212,344			252,183			221,342			268,712			284,256			185,588			181,375
Loans (including loans held for sale)		899,922			797,503			866,459			793,951			688,315			564,761			387,682
Allowance for loan losses		(10,413	)		(9,309	)		(10,096	)		(8,957	)		(7,090	)		(5,682	)		(3,462	)
Total deposits		1,242,718			1,164,732			1,177,156			1,129,154			1,082,362			837,130			605,740
Borrowings and note payable		90,835			75,835			91,205			71,620			69,410			28,941			16,483
Total shareholders’ equity		77,982			77,099			76,915			76,278			60,600			43,809			36,336


	As of and for the Three Months Ended March 31,					As of and for the Years Ended December 31,
	2004(1)			2003(1)		2003(1)			2002(1)			2001(1)			2000(1)			1999(1)
	(in thousands, except per share and branch data)
Selected Financial Ratios and Data:
Performance Ratios and Other Data:
Return on average assets		1.34	%	1.79	%		1.09	%		1.11	%		0.84	%		0.95	%		1.91	%
Return on average equity		16.06		20.37			18.93			20.51			16.04			18.66			33.99
Net interest margin		3.93		4.15			4.11			4.00			3.66			3.84			4.16
Efficiency ratio(6)		80.19		77.96			76.99			75.35			81.89			69.79			66.57

Fee income per deposit account(7)	$	240.27		N/A	(11)	$	231.31		$	211.54		$	161.79		$	135.02		$	154.28
Fee income to total revenue(8)		54.63	%	49.77	%		51.54	%		47.21	%		40.21	%		37.90	%		33.15	%

Asset Quality Ratios(9):
Nonperforming assets to total loans and other real estate		0.89	%	1.16	%		1.32	%		1.16	%		0.71	%		0.31	%		0.44	%
Net charge-offs to average loans		0.24		0.14			0.22			0.19			0.13			0.10			0.09
Allowance for loan losses to total loans		1.16		1.17			1.17			1.13			1.03			1.01			0.89
Allowance for loan losses to nonperforming loans(10)		259.67		341.47			154.97			110.38			179.09			744.69			350.05

Branch Locations (Unaudited):
Traditional		28		25			26			25			24			22			21
In-store		105		88			102			85			64			20			9

Total		133		113			128			110			88			42			30

Number of deposit accounts(7)		170,922		N/A	(11)		155,390			132,636			104,637			72,798			54,813

(1)	Includes the effect of the federal income tax on our earnings as a “C” corporation at the rate of 33%.

(2)	Adjusted for a four-for-one stock split effective September 12, 2001 and a three-for-one stock split effective July 1, 2000.

(3)	Calculated by dividing total assets, less total liabilities, goodwill and intangible assets, by shares outstanding at end of period.

(4)	Does not include a special non-cash dividend to shareholders of 100% of the bank’s ownership interest in a 27-hole golf course, which we acquired in March 2003 upon foreclosure of a loan. The value of such ownership interest at the time of distribution was determined to be $0.285 per share.

(5)

For periods beginning with the year ended December 31, 2001, the number of weighted average shares outstanding has been adjusted to reflect the issuance of 2,929,395 shares of our common stock in this offering equal to the approximate amount necessary to increase our capital account following the spin-off of Delta Card.

(6)	Calculated by dividing total noninterest expense (excluding securities losses) by net interest income before the provision from loan losses plus noninterest income (excluding securities gains).

(7)	For these purposes, deposit accounts exclude money market and time deposits.

(8)	Calculated by dividing noninterest income (excluding securities gains) divided by the sum of net interest income plus noninterest income (excluding securities gains).

(9)	At period end, except for net charge-offs to average loans, which is for periods ended at such dates.

(10)	Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more and restructured loans.

(11)	Information for the three months ended March 31, 2003 is not available.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial information as of March 31, 2004 and for the three months ended March 31, 2004 and the year ended December 31, 2003 is presented to show the impact on our historical financial position and results of operations of:

the proposed distribution to our existing shareholders of our accumulated and undistributed earnings on which they have been or will be subject to federal income tax through the date of our conversion to a “C” corporation and additional taxes to be incurred upon our conversion from a Subchapter S corporation to a “C” corporation;

the proposed spin-off of Delta Card to our shareholders as of a record date prior to completion of this offering; and

the proposed sale of shares of our common stock in this offering and the application of the net proceeds from the sale of such shares, after deducting the underwriting discount and estimated offering expenses, in an amount necessary to increase our capital accounts following the cash distribution to our existing shareholders and the spin-off of Delta Card.

The Unaudited Pro Forma Consolidated Balance Sheet reflects our historical position as of March 31, 2004 with pro forma adjustments based on the assumption that the cash distribution, the spin-off and the conversion to a “C” corporation and this offering were effective March 31, 2004. The Unaudited Pro Forma Consolidated Statements of Earnings assume that each of the transactions listed above were consummated on January 1 of the earliest indicated period. The adjustments are based on information available and certain assumptions that we believe are reasonable.

The following information should be read in conjunction with and is qualified in its entirety by our consolidated financial statements and accompanying notes included with this prospectus.

The unaudited pro forma consolidated financial information is intended for informational purposes and is not necessarily indicative of our future financial position or future operating results or of our financial position or operating results that would have actually occurred had the cash distribution, the spin-off, this offering and the conversion to “C” corporation been in effect as of the date or for the period presented.

Unaudited Pro Forma Consolidated Balance Sheet

As of March 31, 2004


				Pro Forma Adjustments
	Woodforest Historical			Spin-off Transaction			Cash Distribution and “C” Corporation Conversion			Woodforest Pro Forma
	(dollars in thousands)
Assets:
Cash and due from banks	$	77,975		$	(1,188	)(a)	$	(24,000	)(c)	$	117,447
					40,660	(b)		24,000	(d)
Federal funds sold		85,450			—			—			85,450

Total cash and cash equivalents		163,425			39,472			—			202,897
Time deposits in other financial institutions		912									912

Investment securities, held to maturity		10,602									10,602
Investment securities, available for sale		201,742									201,742

		212,344			—			—			212,344

Loans, net of unearned discount		899,922									899,922
Less allowance for loan losses		(10,413	)								(10,413	)

		889,509			—			—			889,509
Bank premises and equipment, net		61,797			(1,863	)(a)					59,934
Bank owned life insurance		22,620									22,620
Accrued interest receivable		6,119									6,119
Intangible assets, net		27,244			(17,930	)(a)					9,314
Goodwill		18,219			(16,534	)(a)					1,685
Other real estate owned		4,038									4,038
Other assets		12,663			(3,662	)(a)					9,001

		152,700			(39,989	)		—			112,711

Total assets	$	1,418,890		$	(517	)	$	—		$	1,418,373

Liabilities and Shareholders’ Equity:
Liabilities:
Deposits		1,242,718									1,242,718
FHLB advances		10,000									10,000
Note payable		33,064									33,064
Subordinated debentures		1,377									1,377
Junior subordinated debentures		46,394									46,394
Accrued interest payable		1,570									1,570
Accounts payable and other liabilities		4,085			(517	)(a)					3,568
Deferred income taxes payable		—						1,700	(f)		1,700

Total liabilities		1,339,208			(517	)		1,700			1,340,391
Shareholders’ equity:
Common stock		14,291			2,929	(b)		1,729	(d)		18,949
Additional paid-in capital		7,873			37,731	(b)		22,271	(d)		61,241
					(5,810	)(a)		(1,324	)(f)
Retained earnings		58,850			(34,850	)(a)		(24,000	)(c)		—
Unrealized gain on securities held for sale		1,074						(376	)(f)		698
Treasury stock (at cost)		(2,406	)								(2,406	)


Total shareholders’ equity		79,682			—			(1,700	)		77,982

Total liabilities and shareholders’ equity	$	1,418,890		$	(517	)	$	—		$	1,418,373

Unaudited Pro Forma Consolidated Statement of Earnings

For the Three Months Ended March 31, 2004


			Pro Forma Adjustments
	Woodforest Historical		Spin-off Transaction			Cash Distribution and “C” Corporation Conversion			Woodforest Pro Forma
	(dollars in thousands, except per share data)
Interest Income:
Loans	$	14,350	$			$			$	14,350
Investment securities		1,251								1,251
Federal funds sold		184								184
Time deposits in other financial institutions		18								18

Total interest income		15,803		—			—			15,803
Interest Expense:
Deposits		3,424								3,424
FHLB advances		56								56
Note payable		247								247
Debentures		16								16
Junior subordinated debentures		799								799

Total interest expense		4,542		—			—			4,542

Net interest income		11,261								11,261
Provision for loan losses		860								860

Net interest income after provision for loan losses		10,401		—			—			10,401
Noninterest Income:
Service charges on deposit accounts		9,747								9,747
Other service charges and fees		2,012								2,012
Merchant income—Delta Card		20,008		(20,008	)(a)					—
Merchant income—Bank		1,350								1,350
Gain on sales of loans		448								448
Gain on sale of investment securities		560								560

Total noninterest income		34,125		(20,008	)		—			14,117
Noninterest Expense:
Salaries and employee benefits		14,050		(3,566	)(a)					10,484
Net occupancy		2,051		(105	)(a)					1,946
Furniture and equipment		1,517		(86	)(a)					1,431
Data processing fees—Bank		974		—						974
Supplies		665		(314	)(a)					351
Telephone		729		(79	)(a)					650
Postage		331		(33	)(a)					298
Professional fees		333		(54	)(a)					279
Merchant processing and interchange fees		12,512		(12,512	)(a)					—
Security		114		—						114
Amortization of intangible assets		674		(379	)(a)					295
Other		5,273		(2,194	)(a)					3,079

Total noninterest expense		39,223		(19,322	)		—			19,901

Earnings before income tax expense		5,303		(686	)		—			4,617
Income tax expense—current period		—		—			(1,524	)(e)		(1,524	)

Net earnings	$	5,303	$	(686	)	$	(1,524	)	$	3,093

Earnings per common share:
Basic	$	0.38							$	0.18
Diluted		0.37								0.18

Unaudited Pro Forma Consolidated Statement of Earnings

For the Year Ended December 31, 2003


			Pro Forma Adjustments
	Woodforest Historical		Spin-off Transaction			Cash Distribution and “C” Corporation Conversion			Woodforest Pro Forma
	(dollars in thousands, except per share data)
Interest Income:
Loans	$	56,881	$			$			$	56,881
Investment securities		7,033								7,033
Federal funds sold		462								462
Time deposits in other financial institutions		75								75

Total interest income		64,451		—			—			64,451
Interest Expense:
Deposits		14,986								14,986
Federal funds purchased		8								8
Note payable		1,174								1,174
Subordinated debentures		66								66
Company obligated mandatorily redeemable trust preferred securities of subsidiary trust		2,730								2,730

Total interest expense		18,964		—			—			18,964

Net interest income		45,487								45,487
Provision for loan losses		2,945					—			2,945

Net interest income after provision for loan losses		42,542		—			—			42,542
Noninterest Income:
Service charges on deposit accounts		33,311								33,311
Other service charges and fees		7,432								7,432
Merchant income—Delta Card		75,895		(75,895	)(a)					—
Merchant income—Bank		6,106		—			—			6,106
Gain on sales of loans		1,528								1,528
Gain on sale of investment securities		2,873								2,873

Total noninterest income		127,145		(75,895	)		—			51,250
Noninterest Expense:
Salaries and employee benefits		50,559		(13,781	)(a)					36,778
Net occupancy		7,813		(352	)(a)					7,461
Furniture and equipment		6,143		(287	)(a)					5,856
Data processing fees—Bank		3,331		—						3,331
Supplies		2,180		(314	)(a)					1,866
Telephone		3,031		(313	)(a)					2,718
Postage		1,260		(27	)(a)					1,233
Professional fees		1,180		(54	)(a)					1,126
Merchant processing and interchange fees		48,141		(48,141	)(a)					—
Security		467		—						467
Amortization of intangible assets		2,694		(1,516	)(a)					1,178
Other		18,867		(8,617	)(a)					10,250

Total noninterest expense		145,666		(73,402	)		—			72,264

Earnings before income tax expense		24,021		(2,493	)		—			21,528
Income tax expense—current period		—		—			(7,104	)(e)		(7,104	)

Net earnings	$	24,021	$	(2,493	)	$	(7,104	)	$	14,424

Earnings per common share:
Basic	$	1.71							$	0.85
Diluted		1.69								0.84

Notes to Unaudited Pro Forma Consolidated Financial Statements

(a)	This adjustment represents the spin-off of our Delta Card subsidiary.

(b)

This adjustment represents the issuance of 2,929,395 shares of our common stock in this offering equal to the approximate amount necessary to increase our capital account following the spin-off of Delta Card, assuming an offering price of $15.00 per share and after deducting the underwriting discounts and commissions and other offering expenses attributable to such shares, for a net of $13.88 per share.

(c)	This adjustment reflects the distribution to our existing shareholders of our accumulated and undistributed earnings immediately prior to completion of this offering.

(d)

This adjustment reflects the issuance of 1,729,107 shares of our common stock in this offering equal to the approximate amount necessary to increase our capital account following the cash distribution to our existing shareholders, assuming an offering price of $15.00 per share and after deducting the underwriting discounts and commissions and other offering expenses attributable to such shares, for a net of $13.88 per share.

(e)	This adjustment represents the federal income tax expense on our earnings as a “C” corporation at the rate of 33.0%. The effective tax rate is lower than the statutory rate due to the effect of our tax-free investment income.

(f)	This adjustment represents the net deferred tax liability incurred upon our conversion from a Subchapter S corporation to a “C” corporation. The total deferred tax liability of $1.7 million includes $376,000 related to the tax effect of the unrealized gain on securities available-for-sale.

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 our balance sheets and statements of earnings. This section should be read in conjunction with our audited consolidated financial statements and related notes as of December 31, 2003 and 2002 and for each of the three years ended December 31, 2003 and our unaudited interim consolidated financial statements and related notes as of and for the three months ended March 31, 2004 and 2003 which are included in this prospectus.

We are currently a Subchapter S corporation. As such, there is no federal income tax included in our historical financial results included in this discussion. However, in connection with this offering, we intend to distribute to our existing shareholders approximately $24.0 million in our accumulated and undistributed S corporation earnings on which they have been or will be subject to federal income tax through the date of our conversion to a “C” corporation, spin-off the ownership interests in our wholly-owned subsidiary, Delta Card, to our existing shareholders as of a record date prior to completion of this offering and convert from a Subchapter S corporation to a “C” corporation for federal income tax purposes.

Except where otherwise indicated, the following discussion and analysis is based on our historical financial condition and results of operation and does not give effect to completion of these transactions. We have included elsewhere in this prospectus pro forma financial information which shows the effect of the distribution of our accumulated and undistributed earnings to our existing shareholders, the spin-off of Delta Card to our existing shareholders and the conversion to a “C” corporation on our historical financial condition and results of operation had these events been effective as of the dates or for the periods indicated.

General

We generate earnings from several sources. We attract customer deposits through our branch locations. These deposits include noninterest-bearing demand deposit transaction accounts, interest-bearing NOW and money market transaction accounts, savings accounts, and various termed time deposits such as certificates of deposit and individual retirement accounts. With the funds deposited at our branches, we originate loans to individuals, small businesses to finance business operations, purchases of real estate or other business opportunities primarily in the markets where our traditional branches are located and to community institutions such as schools, churches and medical facilities. Our net interest income represents the difference between the interest income on earning assets such as loans and securities and interest expense on liabilities such as customer deposits and other borrowed funds. Net interest income represented 26.3% of our revenue during 2003. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect our net interest income.

Fee income from deposit accounts and other fee-based services is another significant source of income for us, representing 23.6% of our revenue during 2003. Generally, we receive the largest portion of our fee income from our deposit customers in the form of service fees, CheckPay fees and also fees for other services. Other services such as safe deposit, wire transfer, notary and official and consigned item sales provide additional fee income. We also earn fees from merchant processing and non-deposit investment and insurance services. The fees collected by us are presented in our Statement of Earnings under “noninterest income.”

Fee income from Delta Card represented 44.0% of our revenue during 2003. Not including Delta Card, net interest income would have represented 47.0% of our revenue during 2003 and fee income from deposit accounts and other fee-based services would have represented 50.0% of our revenue during 2003.

We also from time to time generate earnings through the sale of securities which are categorized on our Balance Sheet as “available-for-sale.” While it is not uncommon to see gains on sales of securities in a declining interest rate environment, they are generally not consistent from one quarter to the next. This inconsistency is directly related to the availability and/or the market for these types of assets that we might want to sell.

Sale of loans is another source of revenue for us. The two types of loans that we typically sell are SBA and student loans. Gains on the sale of loans are more consistent than gains on the sale of securities, but they depend on the amount of these types of loans that we originate.

Offsetting these noninterest earnings are operating expenses referred to as “noninterest expense.” Because banking is a very service-oriented industry, our largest operating expense is employee compensation and benefits.

Critical Accounting Policies

Our accounting policies are integral to understanding our reported results. Our significant accounting policies are described in detail in Note A to our consolidated financial statements included in this prospectus. The policies related to the allowance for loan losses and the amortization periods for purchased merchant portfolios require a significant amount of subjective and complex judgment and a number of assumptions by our management. Because of the nature of the judgments and assumptions made by our management, actual results could differ from these judgments and assumptions, which could have a material impact on our financial condition and results of operations.

Allowance for Loan Losses—The allowance for loan losses is a valuation allowance for probable losses incurred on loans. Loans are charged to the allowance when the loss is confirmed or when a determination is made that a probable loss has occurred on a specific loan. Recoveries are credited to the allowance at the time of recovery. Throughout the year, management estimates the probable level of losses to determine whether the allowance for loan losses is adequate to absorb losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate to absorb losses. Management’s judgment as to the level of probable losses on existing loans involves the consideration of current economic conditions and their estimated effects on specific borrowers; an evaluation of the existing relationships among loans, potential loan losses and the present level of the allowance; results of examinations of the loan portfolio by regulatory agencies; and management’s internal review of the loan portfolio. In determining the collectibility of certain loans, management also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond our control. Please refer to the subsequent discussion of “Allowance for Loan Losses” beginning on page 51 as well as Note A to the consolidated financial statements in this prospectus for additional insight into management’s approach and methodology in estimating the allowance for loan losses.

Purchased Merchant Account Relationships—The purchased merchant portfolios are intangible assets that have finite lives. The useful lives of these portfolios must be estimated to establish the amortization period. The useful life is evaluated at each reporting period to ensure whether events and circumstances warrant a revision in the remaining useful life.

For the Three Months Ended March 31, 2004 and 2003

Overview

Net income for the three months ended March 31, 2004 was $5.3 million compared with $6.3 million for the three months ended March 31, 2003, a decrease of 15.3%. Diluted earnings per share were $0.37 for the three months ended March 31, 2004 compared with $0.44 for the three months ended March 31, 2003, a decrease of $0.07 or 15.9%. The decrease in net income and diluted earnings per share was primarily due to gains on the sales of securities of $1.5 million in the first quarter of 2003 compared with $560,000 in the first quarter of 2004. We posted pre-tax returns on average assets of 1.54% and 1.95% for the three months ended March 31, 2004 and 2003, respectively. Our pre-tax returns on average equity were 27.15% and 33.12% for the three months ended March 31, 2004 and 2003, respectively.

Total assets increased $97.2 million or 7.4% to $1.4 billion at March 31, 2004, from $1.3 billion at March 31, 2003 primarily due to growth in loans. Both deposits and borrowings funded the growth in earning assets. Deposits increased $78.0 million or 6.7% to $1.2 billion at March 31, 2004 compared with March 31, 2003. Demand, interest checking, money market and savings account balances increased $56.3 million or 15.6% for the three months ended March 31, 2004 compared with the same period in 2003 and certificates of deposit decreased $12.5 million or 2.4%.

Total assets increased $65.6 million or 4.8% at March 31, 2004 compared with December 31, 2003 primarily due to growth in loans. Deposits at March 31, 2004 increased $65.6 million or 5.6% from their level at December 31, 2003 while borrowings decreased by $370,000.

After giving effect to the spin-off of Delta Card to our shareholders as of a record date prior to completion of this offering and the conversion to a “C” corporation, our net income for the three months ended March 31, 2004 and 2003 would have been $3.1 million and $3.9 million, respectively. The lower net income compared with our reported net income is due to the combined effect of decreases in the noninterest income and noninterest expense attributable to Delta Card as well as the inclusion of income tax expense of $1.5 million and $1.9 million for the first three months of 2004 and 2003, respectively, estimated at a rate of 33%.

On a pro forma basis after giving effect to the spin-off of Delta Card and the conversion to a “C” corporation, our returns on average assets would have been 1.34% and 1.79% for the three months ended March 31, 2004 and 2003, respectively, and our returns on average equity would have been 16.06% and 20.37% for these same periods, respectively.

Results of Operations

Net Interest Income

Our operating results depend on our net interest income, which is the difference between interest income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as deposits and borrowings. Operating results are also affected by the level of our noninterest income, including fees and service charges on deposits, merchant income and income or loss from the sale of loans and securities, and by the level of our operating expenses, including compensation, premises and equipment, bank data processing, merchant processing and interchange and telecommunications expense.

Net interest income for the three months ended March 31, 2004 was $11.3 million, an increase of 1.2% from $11.1 million for the three months ended March 31, 2003. The increase in net interest income was mainly due to the growth in earning assets resulting from increased loan originations and a decrease in interest expense on deposits. Average earning assets increased 5.9% to $1.2 billion for the three months ended March 31, 2004 compared with $1.1 billion for the three months ended March 31, 2003. Over the same time period, our loan portfolio increased 12.8% while our investment securities portfolio decreased by 15.8%. Some of the increase in our net interest income was due to the shift in interest-earning assets from lower-yielding investment securities to higher-yielding loans. This was partially offset by the increase in our holdings of federal funds sold.

The growth in earning assets more than offset the effect of the decrease in the net interest margin to 3.93% for the three months ended March 31, 2004 from 4.15% for the same period in 2003. The decrease in the net interest margin was primarily due to a decrease in both our lending rates and the rate we earned on investment securities, which was partially offset by decreasing costs on our interest-bearing liabilities.

Our yield on total interest-earning assets was 5.51% for the three months ended March 31, 2004, a decrease from 6.04% for the three months ended March 31, 2003. For the three months ended March 31, 2004, the yield on average loans was 6.53%, down from 7.17% for the three months ended March 31, 2003, while the yield on average securities decreased from 3.10% for the three months ended March 31, 2003 to 2.32% for the same period in 2004. We were also able to increase our noninterest-bearing demand deposits and interest-bearing deposits and minimize our reliance on higher cost liabilities, such as certificates of deposit and Federal Home Loan Bank advances.

The following table presents for the periods indicated the average balances, the interest earned or paid on such amounts and the weighted average yields for each major category of interest-earning assets and interest-bearing liabilities. Calculations have been made utilizing quarterly average balances and nonaccruing loans are reflected in the tables as loans carrying a zero yield.


	For the Three Months Ended March 31,
	2004						2003
	Average Outstanding Balance		Interest Earned/ Paid		Average Yield/ Rate(1)		Average Outstanding Balance		Interest Earned/ Paid		Average Yield/ Rate(1)
	(dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	883,191	$	14,350	6.53	%	$	795,727	$	14,075	7.17	%
Investment securities		216,843		1,251	2.32			260,447		1,989	3.10
Time deposits in other financial institutions		1,690		18	4.28			5,584		38	2.83
Federal funds sold		51,527		184	1.44			27,102		110	1.65

Total interest-earning assets		1,153,251		15,803	5.51			1,088,860		16,212	6.04

Less allowance for loan losses		10,254						9,133

Total interest-earning assets, net of allowance		1,142,997						1,079,727
Noninterest-earning assets		244,032						221,821

Total assets	$	1,387,029					$	1,301,548

Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits	$	926,448	$	3,424	1.49	%	$	879,381	$	4,149	1.91	%
FHLB advances		10,000		56	2.21			—		—
Note payable		33,064		247	3.00			35,664		315	3.58
Subordinated debentures		2,259		16	2.85			8,064		3	0.15
Trust preferred securities		—		—	—			30,000		616	8.33
Junior subordinated debentures		46,394		799	7.15			—		—	—

Total interest-bearing liabilities		1,018,165		4,542	1.80			953,109		5,083	2.16

Noninterest-bearing liabilities:
Demand deposits		283,489						267,562
Accrued interest payable		1,760						2,584
Accounts payable		3,150						—
Other liabilities		1,916						1,605

Total liabilities		1,308,480						1,224,860
Shareholders’ equity		78,549						76,688

Total liabilities and shareholders’ equity	$	1,387,029					$	1,301,548

Net interest income			$	11,261					$	11,129

Net interest spread					3.71	%					3.88	%

Net interest margin					3.93	%					4.15	%

(1)	Annualized

The following table presents information regarding changes in interest income and interest expense for the periods indicated for each major category of interest-earning asset and interest-bearing liability and distinguishes between the changes attributable to changes in volume (changes in volume multiplied by old rate) and changes in rates (changes in rates multiplied by new volume). The dollar amount of changes in interest income and interest expense attributable to changes in rate/volume (change in rate multiplied by change in volume) have been allocated between rate and volume variances based on the percentage relationship of such variances to each other.


	For the Three Months Ended March 31, 2004 compared with the Three Months Ended March 31, 2003
	Increase (Decrease) Due to Change in
	Volume			Rate			Total
	(dollars in thousands)
Interest-earning assets:
Loans	$	1,548		$	(1,272	)	$	276
Securities		(333	)		(405	)		(738	)
Federal funds sold		99			(26	)		73
Time deposits in other financial institutions		(27	)		7			(20	)

Total increase (decrease) in interest income		1,287			(1,696	)		(409	)

Interest-bearing liabilities:
Interest-bearing deposits		222			(947	)		(725	)
Note payable		(23	)		(45	)		(68	)
Junior subordinated debentures		308			(124	)		184
Other borrowings		2			66			68

Total increase (decrease) in interest expense		509			(1,050	)		(541	)

Increase (decrease) in net interest income	$	778		$	(646	)	$	132

Provision for Loan Losses

The provision for loan losses is a current charge to earnings made in order to adjust our allowance for loan losses to a level deemed appropriate by management to absorb the inherent risk in lending based on an evaluation of the current economic conditions and their estimated impact on borrowers; the existing relationships among loans, potential losses and the current value of the allowance; examinations by regulatory agencies and management’s internal review of the loan portfolio. The provision for loan losses for the three months ended March 31, 2004 was $860,000 compared with $625,000 for the three months ended March 31, 2003. The increase in the provision was driven by charge-offs and the growth in the loan portfolio and the fact that a majority of the loan portfolio increase was in the commercial real estate and construction loan categories, which are considered a higher risk than consumer mortgage loans.

Noninterest Income

Noninterest income for the three months ended March 31, 2004 was $34.1 million, an increase of 15.6% from $29.5 million for the three months ended March 31, 2003. This increase was partially offset by a $932,000 decrease in the gain on sales of securities. Service charges on deposit accounts for the three months ended March 31, 2004 were $9.7 million, an increase of 33.2% from $7.3 million compared with the same period in 2003. Other service charges and fees increased 11.8% while merchant income increased 17.5% for the three months ended March 31, 2004 compared with the same period in 2003.

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


	For the Three Months Ended March 31,
	2004		2003
	(dollars in thousands)

Service charges on deposit accounts	$	9,747	$	7,317
Merchant income—bank		1,350		1,368
Gain on sale of loans		448		542
Gain on sale of investment securities		560		1,492
Other service charges and fees		2,012		1,799

Subtotal		14,117		12,518
Merchant income—Delta Card		20,008		17,007

Total noninterest income	$	34,125	$	29,525

The largest increase between the comparative periods was a $3.0 million increase in Merchant income-Delta Card. This line item represents Delta Card’s earnings, excluding the net income we receive under the terms of our operating agreement with Delta Card, which is included under Merchant income-bank. Merchant income-bank also includes income that we receive from the merchant portfolios that we own directly. Following the spin-off of Delta Card, we will no longer receive the income reported under Merchant income-Delta Card, but will continue to receive the income reported under Merchant income-bank.

Not including the income reported under Merchant income-Delta Card, noninterest income would have been $14.1 million and $12.5 million for the three months ended March 31, 2004 and 2003, respectively. The reduction in noninterest income caused by excluding Merchant income-Delta Card is partially offset by a reduction in noninterest expense attributed to Delta Card. For the three months ended March 31, 2004 and 2003, noninterest expense attributable to Delta Card was $19.3 million and $16.5 million, respectively. After giving effect to this noninterest expense, the portion of our net income attributable to Delta Card was $686,000 and $527,000 for the three months ended March 31, 2004 and 2003, respectively.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2004 was $39.2 million, an increase of 16.2% compared with $33.8 million for the three months ended March 31, 2003. At March 31, 2003, we had 113 branch locations while at March 31, 2004 we had increased to 133 branch locations. Increased expenses resulting from additional branch locations accounted for a substantial portion of the increase in noninterest expense. Employee compensation also increased primarily due to additional employees, normal pay increases and increased insurance costs. Data processing expenses for both the bank and our merchant processing subsidiary increased primarily due to increased volume.

Not including noninterest expense attributable to Delta Card, our noninterest expense would have been $19.9 million and $17.3 million for the three months ended March 31, 2004 and 2003, respectively. For these same time periods, noninterest expense attributable to Delta Card was $19.3 million and $16.5 million, respectively.

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


	For the Three Months Ended March 31,
	2004		2003
	(dollars in thousands)

Noninterest expense—excluding Delta Card:
Salaries and employee benefits	$	10,484	$	8,758
Non-staff expenses:
Premises and equipment		3,377		3,084
Bank data processing expense		974		711
Telephone		649		634
Postage		299		296
Professional fees		279		316
Amortization of intangible assets		295		293
Other noninterest expense		3,544		3,195

Total non-staff expenses excluding Delta Card		9,417		8,529

Total noninterest expense excluding Delta Card		19,901		17,287

Noninterest expense—Delta Card:
Salaries and employee benefits		3,566		3,092
Merchant processing and interchange		10,436		8,773
Other noninterest expense		5,320		4,615

Total noninterest expense—Delta Card		19,322		16,480

Total noninterest expense	$	39,223	$	33,767

Excluding Delta Card, salaries and employee benefits expense increased 19.7% to $10.5 million for the three months ended March 31, 2004 compared with $8.8 million in the same period in 2003. This increase was primarily due to a larger employee base, increased insurance costs and normal, recurring employee pay raises. Non-staff expenses, excluding Delta Card, increased from $8.5 million for the three months ended March 31, 2003 to $9.4 million for the same period in 2004. This 10.4% increase in non-staff expenses, exclusive of Delta Card, principally resulted from the increased number of branch locations in 2004 compared with 2003.

Delta Card salaries and employee benefit expenses increased 15.3% to $3.6 million compared with $3.1 million in the same period in 2003. This increase resulted from an increased number of employees, as well as from normal, recurring pay raises. Delta Card’s merchant processing and interchange expenses totaled $10.4 million for the three months ended March 31, 2004 versus $8.8 million during the same period in 2003. The 19.0% increase in these expenses resulted from increased transaction volume at Delta Card and corresponds with the increase in Delta Card revenues. Similarly, other Delta Card noninterest expenses increased 15.3% to $5.3 million during 2004 as a result of Delta Card’s increased business activity.

The efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of our performance and is not defined under generally accepted accounting principles. The efficiency ratio is calculated by dividing total noninterest expense, excluding securities losses, by net interest income before the provision for loan losses plus noninterest income, excluding securities gains. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio was 87.50% at March 31, 2004, a slight increase from 86.23% at March 31, 2003. The increase in the efficiency ratio is due to the additional expenses associated with our rapid expansion and our extensive in-store branch network.

Income Taxes

We elected Subchapter S filing status for the fiscal year commencing January 1, 1998. The financial data presented in this discussion has not been adjusted to give effect to federal income taxes. However, in connection with this offering, we intend to convert from a Subchapter S corporation to a “C” corporation. Had we been taxed as a “C” corporation at a rate of 33.0% for the three months ended March 31, 2004 and 2003, our federal income tax expense would have been $1.7 million and $1.9 million, respectively.

Goodwill

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all future business combinations. Additionally, SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Further, SFAS No. 142 requires that intangible assets with finite lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets to Be Disposed Of,” and subsequently, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The provisions of SFAS Nos. 141 and 142 became effective as of July 1, 2001 and January 1, 2002, respectively.

As of the date of adoption, we had unamortized goodwill in the amount of $12.3 million and unamortized identifiable intangible assets with finite lives in the amount of $31.8 million. Amortization expense related to intangible assets was $684,000 for the three months ended March 31, 2004 and $672,000 for the same period in 2003.

Financial Condition

Loan Portfolio

Total loans increased $102.4 million or 12.8% from $797.5 million at March 31, 2003 to $899.9 million at March 31, 2004, with the increase being primarily in commercial real estate and consumer mortgage loans. Our loans are generated mainly in our primary market in Montgomery and Harris Counties where our traditional branches are located. Consistent with our focus on real estate lending and relationship banking, we have steadily increased our real estate loan portfolio, including commercial real estate loans and construction/land development loans.

The following table summarizes the composition of our loan portfolio by type of loan as of the dates indicated:


	As of March 31, 2004					As of March 31, 2003
	Amount			Percent		Amount			Percent
	(dollars in thousands)

Commercial and industrial	$	107,176		11.9	%	$	89,462		11.2	%
Real estate:
Commercial real estate		342,170		38.0			253,798		31.8
Consumer mortgage		84,617		9.4			90,044		11.3
Construction and land development		263,124		29.2			256,585		32.2
Consumer		19,556		2.2			29,088		3.6
Student		15,871		1.8			7,429		0.9
SBA		37,921		4.2			27,669		3.5
Obligations of state/political		24,117		2.7			31,737		4.0
Other		5,370		0.6			11,691		1.5

Total loans		899,922		100.0	%		797,503		100.0	%
Allowance for loan losses		(10,413	)				(9,309	)

Net loans	$	889,509				$	788,194

Our primary lending focus is on commercial real estate, construction and land development, consumer mortgage and commercial loans to small-medium sized businesses. For business customers, we offer commercial loans, commercial real estate loans, equipment loans, working capital loans, term loans, revolving lines of credit and letters of credit. Most commercial loans are collateralized and on payment programs. The purpose of a particular loan generally determines its structure. In almost all cases, we require personal guarantees on commercial loans to help ensure repayment. The following is a discussion of our major types of lending:

Commercial and Industrial

Our commercial loans are typically made within our primary market areas and are underwritten on the basis of the borrower’s ability to service the debt from income. As a general practice, we take as collateral equipment, other assets owned by the borrower or a lien on any available real estate, and obtain the personal guaranty of the borrower. In general, commercial loans involve more credit risk than residential and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial loans is due to the type of collateral securing these loans. The increased risk also derives from the expectation that commercial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Based on our experience, these types of loans have higher delinquencies than mortgage loans. As a result of these additional complexities, variables and risks, commercial loans require more thorough underwriting and servicing than other types of loans. At March 31, 2004, we had $107.2 million in commercial loans, which represented 11.9% of our total loans.

Commercial Real Estate

In addition to commercial loans secured by real estate, we make commercial mortgage loans to finance the purchase of real property, which generally consists of real estate with completed structures. Commercial mortgage lending typically involves higher loan-to-value amounts and the repayment of loans is dependent, in large part, on sufficient income from the operating entity occupying the facility for owner occupied real estate or sufficient rental income from tenants occupying income producing property securing the loans to cover operating expenses and debt service. As a general practice, we require our commercial mortgage loans to be secured, in the case of owner-occupied property, by well-managed small-to-medium sized businesses and, in the case of income producing property, by leases from creditworthy tenants. Generally, in both cases, we require loans to be

guaranteed by responsible parties. We look for opportunities where cash flow from the business or property collateral provides adequate debt service coverage and the guarantor’s net worth is based on assets other than the project we are financing.

In underwriting owner occupied commercial mortgage loans, we consider the business’s operating history, future operating projections, location and physical condition of the property. The underwriting analysis also includes credit checks, appraisals and a review of the financial condition of the borrower.

In underwriting loans secured by income-producing properties, we consider the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit checks, appraisals and a review of the financial condition of the borrower and tenants.

Our commercial mortgage loans are generally secured by first liens on real estate, typically have fixed interest rates and amortize over a 10 to 20 year period with balloon payments due at the end of one to five years. Payments on loans secured by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. At March 31, 2004, we had $342.2 million in commercial real estate loans, which represented 38.0% of our total loans.

Consumer Mortgage

We offer a variety of mortgage loan products which generally are amortized over five to 25 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 90% of appraised value. Of the consumer mortgage loans originated, our fixed rate loans generally have shorter terms.

We retain a valid lien on real estate and obtain a title insurance policy that insures that the property is free of encumbrances. We also require hazard insurance in the amount of the loan and, if the property is in a flood plain as designated by the Department of Housing and Urban Development, we also require flood insurance. We also require most borrowers to advance funds on a monthly basis from which we make disbursements for items such as real estate taxes, private mortgage insurance and hazard insurance. As of March 31, 2004, we had $84.6 million in consumer mortgage loans, which represented 9.4% of our total loans.

Construction/Land Development

We also make loans to finance the construction of residential and nonresidential properties. Construction loans generally are secured by first liens on real estate. We conduct periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described above are also used in our construction lending activities. In keeping with the community-oriented nature of our customer base, we provide financing for construction of residential properties, churches, medical facilities, and residential lot developments located within our market area. Construction loans involve additional risks because the loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, there is no assurance that we will be able to recover all of the unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While we have underwriting procedures designed to identify what we believe to be acceptable levels of risks in construction lending, we can give no assurance that these procedures will prevent losses from the risks described above.

At March 31, 2004, we had $263.1 million in construction/land development loans, which represented 29.2% of our total loans. Approximately $69.0 million in construction loans were loans to local builders and individuals to finance residential construction. Approximately $141.6 million of the remaining construction loans were loans to finance residential lots and land for development into residential lots to individuals and local builders. The remainder of the construction loans of $52.5 million was for the construction of owner occupied commercial real estate.

SBA and Student Loans

We provide alternative financing options to small businesses through the federally guaranteed programs offered by the SBA. The SBA program is an economic development program which finances the expansion of small businesses. We are a “Preferred Lender” in the Houston District. As an SBA Preferred Lender, our preapproved status allows us to quickly respond to customers’ needs. Under the SBA program, we originate and fund SBA 7(a) loans which qualify for guarantees up to 75% of principal and accrued interest. We typically use SBA 7(a) loans to fund loans secured by items other than real estate, such as machinery, equipment, furniture, fixtures, inventory and in some instances, working capital and debt refinancings. We also originate 504 chapter loans, which are primarily secured by real estate, and which give borrowers access to 90% financing for a project. We often sell these loans in the secondary market at a premium.

We provide SBA loans to potential borrowers who are proposing a business venture, often with existing cash flow as the source of repayment and what we believe to be a better than average reasonable chance of success. We do not treat the SBA guarantee as a substitute for a borrower meeting our credit standards, and except for minimum capital levels or maximum loan terms, the borrower must meet our other credit standards as applicable to loans outside the SBA programs.

We provide student loans to students at approximately 50 schools in the government guarantee student loan program from the U.S. Department of Education. We offer both Stafford and Plus loans through this program. We market these programs and outsource the underwriting of these loans. We often sell these loans in the secondary market at a premium. At March 31, 2004, we had $53.8 million in SBA and student loans, which represented 6.0% of our total loans.

Consumer

We provide a wide variety of consumer loans including motor vehicle, watercraft, education, personal (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 72 months and vary based upon the nature of collateral and size of loan. Consumer loans are subject to greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness, personal bankruptcy or similar factors. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. We have initiated very few indirect consumer loans, indicating a preference to maintain personal banking relationships and strict underwriting standards. Installment loans have decreased during the last five years, reflecting management’s tight control of consumer credit due to record high personal bankruptcy filings nationwide during that period. At March 31, 2004, we had $19.6 million in consumer loans, which represented 2.2% of our total loans.

Underwriting Strategy

Because future loan losses are closely related to our underwriting policy, we have instituted what we believe is a conservative loan underwriting policy. We have a standing Executive Loan Committee comprised of certain

of our officers, each of whom has a defined lending authority as an individual and in combination with other officers. These individual lending authorities are determined by the senior lending officer and are based on the loan officer’s title and lending experience. The loan officer who sponsors a loan is primarily responsible for the customer’s relationship with us, including, among other things, obtaining and maintaining adequate credit file information.

The approvals required differ based on the size of the borrowing relationship. At least one regional president or senior lending officer and one executive vice president or more senior officer must approve all loans in the amount of $500,000 or more. Our Executive Loan Committee must approve all lending relationships in the amount of $1.0 million or more. Our board of directors must approve all loans in an amount equal to or greater than 50% of our legal lending limit, which was $18.0 million per relationship as of March 31, 2004.

Our strategy for approving or disapproving loans is to follow a conservative loan policy and underwriting practices which include, among other things:

granting loans on a sound and collectible basis;

investing funds properly for the benefit of our shareholders and the protection of our depositors;

serving the legitimate needs of the community and our general market area while obtaining a balance between maximum yield and minimum risk;

securing adequate primary and secondary sources of repayment in relation to the amount of the loan;

developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each category; and

properly documenting each loan and, if appropriate, obtaining adequate insurance coverage.

Our loan review and compliance personnel interact daily with commercial, mortgage and consumer lenders to identify potential underwriting or technical exception variances. In addition, we emphasize the early identification of problem loans to aggressively seek resolution of the situations, and thereby keep loan losses at a minimum.

The following table sets forth the contractual maturity ranges of the primary categories of our loan portfolio and the amount of those loans with predetermined and floating interest rates in each maturity range as of March 31, 2004:


	As of March 31, 2004
			After 1 Year Through 5 Years				After 5 Years				Total
	One Year or Less		Fixed Rate		Floating Rate		Fixed Rate		Floating Rate		Total
	(dollars in thousands)

Commercial and industrial	$	52,250	$	26,593	$	23,535	$	848	$	3,950	$	107,176
Real estate:
Commercial real estate		85,010		82,227		106,170		11,854		56,909		342,170
Consumer mortgage		9,269		31,095		963		40,882		2,408		84,617
Construction and land development		145,890		59,357		36,910		11,201		9,766		263,124
Consumer		7,229		11,077		773		477		—		19,556
Student		—		—		—		—		15,871		15,871
SBA loans		1,328		—		2,688		1,095		32,810		37,921
Obligations of state/political		—		19,740		—		4,377		—		24,117
Other		5,370		—		—		—		—		5,370

Total loans	$	306,346	$	230,089	$	171,039	$	70,734	$	121,714	$	899,922

Scheduled contractual principal repayments do not reflect the actual maturities of loans. The average maturity of loans is substantially less than their average contractual term because of prepayments. The average life of mortgage loans tends to increase when the current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan rates are substantially lower than existing mortgage loan rates (due to refinancings of adjustable rate and fixed rate loans at lower rates).

Loan Concentrations

Our concentrations are monitored by industry, loan type and geographic area. We have two industry risk concentrations: loans to religious organizations and loans to the medical industry. The following table outlines these concentrations as of March 31, 2004 and 2003:


	As of March 31, 2004				As of March 31, 2003
	Loans Outstanding		% of Total Loans		Loans Outstanding		% of Total Loans
	(dollars in thousands)

Religious organizations	$	86,959	9.7	%	$	69,116	8.7	%
Medical industry		76,234	8.5			44,198	5.5

Our loan type concentrations are centered on loans secured by various types of real estate. As of March 31, 2004, loans collateralized by real estate accounted for 80.0% of total loans. Since our primary lending market is the greater Houston metropolitan area, our loan portfolio primarily consists of customers conducting business in that market.

Nonperforming Assets

Nonperforming assets were $8.1 million at March 31, 2004 compared with $9.3 million at March 31, 2003, reflecting our continued strong asset quality. Our ratio of nonperforming assets to total loans and other real estate owned was 0.89% at March 31, 2004 and 1.16% at March 31, 2003.

We generally place a loan on nonaccrual status and cease to accrue interest when it becomes 90 days past due. We also place loans on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is classified nonaccrual are recorded as a reduction of principal as long as doubt exists as to future collections.

We maintain current appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential problem loans. In instances where updated appraisals reflect reduced collateral values, we evaluate the borrower’s overall financial condition to determine the need, if any, for possible writedowns to their net realizable values. We record other real estate owned at fair value at the time of acquisition, less our estimated costs to sell.

The following table sets forth information regarding our nonperforming assets as of the dates indicated:


	As of March 31, 2004			As of March 31, 2003
	(dollars in thousands)

Nonaccrual loans	$	3,814		$	2,087
Accruing loans past due 90 days or more		196			639
Restructured loans		—			—
Repossessed assets		38			206
Other real estate owned		4,038			6,376

Total nonperforming assets	$	8,086		$	9,308

Nonperforming assets to total loans and other real estate		0.89	%		1.16	%

Our loss and delinquency experience on our residential real estate loan portfolio has been limited by a number of factors, including our underwriting standards. Whether our loss and delinquency experience in this area of our portfolio will increase significantly depends upon the value of the real estate securing loans and economic factors such as increases in unemployment as well as the overall economy of the region.

At March 31, 2004 and 2003, loans totaling $10.8 million and $8.2 million, respectively, were classified as potential problem loans that are not reported in the table above. Through our internal loan review process, we have classified these loans as substandard. These loans are subject to management attention and their classification is reviewed on a quarterly basis. Interest on nonperforming loans that would have been accrued under the original loan agreements was $257,000 and $192,000 at March 31, 2004 and March 31, 2003, respectively.

Net charge-offs were $543,000 for the three months ended March 31, 2004 compared with $273,000 for the same period in 2003, which contributed to the increase in the provision for loan losses. As a percentage of average loans, these net charge-offs were 0.24% as of March 31, 2004 and 0.14% as of March 31, 2003. The allowance for loan losses at March 31, 2004 was $10.4 million, or 1.16% of total loans compared with $9.3 million at March 31, 2003, or 1.17% of total loans.

Allowance for Loan Losses

The following table summarizes activity in our allowance for loan losses during the periods indicated:


	As of and for the Three Months Ended March 31, 2004			As of and for the Three Months Ended March 31, 2003
	(dollars in thousands)

Total loans at end of period	$	899,922		$	797,503

Average loans outstanding	$	883,191		$	795,727

Allowance at beginning of period	$	10,096		$	8,957
Provision for loan losses		860			625
Charge-offs:
Commercial and industrial		(84	)		(244	)
Real estate—mortgage		(50	)		(30	)
Real estate—construction		(420	)		—
Consumer and other		(24	)		(36	)

Total charge-offs		(578	)		(310	)
Recoveries:
Commercial and industrial		6			6
Real estate—mortgage		17			28
Real estate—construction		—			—
Consumer and other		12			3

Total recoveries		35			37

Net charge-offs		(543	)		(273	)


Allowance for loan losses at end of period	$	10,413		$	9,309

Ratio of allowance for loan losses to end of period loans		1.16	%		1.17	%
Ratio of net charge-offs to average loans outstanding		0.24	%		0.14	%
Ratio of allowance for loan losses to nonperforming loans		259.67	%		341.47	%

Our allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. Management evaluates the adequacy of the allowance at least quarterly. In addition, on a quarterly basis our board of directors reviews our loan portfolio, conducts an evaluation of the credit quality and reviews the adequacy of the provision for loan losses, recommending changes as may be required. In evaluating the adequacy of the allowance, management considers the growth, composition and industry diversification of the portfolio, loan loss experience, current delinquency levels, the results of regulatory examinations and general economic conditions.

The allowance for loan losses represents management’s estimate of an amount adequate to provide for losses inherent in the loan portfolio in the normal course of business. However, there are additional risks of losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because those risks include general economic trends as well as conditions affecting individual borrowers, management’s judgment of the amount of the allowance necessary to absorb probable losses is approximate. The allowance is also subject to regulatory examinations and determination by the regulatory agencies as to the adequacy of the allowance in comparison with peer institutions.

We follow a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process, we maintain an internally classified watch list which helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans categorized as watch list loans show warning elements where the present status portrays one or more deficiencies that require attention in the short term or where pertinent ratios of the loan account have weakened to a point where more frequent monitoring is warranted. These loans do not have all of the characteristics of a classified loan (substandard or doubtful) but do show weakened elements as compared with those of a satisfactory credit. We review these loans to assist in assessing the adequacy of the allowance for loan losses.

In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, loans are categorized as substandard, doubtful or special mention.

Loans classified as “substandard” are those loans with clear and defined weaknesses such as a highly-leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some losses if the deficiencies are not corrected.

Loans classified as “doubtful” are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.

Once a loan is deemed uncollectible and of such little value that its continuance as a bankable asset is not warranted, the loan is charged-off against the allowance for loan losses. This does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be effected in the future.

The uncollectability of at least some portion of the doubtful classification makes the accurate identification of such loans of obvious importance. The function of the substandard classification is to indicate those loans that are unduly risky and may be a future hazard to our capital.

In addition to the above “adverse classification” categories, we also categorize certain loans as “special mention.” While special mention loans do not have all the characteristics of a substandard or doubtful loan, they have one or more deficiencies which warrant special attention and which corrective management action, such as accelerated collection practices, may remedy.

During the evaluation of the loan portfolio, any loans that are not classified or rated special mention are referred to as “pass loans.”

Each category of loans is assigned a risk factor or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk weighted by product type to calculate the applicable reserve. The unallocated portion of the reserve, which takes into account industry comparable reserve ratios and historical trends, serves to cover general economic uncertainties and will vary.

The following table describes the allocation of the allowance for loan losses among various categories of loans and certain other information as of the dates indicated. The allocation is made for analytical purposes only and is not necessarily indicative of the categories in which future losses may occur. With respect to investment securities underwritten as loans, the allowance is not available to cover any impairment that is other than temporary. Because of this, in the event of other than temporary impairment of an investment security underwritten as a loan, the impaired security must be charged to earnings in the same manner as an investment security which is not underwritten as a loan.


	As of March 31, 2004				As of March 31, 2003
	Amount		Percent of Loans to Total Loans		Amount		Percent of Loans to Total Loans
	(dollars in thousands)
Balance of allowance for loan losses applicable to:
Commercial and industrial	$	1,162	11.9	%	$	1,092	11.2	%
Real estate		4,744	76.6			4,511	75.3
Consumer and other		273	11.5			206	13.5
Unallocated		4,234	—			3,500	—

Total allowance for loan losses	$	10,413	100.0	%	$	9,309	100.0	%

Investment Securities

We use our securities portfolio to ensure liquidity for cash requirements, to manage interest rate risk, to provide a source of income, to ensure collateral is available for municipal pledging requirements and to manage asset quality. The bank’s Senior Vice President and Controller manages our securities portfolio, with the concurrence of our Asset/Liability Committee. This committee is comprised of the Chairman of the Board, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Senior Lending Officer and Senior Vice President of Operations. Investment management is performed in accordance with our investment policy, which is approved annually by our Asset/Liability Committee and our board of directors. Our investment policy addresses our investment strategies, approval process, approved securities dealers and authorized investments. As of March 31, 2004, 95.0% or $201.7 million of our investment securities were classified as available-for-sale and may be sold as part of our asset/liability management strategy in response to changes in interest rates and liquidity needs.

Our investment portfolio is conservative with approximately 80% in U.S. Agency securities, 10% in U.S. Treasury securities and 10% in municipal securities. This portfolio make-up helps minimize interest rate risk associated with call options and prepayments. We have taken securities gains of $12.6 million during the last three years (2001-2003) because of the declining interest rate environment.

The following table sets forth the composition and fair value of our investment portfolio as of the dates indicated:


	As of March 31, 2004									As of March 31, 2003
	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)

U.S. Treasury securities	$	19,966	$	135	$	—		$	20,101	$	38,274	$	603	$	—		$	38,877
U.S. Agency securities		162,235		845		(4	)		163,076		198,303		3,013		(3	)		201,313
Mortgage-backed securities		223		9		(1	)		231		552		27		(1	)		578
Obligations of counties and municipalities		21,833		390		(6	)		22,217		9,648		457		—			10,105
Other		7,011		—		—			7,011		5,524		—		—			5,524

Total securities	$	211,268	$	1,379	$	(11	)	$	212,636	$	252,301	$	4,100	$	(4	)	$	256,397

Investment securities classified as available-for-sale decreased 16.6% from $242.0 million at March 31, 2003 compared with $201.8 million at March 31, 2004. We decreased investment securities by $9.0 million, which was the result of purchases totaling $93.3 million and sales totaling $102.3 million during the three months ended March 31, 2004. The investment securities sold consisted primarily of U.S. government agency securities. The reduction in securities classified as available-for-sale was offset by growth in the loan portfolio.

The following table summarizes the contractual maturity of investment securities on an amortized cost basis and their weighted average yields as of March 31, 2004. Tax-exempt obligations have not been computed on a tax-equivalent basis.


	As of March 31, 2004
	Within One Year				After One Year but Within Five Years				After Five Years but Within Ten Years				After Ten Years
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield
	(dollars in thousands)

U.S. Treasury securities	$	5,009	1.73	%	$	14,957	1.89	%	$	—	—	%	$	—	—	%	$	19,966	1.85	%
U.S. Agency securities		27,536	2.15			134,699	1.94			—	—			—	—			162,235	2.01
Mortgage-backed securities(1)		78	2.93			1	7.90			66	7.09			78	7.30			223	7.21
Obligations of counties and municipalities		4,158	4.55			10,738	3.54			3,743	5.59			3,194	4.25			21,833	4.18
Other		—				—				—				6,719	5.19			6,719	5.19

Total securities	$	36,781			$	160,395			$	3,809			$	9,991			$	210,976

(1)	Contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time.

Deposits

Deposits, which represent 93.1% of our interest rate-sensitive liabilities as of March 31, 2004, have historically been our primary source for funding our asset growth. In addition to deposits, we obtain funds from loan repayments, maturing investments, loan sales, cash flows generated from operations, capital trust borrowings and Federal Home Loan Bank (FHLB) advances. We may use borrowings as an alternative source of lower cost funds or to fund the origination of certain assets.

Total deposits increased $78.0 million or 6.7% to $1.2 billion at March 31, 2004 compared with deposits at March 31, 2003. This increase was primarily a result of growth in certificates of deposit resulting from a

successful rate promotion. At March 31, 2004, we had $292.9 million in noninterest-bearing deposits compared with $282.1 million at March 31, 2003, an increase of $10.8 million. Interest-bearing deposits totaled $949.8 million or 76.4% of total deposits at March 31, 2004 compared with $882.6 million or 75.8% of total deposits at March 31, 2003.

The following table sets forth the average balances and weighted average rates paid for our deposits for the periods indicated. Average balances are calculated as the average of all quarter-ends during the period and the quarter ended just prior to the beginning of the period.


	For the Three Months Ended March 31, 2004				For the Three Months Ended March 31, 2003
	Average Balance		Average Rate		Average Balance		Average Rate
	(dollars in thousands)

Demand	$	283,489	—	%	$	267,562	—	%
Interest checking		339,214	0.60			319,355	1.28
Money market and savings		207,003	0.59			197,005	0.81
Certificates of deposit		380,231	2.72			363,021	3.07

Total deposits	$	1,209,937			$	1,146,943

Weighted average rate			1.14	%			1.47	%

Of our total deposits at March 31, 2004, 23.6% were noninterest-bearing and another 44.1% were low-cost interest-bearing accounts, such as NOW accounts, with an average rate of 0.60% for the first three months of 2004, and money market and savings accounts, with an average rate of 0.59% for the same period. Further, our certificates of deposit in amounts of $100,000 or more represented only 8.3% of our deposits at March 31, 2004. Approximately 83.2% of these certificates of deposit are held by customers who have other banking relationships with us.

The following table sets forth by time remaining until maturity our certificates of deposit of $100,000 or more as of the date indicated:


	As of March 31, 2004
	(dollars in thousands)

Three months or less	$	12,662
Over three months through six months		9,774
Over six months through twelve months		13,173
Over one year		69,760

Total	$	105,369

While approximately 33.8% of these certificates of deposit will mature within one year, we expect that a significant portion of these deposits will be renewed. Historically, our large time deposits have been stable and management believes that the rates offered on certificates of deposit are comparable with rates offered by competition in our market areas. If a significant portion of the certificates of deposit were not renewed, we would be able to utilize our other available funding sources, such as purchased funds from correspondent banks and FHLB advances, to provide liquidity.

Borrowings

Borrowings consist of a term loan from U.S. Bank, St. Louis, Missouri, a commercial bank, debentures, an advance from the FHLB and junior subordinated debentures issued to our subsidiary trusts. In December 2003, we obtained a $10.0 million advance from the FHLB at an interest rate of 2.20% per annum which matures on January 3, 2006.

During 2001, we entered into a $38 million multi-advance term loan with a commercial bank. The loan was subsequently increased to $45 million in February 2002. In March 2003, the loan was converted to a term loan for $41.9 million. The interest rate on this loan from inception was prime minus 1.00%. The maturity date of the loan is March 3, 2006. At March 31, 2004, the outstanding balance was $33.1 million.

Debentures totaling $1.4 million with maturity dates from 2003 to 2006 and an interest rate of prime minus 1.5% are outstanding as of March 31, 2004. From February 2001 to January 2003, we had another series of debentures outstanding with a rate of prime plus 1.00%.

The following table summarizes our outstanding borrowings, including our junior subordinated debentures, as of and for the periods indicated:


	As of and for the Three Months Ended March 31, 2004			As of and for the Three Months Ended March 31, 2003
	(dollars in thousands)

Ending balance	$	90,835		$	75,835
Average balance for the period		91,020			73,727
Maximum month-end balance during the period		91,200			75,835

Average interest rate for the period		4.12	%		5.13	%

At March 31, 2004, we had five issues of junior subordinated debentures outstanding totaling $46.4 million as follows:


Description	Issuance Date	Optional Prepayment Date	Interest Rate	Junior Subordinated Debt Owed to Trusts		Maturity Date
Woodforest Capital Trust I	03/08/2000	03/08/2010	10.875%	$	10,310,000	03/08/2030
Woodforest Statutory Trust II	09/07/2000	09/07/2010	10.600%		7,732,000

Woodforest Financial Group,Inc. S-1